Publication 17: Your Federal Income Tax; Chapter 32

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Table of Contents

What's New

Tax Computation Worksheet. If your taxable income for 2004 is $100,000 or more, you will figure your 2004 tax using a new Tax Computation Worksheet, rather than the tax rate schedules, in the instructions for Form 1040.

Introduction

After you have figured your income and deductions as explained in Parts One through Five, your next step is to figure your tax. This chapter discusses:

The general steps you take to figure your tax,
An additional tax you may have to pay called the alternative minimum tax, and
The conditions you must meet if you want the IRS to figure your tax.

Figuring Your Tax

Your income tax is based on your taxable income. After you figure your income tax, subtract your tax credits and add any other taxes you may owe. The result is your total tax. Compare your total tax with your total payments to determine whether you are entitled to a refund or owe additional tax.

This section provides a general outline of how to figure your tax. You can find step-by-step directions in the instructions for Forms 1040EZ, 1040A, and 1040. If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1.

Tax. Most taxpayers use either the Tax Table or the Tax Computation Worksheet to figure their income tax. However, there are special methods if your income includes any of the following items.

A net capital gain. (See chapter 17.)
Qualified dividends taxed at the same rates as a net capital gain. (See chapter 17.)
Lump-sum distributions. (See chapter 11.)
Farming or fishing income. (See Schedule J (Form 1040), Income Averaging for Farmers and Fishermen.)
Investment income over $1,600 for children under age 14. (See chapter 33.)

Credits. After you figure your income tax, determine your tax credits. This chapter does not explain whether you are eligible for these credits. You can find that information in chapters 34 through 39 and your form instructions. See the following table for credits you may be able to subtract from your income tax.

CREDITS
For information on:	See chapter:
Adoption	39
Child and dependent care	34
Child tax credit	36
Education	37
Elderly or disabled	35
Foreign tax	39
Mortgage interest	39
Prior year minimum tax	39
Qualified electric vehicle	39
Qualified retirement savings contributions	39

Some credits (such as the earned income credit) are not listed above because they are treated as payments. See Payments, later.

There are other credits that are not discussed in this publication. These include the following items.

General business credit, which is made up of several separate business-related credits. These generally are reported on Form 3800, General Business Credit, and are discussed in chapter 4 of Publication 334, Tax Guide for Small Business.
Empowerment zone and renewal community employment credit, which is for certain employers who are engaged in a business in an empowerment zone, a renewal community or the DC zone. See Publication 954, Tax Incentives for Distressed Communities. Also see the instructions for Form 8844, Empowerment Zone and Renewal Community Employment Credit.
District of Columbia first-time homebuyer credit, which is for certain persons who buy a main home in the District. See the instructions for Form 8859, District of Columbia First-Time Homebuyer Credit.
Credit for fuel from a nonconventional source, which is for the person who sold the fuel. See the instructions for line 54 of Form 1040 and section 29 of the Internal Revenue Code.

Other taxes. After you subtract your tax credits, determine whether there are any other taxes you must pay. This chapter does not explain these other taxes. You can find that information in other chapters of this publication and your form instructions. See the following table for other taxes you may need to add to your income tax.

OTHER TAXES
For information on:	See chapter:
Additional taxes on qualified retirement plans and IRAs	11, 18
Advance earned income credit payments	38
Household employment taxes	34
Recapture of an education credit	37
Social security and Medicare tax on unreported tips	7
Uncollected social security and Medicare tax on tips	7

Another tax you may have to pay, the alternative minimum tax, is discussed later in this chapter.

There are other taxes that are not discussed in this publication. These include the following items.

Self-employment tax. You must figure this tax if either of the following applies to you (or your spouse if you file a joint return).
1. Your net earnings from self-employment from other than church employee income were $400 or more. The term “net earnings from self-employment” may include certain nonemployee compensation and other amounts reported to you on Form 1099-MISC, Miscellaneous Income. If you received a Form 1099-MISC, see the Instructions to Recipients on the back. Also see the instructions for Schedule SE (Form 1040), Self-Employment Tax, and Publication 533, Self-Employment Tax.
2. You had church employee income of $108.28 or more.
Recapture taxes. You may have to pay these taxes if you previously claimed an investment credit, a low-income housing credit, a mortgage interest credit, a new markets credit, a qualified electric vehicle credit, a credit for employer-provided child care facilities, or an Indian employment credit. For more information, see the instructions for line 62 of Form 1040.
Section 72(m)(5) excess benefits tax. If you are (or were) a 5% owner of a business and you received a distribution that exceeds the benefits provided for you under the qualified pension or annuity plan formula, you may have to pay this additional tax. See Tax on Excess Benefits in chapter 4 of Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
Uncollected social security and Medicare tax on group-term life insurance. If your former employer provides you with more than $50,000 of group-term life insurance coverage, you must pay the employee part of social security and Medicare taxes on those premiums. The amount should be shown in box 12 of your Form W-2 with codes M and N.
Tax on golden parachute payments. This tax applies if you received an “excess parachute payment” (EPP) due to a change in a corporation's ownership or control. See the instructions for line 62 of Form 1040.
Tax on accumulation distribution of trusts. This applies if you are the beneficiary of a trust that accumulated its income instead of distributing it currently. See the instructions for Form 4970, Tax on Accumulation Distribution of Trusts.
Additional tax on HSAs or MSAs. If amounts contributed to, or distributed from, your health savings account or medical savings account do not meet the rules for these accounts, you may have to pay additional taxes. See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans; Form 8853, Archer MSAs and Long-Term Care Insurance Contracts; Form 8889, Health Savings Accounts (HSAs); and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
Additional tax on Coverdell ESAs. This applies if amounts contributed to, or distributed from, your Coverdell ESA do not meet the rules for these accounts. See Publication 970, Tax Benefits for Education, and Form 5329.
Additional tax on qualified tuition programs. This applies to amounts distributed from qualified tuition programs that do not meet the rules for these accounts. See Publication 970 and Form 5329.
Tax on insider stock compensation from an expatriated corporation. You may owe a 15% excise tax on the value of nonstatutory stock options and certain other stock-based compensation held by you or a member of your family from an expatriated corporation or its expanded affiliated group in which you were an officer, director, or more-than-10% owner. For more information, see the instructions for line 62 of Form 1040.

Payments. After you determine your total tax, figure the total payments you have already made for the year. Include credits that are treated as payments. This chapter does not explain these payments and credits. You can find that information in other chapters of this publication and your form instructions. See the following table for amounts you can include in your total payments.



PAYMENTS
For information on:	See chapter:
Child tax credit (additional)	36
Earned income credit	38
Estimated tax paid	5
Excess social security and RRTA tax withheld	39
Federal income tax withheld	5
Health coverage tax credit	39
Regulated investment company credit	39
Tax paid with extension	1

Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. It is claimed on line 69 of Form 1040. See Publication 378, Fuel Tax Credits and Refunds, and Form 4136, Credit for Federal Tax Paid on Fuels.

Refund or balance due. To determine whether you are entitled to a refund or owe additional tax, compare your total payments with your total tax. If you are entitled to a refund, see your form instructions for information on having it directly deposited into your checking or savings account instead of receiving a paper check.

Alternative Minimum Tax

This section briefly discusses an additional tax you may have to pay.

The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax. This additional tax is called the alternative minimum tax (AMT).

You may have to pay the alternative minimum tax if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than:

$58,000 if your filing status is married filing a joint return (or qualifying widow(er) with dependent child),
$40,250 if your filing status is single or head of household, or
$29,000 if your filing status is married filing a separate return.

Adjustments and tax preference items. The more common adjustments and tax preference items include:

Addition of personal exemptions,
Addition of the standard deduction (if claimed),
Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses,
Subtraction of any refund of state and local taxes included in gross income,
Changes to accelerated depreciation of certain property,
Difference between gain or loss on the sale of property reported for regular tax purposes and AMT purposes,
Addition of certain income from incentive stock options,
Change in certain passive activity loss deductions,
Addition of certain depletion that is more than the adjusted basis of the property,
Addition of part of the deduction for certain intangible drilling costs, and
Addition of tax-exempt interest on certain private activity bonds.

More information. For more information about the alternative minimum tax, see the instructions for Form 1040, line 44, and Form 6251, Alternative Minimum Tax—Individuals.

Tax Figured by IRS

If you file by April 15, 2005, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040.

If the IRS figures your tax and you paid too much, you will receive a refund. If you did not pay enough, you will receive a bill for the balance. To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later.

When the IRS cannot figure your tax. The IRS cannot figure your tax for you if any of the following apply.

You want your refund directly deposited.
You want any part of your refund applied to your 2005 estimated tax.
Any of your income for the year was from other than wages, salaries, tips, interest, dividends, taxable social security benefits, unemployment compensation, IRA distributions, pensions, and annuities.
Your taxable income is $100,000 or more.
You itemize deductions.
You file any of the following forms.
1. Form 2555, Foreign Earned Income.
2. Form 2555-EZ, Foreign Earned Income Exclusion.
3. Form 4137, Social Security and Medicare Tax on Unreported Tip Income.
4. Form 4970, Tax on Accumulation Distribution of Trusts.
5. Form 4972, Tax on Lump-Sum Distributions.
6. Form 6198, At-Risk Limitations.
7. Form 6251, Alternative Minimum Tax—Individuals.
8. Form 8606, Nondeductible IRAs.
9. Form 8615, Tax for Children Under Age 14 With Investment Income of More Than $1,600.
10. Form 8814, Parents' Election To Report Child's Interest and Dividends.
11. Form 8839, Qualified Adoption Expenses.
12. Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.
13. Form 8889, Health Savings Accounts (HSAs).

Filing the Return

After you complete the line entries for the tax form you are filing, as discussed next, attach the peel-off label. If you do not have a peel-off label, fill in your name and address. Enter your social security number in the space provided. If you are married, enter the social security numbers of both spouses. Sign and date your return and enter your occupation(s). If you are filing a joint return, both you and your spouse must sign it. Enter your daytime phone number in the space provided.

Attach a copy of each of your Forms W-2 to your return. Also attach any Form 1099-R you received that has withholding tax in box 4.

Mail your return to the Internal Revenue Service Center for the area where you live. A list of Service Center addresses is shown near the end of this publication.

Form 1040EZ Line Entries

Read lines 1 through 8b and fill in the lines that apply to you. Do not complete lines 9 through 12. If you are filing a joint return, use the space to the left of line 6 to separately show your taxable income and your spouse's taxable income.

Earned income credit. If you can take this credit, as discussed in chapter 38, the IRS can figure it for you. Print “EIC” in the space to the left of line 8a.

If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. For details, see the Form 1040EZ instructions.

Form 1040A Line Entries

Read lines 1 through 27 and fill in the lines that apply to you. If you are filing a joint return, use the space to the left of line 27 to separately show your taxable income and your spouse's taxable income. Do not complete line 28. Complete lines 29 through 33, 37, and 39 through 42 if they apply to you. Do not fill in lines 30 and 41a if you want the IRS to figure the credits shown on those lines. Also, enter any write-in information that applies to you in the space to the left of line 43. Do not complete lines 35, 36, 38, and 43 through 48.

Credit for child and dependent care expenses. If you can take this credit, as discussed in chapter 34, complete Schedule 2 and attach it to your return. Enter the amount of the credit on line 29 (Form 1040A). The IRS will not figure this credit.

Credit for the elderly or the disabled. If you can take this credit, as discussed in chapter 35, attach Schedule 3 (1040A), Credit for the Elderly or the Disabled for Form 1040A Filers. Print “CFE” next to line 30 (Form 1040A). The IRS will figure this credit for you. On Schedule 3, check the box in Part I for your filing status and age. Complete Part II and lines 11 and 13 of Part III if they apply.

Earned income credit. If you can take this credit, as discussed in chapter 38, the IRS will figure it for you. Print “EIC” to the left of the entry space for line 41a. If you have a qualifying child, you must fill in Schedule EIC, Earned Income Credit, and attach it to your return.

If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. For details, see the Form 1040A instructions.

Form 1040 Line Entries

Read lines 1 through 42 and fill in the lines that apply to you. Do not complete line 43.

If you are filing a joint return, use the space under the words “Adjusted Gross Income” on the front of your return to separately show your taxable income and your spouse's taxable income.

Read lines 44 through 69. Fill in the lines that apply to you, but do not fill in the “Total” lines. Also, do not complete line 56 and lines 70 through 75. Do not fill in lines 48 and 65a if you want the IRS to figure the credits shown on those lines.

Fill in any forms or schedules asked for on the lines you completed, and attach them to your return.

Credit for child and dependent care expenses. If you can take this credit, as discussed in chapter 34, complete Form 2441 and attach it to your return. Enter the amount of the credit on line 47. The IRS will not figure this credit.

Credit for the elderly or the disabled. If you can take this credit, as discussed in chapter 35, attach Schedule R, Credit for the Elderly or the Disabled. Print “CFE” on the dotted line next to line 48 of Form 1040. The IRS will figure the credit for you. On Schedule R check the box in Part I for your filing status and age. Complete Part II and lines 11 and 13 of Part III if they apply.

Earned income credit. If you can take this credit, as discussed in chapter 38, the IRS will figure it for you. Print “EIC” on the dotted line next to line 65a of Form 1040. If you have a qualifying child, you must fill in Schedule EIC and attach it to your return.

If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. For details, see the Form 1040 instructions.

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Chapter 32 - How To Figure Your Tax