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Publication 505 2003 Tax Year

Publication 505
Introductory Material

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Introduction

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go.

  • Withholding. If you are an employee, your employer probably withholds income tax from your pay. Tax may also be withheld from certain other income — including pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is paid to the Internal Revenue Service (IRS) in your name.
  • Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.

This publication explains both of these methods. It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments.

If you did not pay enough tax during the year either through withholding or by making estimated tax payments, you may have to pay a penalty. The IRS usually can figure this penalty for you. This underpayment penalty, and the exceptions to it, are discussed in chapter 4.

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Important Changes
for 2002

You should consider the items in this section when figuring any underpayment penalty for 2002. Figuring the penalty is discussed in chapter 4.

Penalty rate. The penalty for underpayment of 2002 estimated tax is figured at an annual rate of 6% for the number of days the underpayment remained unpaid from April 16, 2002, through December 31, 2002 and 5% from January 1, 2003, through April 15, 2003.

Estimated tax safe harbor for higher income individuals. For installment payments for tax years beginning in 2002, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your adjusted gross income was more than $150,000 ($75,000 if married filing a separate return), you must have deposited the smaller of 90% of your expected tax for 2002 or 112% of the tax shown on your 2001 return to avoid an estimated tax penalty.

Important Changes
for 2003

This section summarizes important changes that take affect in 2003 and that could affect your estimated tax payments for 2003. More information on these and other changes can be found in Publication 553.

Standard mileage rates.  For tax years beginning in 2003, the standard mileage rate for the cost of operating your car decreases to:

  • 36 cents a mile for all business miles driven,
  • 12 cents a mile for the use of your car for medical reasons, and
  • 12 cents a mile for the use of your car for determining moving expenses.

Lifetime learning credit. Beginning in 2003, the amount of qualified tuition and related expenses you may take into account in figuring your lifetime learning credit increases from $5,000 to $10,000. The credit will equal 20% of these qualified expenses, with the maximum credit being $2,000.

Estimated tax safe harbor for higher income individuals. For estimated tax payments for tax years beginning in 2003, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your 2002 adjusted gross income is more than $150,000 ($75,000 if you are married filing a separate return for 2003), you must deposit the smaller of 90% of your tax for 2003 or 110% of the tax shown on your 2002 return to avoid an estimated tax penalty.

Child and dependent care credit.  Significant changes to the child and dependent care credit take effect in 2003.

  • The credit amount can be as much as 35% (previously 30%) of your qualifying expenses.
  • The maximum adjusted gross income amount that qualifies for the highest rate increases to $15,000 (previously $10,000).
  • The limit on the amount of qualifying expenses increases to $3,000 for one qualifying individual and $6,000 for two or more qualifying Individuals.
  • The amount of income that is treated as having been earned by a spouse who is either a full-time student or not able to care for himself or herself increases. This amount increases to $250 a month if there is one qualifying individual and $500 a month if there are two or more qualifying individuals.

Tax benefits for adoption. Beginning in 2003, the adoption credit and the exclusion from income of benefits under an adoption assistance program for the adoption of a child with special needs is $10,160 regardless of the amount of qualified adoption expenses.

Retirement savings plans.  The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs). Traditional IRA income limits. If you have a traditional IRA and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phaseout increases. The amounts vary depending on filing status. Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. An employee's account can be treated as a traditional IRA or a Roth IRA. Limit on elective deferrals.The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $12,000 ($14,000 If you are age 50 or over). However, for SIMPLE plans, the amount increases to $8,000 ($9,000 if you are age 50 or over). Simplified rules for required minimum distributions. There are new rules for determining the amount of a required minimum distribution for a year beginning after 2002. The new rules, including new life expectancy tables, are in Publication 590.

Self-employed health insurance deduction. You can deduct 100% of your self-employed health insurance premiums as an adjustment to income.

Important Reminder

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1–800–THE–LOST (1–800–843– 5678) if you recognize a child.

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