MILITARY/INTERNATIONAL STUDENT TEXT

For Use in Preparing Tax Year 2003 Returns

Department of the Treasury

Internal Revenue Service

Publication 678-M (Rev. 2003) IRS Catalog Number 46676K www.irs.gov

IRS VOLUNTEERS

VOLUNTEERASSISTOR'SGUIDE

FOR USE IN IRS VOLUNTEER PROGRAMS

M-VITA Military Volunteer Income Tax Assistance

Course Number 3004 M

VECTA Volunteer Embassy and Consulate Tax Assistance

M-VITA

VECTA

Military Volunteer Income Tax Assistance

Volunte er Embassy & Consulate Tax Assistance
Provide America’s taxpayers

top quality service by helping

them understand and meet

their tax responsibilities and

by applying the tax law with

integrity and fairness to all.

IRS

Department of the Treasury

Internal Revenue Service

www.irs.gov

TaxWise® is a copyrighted software program owned by Universal Tax Systems, Inc.® (UTS). All 

screen shots that appear throughout the official Volunteer Income Tax Assistance (VITA) and Tax 

Counseling for the Elderly (TCE) training materials are used with the permission of UTS. The 

screen shots used in this publication—or any other screen shots from TaxWise or its affiliated 

programs—may not be extracted, copied, or distributed without written approval from the IRS 

SPEC Office of Education and Product Development. 

Confidentiality Statement:

All tax information you receive from taxpayers in your VOLUNTEER capacity is strictly 

confidential and should not, under any circumstances, be disclosed to unauthorized individuals.
Table of Contents M-i

TABLE OF CONTENTS

Introduction And Administrative Guidelines........................1

Basic Module

Lesson 1 Getting Started..........................................................1-1

Military Segments —

 Dependency Exemptions ...................................... M-1-1

Exemption For A Foreign Spouse ........................ M-1-5

International Segments —

Exemption For Foreign Spouse Or Dependent .....I-1-1

 Filing Status ............................................................1-19

Military Segment —

 Filing Status ......................................................... M-1-7

International Segment —

 Filing Status Issues................................................I-1-7

 Who Must File — Who Should File.........................1-30

Lesson 2 Income ........................................................................2-1

Military Segments — 

Income ................................................................... M-2-1

 Other Income ...................................................... M-2-13

International Segments —

 Worldwide Income ..................................................I-2-1

 Self-Employment Tax .............................................I-2-7

 Rental Income And Expenses ..............................I-2-17

Lesson 3 Adjustments...............................................................3-1

Military Segment —

 Moving Expenses .................................................. M-3-1

Lesson 4 Standard and Itemized Deductions, and Tax 

 Computation ..............................................................4-1

Military Segments —

 Travel Expenses.................................................... M-4-1

 Miscellaneous Itemized Deductions .................... M-4-9

International Segment —

 Business Travel Expenses......................................I-4-1
M-ii Table of Contents

Lesson 5 Miscellaneous Tax Credits ........................................5-1

International Segment —

Foreign Tax Credit..................................................I-5-1

Lesson 6 Finishing the Return.................................................6-1

Military Segment —

 Finishing and Filing The Return......................... M-6-1

Wage Earner Module

Lesson 7 Credit for Child and Dependent Care Expenses......7-1

Lesson 8 Education Credits......................................................8-1

Lesson 9 Earned Income Credit ...............................................9-1

Lesson 10 Child Tax Credit ......................................................10-1

Problem A Wage Earner Comprehensive Problems............. CW -1

Pension Earner Module

Lesson 11 Sale of Stock.............................................................11-1

Lesson 12 Sale of Home ............................................................12-1

Lesson 13 Pensions ...................................................................13-1

Military Segment —

 Thrift Savings Plan............................................. M-13-1

Lesson 14 Credit for the Elderly or the Disabled....................14-1

Problem B Pension Earner Comprehensive Problems...........CP -1

Military and International Specific Lessons

Lesson 15 Foreign Earned Income Exclusion..................... M-15-1

Lesson 16 Tax Options for Combat Zone Participants....... M-16-1

Lesson 17 Aliens.....................................................................I-17-1

Lesson 18 Home Leave ..........................................................I-18-1

Appendices

Integrated Training .................................................. A-1

 Student Notes ........................................................... B-1

 2003 Earned Income Credit (EIC) Tables................ C-1

 2003 Tax Rate Tables................................................D-1

 Index.......................................................................... E-1

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. 
Table of Contents M-iii

WELCOME, VOLUNTEERS! 

Through the assistance of trained volunteers from the Volunteer Income Tax Assistance (VITA) and Tax 

Counseling for the Elderly (TCE) programs, the Internal Revenue Service and its partners across the 

nation and abroad are able to offer free tax help to taxpayers having low-to-moderate income. As a 

volunteer, you will help prepare tax returns for a taxpayer segment which often includes seniors, disabled 

persons, people with limited English proficiency, and others who cannot afford professional tax 

assistance. 

This publication will help you to acquire the skills to prepare basic tax returns. There are two tracks to 

certification – the Wage Earner and the Pension Earner. The Wage Earner track covers issues working 

individuals and families customarily face. The Pension Earner track contains more complex issues, those 

generally encountered by retired people and senior citizens. These tracks allow instructors to train 

volunteers in specific tax issues encountered at the volunteer sites. For instance, a TCE class might 

certify their volunteers on the Pension Earner track that does not include training on the Earned Income 

Tax Credit (EITC). If the instructor or the site coordinator anticipates that taxpayers coming into the site 

will be eligible for the EITC, he/she can also teach, test, and certify volunteers on the EITC chapter, a 

portion of the Wage Earner track. 

I urge you to electronically file (e-file) the returns you prepare. Electronic filing (e-filing) uses automation 

to quickly check for errors or missing information. Consequently, e-filed returns have a higher accuracy 

rate than paper prepared returns. As technology changes the face of filing taxes, we recognize that it will 

impact every aspect of volunteer training. In fact, the 2003 edition of our volunteer training materials 

employs a new integrated training feature that bridges the gap between paper-based training of the past 

and web-based training of the future. We are working to make this training as convenient and versatile as 

possible. 

In performing this service to your fellow taxpayers, I appreciate your steps to safeguard the personal and 

sensitive documents or files that you may encounter. Preserving the privacy of those persons you assist 

is key to the preservation of the integrity embedded in the VITA/TCE Programs. 

I welcome your comments and recommendations about our training material. Your instructor or site 

coordinator can take your suggestions or you can write to us at the following address: 

 Internal Revenue Service 

 Stakeholder Partnerships, Education and Communication 

 SE:W:CAR:SPEC:PPD:E, Stop 45-WI 

 401 W. Peachtree Street, NW 

 Atlanta, GA 30308 

Thank you in advance for your willingness to volunteer your own time to provide this much needed 

service to your neighbors and your community. 

 Sincerely, 

 Mark E. Pursley 

 Director, Stakeholder Partnerships, 

Education and Communication
M-iv Table of Contents

Important Tax Law Changes for 2003

Exemption amount increased. The amount each taxpayer can deduct for each exemption has increased from $3,000 to $3,050. 

Standard deduction amount increased. The standard deduction (for taxpayers that 

do not itemize deductions on Schedule A ( Form 1040)) is higher in 2003 than it was in 

2002. In addition, the standard deduction for married taxpayers filing jointly is twice the 

amount for single filing status. 

Married fi ling jointly &

Qualifying Widow(er)

$9,500

 Head of Household $7,000

Single $4,750

Married Filing separately $4,750

Increase in 10% tax bracket. The 10% tax bracket has been increased from $6,000 to 

$7,000 ($12,000 to $14,000) for joint fi lers. 

Increase in 15% bracket for married filing jointly status. The 15% tax bracket has 

been increased to twice that of single filers. 

Marginal tax rates reduced. The rates are reduced to 25%, 28%, 33%, and 35% retroactively effective January 1, 2003. 

Capital gains rate reduced. The rate has reduced from 20% to 15% (from 10% to 5% 

for taxpayers in the 10 and 15 percent brackets) effective on or after May 6, 2003 through 

December 31, 2008. In 2008, the capital gains rate will drop to 0% for lower-income tax 

taxpayers. The lower rates will apply to both regular tax and alternative minimum tax. 

Certain dividends taxed at capital gains rates. The same rates apply to both foreign 

and domestic companies’ dividends. Lower-income taxpayers will pay 5% on dividends 

paid between January 1, 2003 and December 31, 2007 and 0% in 2008. Taxpayers in tax 

brackets above 15 % would pay 15 % on dividends paid between January 1, 2003 and 

December 31, 2008. 

Standard mileage rate. The standard mileage rate for the cost of operating a car in 

2003 is 36 cents a mile for all business miles. The 2003 rate for use of a vehicle for medical care and moving expenses is 12 cents a mile. 

Household employer’s income reporting requirement. In 2003, household employers are required to issue a Form W-2 to employees whose earnings are $1400 or more. 

Lifetime learning credit. Beginning in 2003, the amount of the 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 qualified expenses, with 

the maximum credit being $2,000. 

Student loan interest deduction. Beginning in 2003, the modified adjusted gross 

income ranges for phasing out the student loan interest deduction may be adjusted 

annual for inflation. 
Table of Contents M-v

Child tax credit increased. The child tax credit has been increased to $1,000 for 2003. 

An early refund of the 2003 Child Tax Credit was issued to eligible taxpayers who claimed 

the child tax credit on their 2002 tax return and had a qualifying child that was born after 

1986. Taxpayers that received the “early refund” Advance Child Tax Credit payment must 

include the amount received when calculating the 2003 Child Tax Credit.

Earned Income Credit (EIC) Limits: For 2003, the investment, earned income, and 

adjustment gross income for the EIC are: 

Investment income is $2,600 or less.

Total earned income must be at least $1 but less than: 

• $33,692 ($34,692 if married filing jointly) and more than one qualifying child.

• $29,666 ($30,666 if married filing jointly) and one qualifying child.

• $11,230 ($12,230 if married filing jointly) and no qualifying child.

Adjusted gross income less than:

• $33,692 ($34,692 if married filing jointly) and more than one qualifying child.

• $29,666 ($30,666 if married filing jointly) and one qualifying child.

• $11,230 ($12,230 if married filing jointly) and no qualifying child.

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 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 benefit for adoption. 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. The modified adjusted 

gross income limit will be adjusted annually for inflation.

Traditional Individual Retirement Account (IRA) income limits. The amount 

of income taxpayers can have and not be affected by the deduction phase-out increases. 

The amounts vary depending on filing status and impacts taxpayers that have a traditional IRA and are covered by a retirement plan at work. For further information go to 

www.irs.gov.

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.

The Health Coverage Tax Credit (HCTC). The HCTC was introduced by the Trade 

Act of 2002 to assist certain taxpayers. Potentially eligible taxpayers receive a HCTC 

Program Kit in the mail. This credit is primarily available to workers who have lost their 
M-vi Table of Contents

jobs due to the effects of international trade and taxpayers over age 55 who receive benefits from the Pension Benefit Guaranty Corporation. Calculation of the credit is outside 

of the scope of the volunteer programs. For further information go to www.irs.gov

Increase in Alternative Minimum Tax Exemption. Increased to $40,250 for single and head of household taxpayers; $58,000 for Married Filing Jointly and Qualified 

Widow(er)s; and $29,000 for Married Filing Separately taxpayers.
Introduction and

Administrative Guidelines 1

INTRODUCTION AND

ADMINISTRATIVE GUIDELINES

Welcome to the Internal Revenue Service’s (IRS) Military Volunteer 

Income Tax Assistance (M-VITA) and Volunteer Embassy and 

Consulate Tax Assistance (VECTA) Programs. As an IRS volunteer 

you provide a tremendous service to the American public and to 

your community. You are about to embark on a very challenging 

and rewarding task as an important player in the process.

Every year thousands of volunteers nationally and internationally 

assist millions of taxpayers with their federal income tax return. 

We’ve taken great care to improve our products and incorporate 

changes recommended by our volunteer community. In this section, 

we explain general training requirements and highlight important 

administrative requirements and enhancements.

TAX YEAR 2003 ADMINISTRATIVE ENHANCEMENTS

Site Identification Number (Site IDN). Your site IDN is a

8-digit number preceded by the “letter P” that must be entered on 

all returns (Forms 1040, 1040A, and 1040EZ) you prepare—both 

paper and electronic. Your site coordinator provides this number 

along with other necessary guidelines for completing the return. 

The Site identification number should appear in the “Paid 

Preparer’s Use Only” section of the return and will be discussed in 

detail in Lesson 6, Finishing the Return. 

Evaluation Process. A new procedure is in place for student 

evaluation of the M-VITA/VECTA training and course material. 

Beginning with training for filing season 2004, a new evaluation 

form is included in your training materials. It is a scannable form 

designed for IRS employees but we believe it provides the questions 

we need to evaluate both your training and our course materials. 

Your instructor will give you specific instructions on completing the 

form. If you are taking this course self-study, please contact your 

local IRS SPEC office or your site manager for details. Your instructor will also give you information on how to complete this form on 

the internet and transmit directly to the vendor who will compile 

the evaluations.
Introduction and 2 Administrative Guidelines

IMPORTANT REQUIREMENTS

Valid Social Security Number: One of the primary reasons for 

the rejection of a return or a delay in processing a return is an 

incorrect SSN. It is important, therefore, that you check the accuracy of each SSN, as well as the spelling of the name associated 

with the number.

e-file: Each year the IRS contracts with a software developer to 

provide tax return preparation software. All returns prepared 

using the software should be electronically filed and not mailed to 

the applicable IRS Processing Center. Exception: When a return 

is filed electronically with the IRS and you encounter unworkable 

rejects.

SCOPE AND SEQUENCE

Most taxpayers are either wage earners or pension earners. 

Therefore, we have organized this training material in four modules: basic, wage earner, pension earner, military and international 

specific. There are instances where a site serves both wage earners 

and pension earners. Your instructor has worked closely with the 

coordinator(s) at the site where you will assist taxpayers to determine which lessons you should learn.

Basic Module

All volunteers must complete the following lessons and the applicable lesson(s) from the Military and International specific module. 

Introduction

Lesson 1 — Getting Started

 Military Segments

 Dependency Exemptions

 Exemption For A Foreign Spouse

 Filing Status

 International Segments

 Exemption For Foreign Spouse Or Dependent

 Filing Status Issue

Lesson 2 — Income

 Military Segments

 Income

 Other Income

 International Segments

 Worldwide Income

 Self-Employment Tax

 Rental Income And Expenses
Introduction and

Administrative Guidelines 3

Lesson 3 — Adjustments

 Military Segment

 Moving Expenses

Lesson 4 — Standard And Itemized Deductions, And Tax 

Computation

 Military Segments

 Travel Expenses

 Miscellaneous Itemized Deductions

 International Segment

 Business Travel Expenses

Lesson 5 — Miscellaneous Credits

 International Segment

 Foreign Tax Credit

Lesson 6 — Finishing The Return

 Military Segment

 Finishing and Filing The Return

Wage Earner Module

Volunteers who will be assisting wage earners need to complete the 

following lessons: 

Lesson 7 — Credit For Child And Dependent Care Expenses

Lesson 8 — Education Credits

Lesson 9 — Earned Income Credit

Lesson 10 — Child Tax Credit

 Pension Earner Module

Volunteers who will be assisting pension earners are required to 

complete the following lessons: 

Lesson 11 — Sale of Stock

Lesson 12 — Sale of Home

Lesson 13 — Pensions

 Military Segment

 Thrift Savings Plan

Lesson 14 — Credit For The Elderly Or The Disabled
Introduction and 4 Administrative Guidelines

Military and International Specific Lessons

Volunteers must complete the Military and International specific 

module if applicable.

Lesson 15 — Foreign Earned Income Exclusion

Lesson 16 — Tax Options For Combat Zone Participants

Lesson 17 — Aliens

Lesson 18 — Home Leave

 Proof Copies of Forms

Forms imprinted with “draft” were current as of the date this publication 

was sent to print. Final forms may have changes. Be sure to compare 

the final forms with those in this publication. The Internet (www.irs.gov)

provides access to the final form.

 Testing

All volunteers must take the applicable tests to show that they can 

complete returns accurately. You may use this text and all reference 

materials to complete the test. Volunteers who do not pass the 

test may take the appropriate retest. Instructions on taking and 

grading the test are in the Test and Retest Booklets.

Exercises and Exhibits

It is important that you take the time to complete the exercises 

to achieve the objectives in each lesson. Studies have shown that 

long-term retention of information increases dramatically if you 

put pencil to paper in responding to questions and problems. The 

Volunteer Assistor’s Guide is your learning tool and you may mark 

it up in any way you wish.

Note: Answers to all exercises are available at the end of the lesson.

Each exercise is separated from the rest of the text by a border 

design. Write out your answer to each exercise, and then check 

it immediately against the answer provided. If your answer 

is different, work the problem again. If you need additional 

reinforcement, review any parts of the text that apply.

The exercises are designed to give you practice, to emphasize what 

we think is important, and to help you complete your training 

successfully.

The coursebook contains a large number of exhibits of the various 

tax forms and schedules. These exhibits are numbered starting at 

the beginning of each lesson. Many of the exercises contain exhibits 

of blank forms, or part of the form, that you must complete.
Introduction and

Administrative Guidelines 5

Lesson Features

Introduction and Objectives

There is a brief Introduction to each lesson or segment. This 

will give you an overview of the topic to be covered, as well as an 

idea of how you will most likely be asked to apply the information 

when helping taxpayers. There will be a list of Objectives, when 

appropriate, that clearly defines the key points for mastery of the 

topic. They not only help you focus your reading, but also help you 

check for understanding.

Summing Up This Section, Segment, or Lesson

This boxed feature appears at the end of each lesson/segment. 

It provides you with a summary of the main points covered 

in the lesson. Used together, the lesson summaries provide a 

comprehensive overview of the course content.

Sidebar Features

Sidebar features appear in the outer margins (left and right) of the 

text. These boxed features emphasize important points presented 

in the lesson, or provide additional, related information. Potential 

Pitfalls point out commonly made errors and indicate ways to 

avoid these errors. Alert! identifies pending legislation, tax law 

changes, or tax forms changes that were expected, but not enacted.

CONFIDENTIALITY AND INTEGRITY

Taxpayers come to you for help. To provide appropriate assistance, 

you will be asking very personal questions about the taxpayers 

and their families, their sources of income, and their expenses. 

Taxpayers will give this information only if they trust and have 

confidence in you. To maintain the taxpayer’s trust and confidence, DO NOT disclose any personal tax information you 

learn as a result of the assistance you provide.

Taxpayers can be amazingly frank about their personal lives. When 

taxpayers share extremely personal information with you, this creates a responsibility for you not to discuss the information with 

other taxpayers or fellow volunteers. Never use a taxpayer’s name 

in the presence of other taxpayers.

However, volunteers may discuss tax situations with other taxpayers and volunteers. For example, a volunteer may refer to a situation (not a taxpayer) and ask or give advice about the appropriate 

tax treatment for that specific situation.

The M-VITA and VECTA Programs offer free tax assistance. You 

cannot accept payment nor any type of gratuity for preparing a federal tax return or for other tax-related assistance that you provide. 

If you accept payment for preparing a tax return, you are considered a “paid preparer.” Paid preparers are legally liable under federal law for the returns they prepare; volunteers are not.

ALERT

CONFIDENTIALITY 

AND INTEGRITY

All tax information you 

receive from taxpayers 

in your VOLUNTEER 

capacity is strictly 

confi dential and should 

not, under any circumstances, be disclosed to 

unauthorized individuals. 

See your site coordinator 

for additional information.
Introduction and 6 Administrative Guidelines

An important aspect of integrity for volunteer assistors is declining 

to prepare a tax return when there is a question about the validity 

of the information supplied by a taxpayer. Some individuals may 

attempt to defraud the government by filing false tax returns.

Volunteers who are not comfortable with the information provided 

by a taxpayer because of any reason, should discuss their concerns 

with their Site Coordinator or other individual in charge of the site.

QUALITY OF SERVICE

The goal of the M-VITA and VECTA Programs is to provide high 

quality service. The following list suggests some ways to ensure 

that each return is prepared correctly:

■ Where possible prepare the return using electronic filing software.

■ If preparing a paper return, use a calculator to check your math.

■ Refer to your Publication 17, other IRS publications and job aids 

for help with complicated topics.

■ Use the checklists and worksheets provided.

■ Consult with other, more experienced, volunteers.

■ Call the Volunteer Hotline (1-800-829-8482).

 Volunteer Hotline

There is a toll-free hotline available for M-VITA and VECTA volunteer use only. This hotline is a source of tax information for volunteers. When you use the hotline, identify yourself as a M-VITA or 

VECTA volunteer.

The hotline number is 1-800-829-8482 (829-VITA). Do not give 

this number to taxpayers. This service is generally available 

between February 1 and April 15th.

Do not use this hotline to order forms or schedules. Instead, contact 

your IRS Territory Manager.

EFFECTIVE INTERVIEWING

To complete accurate returns, you must ask certain questions about 

the taxpayers and their families. It is important to set the appropriate climate to obtain this information.

It is also important to be sensitive to the needs of all taxpayers you 

assist, especially those with disabilities. All references to taxpayers 

with disabilities should reflect the individuality, equality and dignity of the person.

Refrain from using such terms as “handicapped, physically or mentally challenged, differently challenged”. It would be better to use:

Person(s) with a disability;

Persons who are blind; persons who are visually impaired;
Introduction and

Administrative Guidelines 7

Persons who are deaf; persons who are hearing impaired or hard of 

hearing;

Persons who use a wheelchair;

Persons who are physically disabled; or, persons with mental retardation.

Steps to Effective Interviewing:

1. Make necessary introductions and engage in small talk.

2. Preface what will take place during the interview.

3. Share your intentions and any hopeful results/benefits for the 

taxpayer.

4. Allow the taxpayer to share any expectations, needs, and/or 

concerns.

5. Respond with active listening skills.

A. Create a “safe” climate.

B. Remember your nonverbal listening clues.

C. Listen, then respond by:

1. restating,

2. paraphrasing, (and/or)

3. encouraging

6. Ask the first key tax question, creating an awareness about 

why the tax information is needed.

A. Make no assumptions.

B. Ask no leading questions.

C. Ask, “What have you brought with you today?”

7. Continue to ask questions. Define any terms that may be unfamiliar to the taxpayer.

8. Check your own comfort level.

9. Respond to any misunderstandings.

10. Continue with effective questioning and active listening.

11. Overcome any communication barriers.

A. Stay on track. (“I hear you.”/repeat question)

B. Allow adequate response time.

C. Avoid making assumptions.

D. Deal with taxpayers.

1. Silent (“tell me more about...”)

2. Upset (paraphrase)

E. Concentrate.
Introduction and 8 Administrative Guidelines

12. Indicate the taxpayer’s next steps. Inform the taxpayer about 

the M-VITA and VECTA Programs and stress the benefits of 

accurate recordkeeping.

A. Express confidence in having completed an accurate tax 

return. 

B. Part cordially.

WHAT IF . . . ?

Use these questions and answers to provide quick and accurate 

information to taxpayers who have administrative questions.

1. What if a taxpayer or dependent does not have a social 

 security number? 

Taxpayers who do not have a social security number must apply 

for one by using Form SS-5, Application for a Social Security Card. 

This form is available from the Social Security Administration and 

U.S. Citizens must show proof of age, identity, and citizenship when 

they apply for a social security number. Individuals who are age 18 

or older must apply at the Social Security Administration office in 

person rather than by mail.

2. What if the taxpayer needs an IRS form or publication?

Most IRS offices and many post offices and libraries have IRS 

forms that taxpayers may take or photocopy. They also have the 

instruction booklets for specific forms and publications. Remind the 

taxpayer that forms can also be ordered by calling the IRS on 1-

800-829-3676 (1-800-TAX FORM) or from a fax machine dial (703) 

487-4160.

IRS offers tax products and information on the Internet. The IRS 

Internet site provides instant access to federal income tax forms, 

instructions, publications, and information on free tax assistance 

programs, electronic tax filing, and more 24 hours a day. Current 

and prior year federal tax products and information are available 

for downloading.

By Internet:

1. World Wide Web – www.irs.gov

2. FTP – ftp.irs.ustreas.gov

3. Telnet – iris.irs.ustreas.gov

3. What if the taxpayers move?

Taxpayers should use Form 8822, Change of Address, to notify the 

IRS of any change of address. If the taxpayers plan to move after 

sending the return and before a refund is received, they should 

notify their old post office and the IRS of their new address. (See 

item #4 for information on how to order Form 8822.)
Introduction and

Administrative Guidelines 9

4. Which address should taxpayers use, their street address 

or their post office box?

If the post office delivers mail to the post office box rather than to 

a street address, enter the P.O. box number on the line for the present home address.

5. What if the taxpayer needs a copy of a prior year return?

To obtain a copy of a prior-year return, taxpayers should complete 

Form 4506, Request for Copy or Transcript of Tax Form, and mail it, 

with the required fee, to the Internal Revenue service center where 

the return was filed. As an alternative, a transcript of a prior-year 

return may be obtained, also using Form 4506. There is no charge 

for the transcript. A transcript shows most line items from the original return, including accompanying forms and schedules.

6. What if the taxpayer wants to make a voluntary contribution to reduce the public debt?

Voluntary contributions to reduce the public debt should be made 

payable to “Bureau of the Public Debt.” The contribution may be 

sent in the tax return envelope. If the taxpayer is making a payment of tax due, as well as a contribution, there should be two 

checks or money orders in the tax-return envelope—one to pay the 

tax due and one to make the voluntary contribution. Voluntary 

contributions to reduce the public debt are considered charitable 

contributions and may be entered as an itemized deduction on 

Schedule A of Form 1040 in the year paid.

7. How long should taxpayers keep their tax returns?

Taxpayers should keep a copy of the tax return, worksheets used, 

and records of all items appearing on it (such as 1099 forms) until 

the statute of limitations runs out for that return. Usually, this is 3 

years from the date the return was due or filed, or 2 years from the 

date the tax was paid, whichever is later. They should keep forms 

W-2 until the Social Security Administration has recorded the earnings reflected on the forms. Keep property records (including those 

on a home) as long as they are needed to figure the basis of the 

original or replacement property. Closing statements for a home 

should be kept until the home is sold. Brokerage statements showing the purchase price of stock should be kept until the stock is 

sold. Also, contributions to nondeductible IRAs should be kept until 

all IRA funds are withdrawn. Calculations determining the nontaxable portion of pension income should be kept until all of the pension income is taxable. For additional recordkeeping information, 

see Publication 552, Recordkeeping for Individuals.

8. What is On-Line filing?

On-line filing allows a taxpayer to file their tax return from 

home through an Internet Web site or third-party transmitter. 

Information about filing from home is included in many commercial tax preparation software packages. Also, many software compa-
Introduction and 10 Administrative Guidelines

nies offer tax preparation and electronic filing software that can be 

downloaded from the Web; or they provide the option for individuals to prepare their returns while logged on to the Internet.

All that is needed is a personal computer (PC), software and a 

modem to send the return data. On-line filing accommodates the 

same basic forms and schedules as electronic filing. The taxpayer is 

responsible for sending their signature document (Form 8453-OL) 

accompanying paper documents to IRS after they receive notification from the Internet on-line provider or transmitter that their 

return has been accepted by IRS. If IRS rejects the return, the taxpayer will either have to correct the information and retransmit 

the return or print it and send it as a paper return to IRS. Credit 

card and direct debit payment options are available for balance due 

returns. 

9. Are there any publications or forms that can assist a taxpayer that owes prior year taxes or previously had their 

refund offset to satisfy another’s debt?

IRS offers various publications and forms that are specific to these 

issues.

The IRS Collection Process, Publication 594, explains a taxpayers right and responsibility regarding payment of federal taxes. 

Installment Agreement Request, Form 9465, gives the taxpayer 

the option to pay a balance due through monthly installment payments.

Innocent Spouse Relief, Publication 971, addresses how one 

spouse may request relief from past taxes due solely based on the 

other spouse’s debt. Request for Innocent Spouse Relief, Form 8857, 

explains various forms of relief and who may qualify.

Injured Spouse Claim and Allocation, Form 8379, allows a taxpayer 

to request relief from their spouse’s past due federal debts including back child support and past due taxes. An injured spouse can 

get a refund for his or her share of the overpayment that would be 

used to pay the past due amount. 

Additional information on these topics can be obtained by contacting the IRS at 1-800-829-1040, accessing their web page at 

www.irs.gov, or by visiting a Tax Assistance Center in your area.

10. Your Civil Rights Are Protected

Publication 4053, explains that under no circumstances will the 

Internal Revenue Service tolerate discrimination by its employees, grantees, contractors, and/or subcontractors. These provisions 

extend to VITA and TCE Programs. Publication 4053 or other IRS 

Civil Rights information should be displayed or made available to 

all taxpayers.
Introduction and

Administrative Guidelines 11

WHERE IS THE TOPIC?

The following pages show forms 1040EZ, 1040A, and 1040. For a 

discussion about what to put on a line, turn to the lesson in this 

text that is shown in the circle.
Introduction and 12 Administrative Guidelines

 FORM 1040EZ

Proof as of

July 21, 2003

(subject to change)

Do you, or your spouse if a joint return, want $3 to go to this fund? 

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

Department of the Treasury—Internal Revenue Service

Form Income Tax Return for Single and 1040EZ Joint Filers With No Dependents 2003 OMB No. 1545-0675

Note. Checking “Yes” will not change your tax or reduce your refund.

Presidential

Election

Campaign

(page 14)

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.

Attach your Form(s) W-2.

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check

Yes or No.

Yes. No.

5

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.

This is your taxable income. 

6

6

Payments

and tax

Earned income credit (EIC).

7 7

Tax. Use the amount on line 6 above to find your tax in the tax table on pages

25–29 of the booklet. Then, enter the tax from the table on this line.

10

10

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24.

Income

Cat. No. 11329W



4 4

12

12

Add lines 7 and 8. These are your total payments. 

8 8

9 9

Federal income tax withheld from box 2 of your Form(s) W-2.

Unemployment compensation and Alaska Permanent Fund dividends

(see page 16).

3

3

Amount

you owe

b Routing number

Account number

c Type: Checking

Enter amount from

worksheet on back.

If single, enter $7,800.

If married filing jointly, enter $15,600.

See back for explanation.

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

(99)

Yes No Yes No

You Spouse

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Your first name and initial Last name Your social security number

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see page 14. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.

Important! 



Label

(See page 14.)

Use the IRS

label.

Otherwise,

please print

or type.



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 

6

6

6

6

4

6

9

6

5

2

2

2

6

ENTER SITE

IDENTIFICATION

NUMBER ➤
Introduction and

Administrative Guidelines 13

 FORM 1040A

Proof as of

July 21, 2003

(subject to change)

Form Department of the Treasury—Internal Revenue Service

1040A 2003 U.S. Individual Income Tax Return

OMB No. 1545-0085

Your social security number

Your first name and initial Last name Label L

A

B

E

L

H

E

R

E

(See page 21.)

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the

IRS label. Home address (number and street). If you have a P.O. box, see page 22. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 22.

Filing

status

No. of boxes

checked on

6a and 6b

Yourself. If your parent (or someone else) can claim you as a

dependent on his or her tax return, do not check box 6a. Exemptions 6a

b Spouse No. of children

on 6c who: (4) if qualifying

child for child

tax credit (see

page 25)

(2) Dependent’s social

security number

c ● lived with

you

● did not live

with you due

to divorce or

separation

(see page 26)

If more than six

dependents,

see page 24.

Dependents

on 6c not

entered above

d

Add numbers

on lines Total number of exemptions claimed. above

7 Wages, salaries, tips, etc. Attach Form(s) W-2. 7

8a Taxable interest. Attach Schedule 1 if required. 8a

b Tax-exempt interest. Do not include on line 8a. 8b

Attach

Form(s) W-2

here. Also

attach

Form(s)

1099-R if tax

was withheld.

9a Ordinary dividends. Attach Schedule 1 if required. 9a

IRA

distributions.

11a Taxable amount

(see page 27).

11b

Enclose, but do

not attach, any

payment.

11a 11b

Taxable amount

(see page 28).

12a Pensions and 12b

annuities. 12a 12b

13 Unemployment compensation and Alaska Permanent Fund dividends. 13

14a Taxable amount

(see page 30).

Social security

benefits.

14b

14a 14b

15 Add lines 7 through 14b (far right column). This is your total income.  15

17 IRA deduction (see page 30). 17

Student loan interest deduction (see page 33).

Income

18

Add lines 16 through 19. These are your total adjustments. 20

Subtract line 20 from line 15. This is your adjusted gross income. 

18

21

Dependents:



Check only

one box.

If you did not

get a W-2, see

page 27.

Form 1040A (2003)

IRS Use Only—Do not write or staple in this space.

(3) Dependent’s

relationship to

(1) First name Last name you

20

21

Adjusted

gross 

income

Important! 

Cat. No. 11327A

Otherwise,

please print

or type.

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 57.

(99)

10a Capital gain distributions (see page 27). 10a

Presidential

Election Campaign

(See page 22.)  Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund?  No Yes

You Spouse

19 Tuition and fees deduction (see page 33). 19

1 Single

2 Married filing jointly (even if only one had income)

3

Qualifying widow(er) with dependent child (See page 24.) Married filing separately. Enter spouse’s SSN above and

full name here. 

Head of household (with qualifying person). (See page 23.)

If the qualifying person is a child but not your dependent,

enter this child’s name here. 

4

5

16 Educator expenses (see page 30). 16

b Qualified dividends (see page XX). 9b

b Post-May 5 capital gain distributions (see page 27). 10b

6

1

1

2

2

2

2

3

2

13

13

13
Introduction and 14 Administrative Guidelines

 FORM 1040A

Proof as of

July 21, 2003

(subject to change)

Single or

Married filing

separately,

$4,750

30

22 Enter the amount from line 21 (adjusted gross income). 22

Total boxes

checked 

Check You were born before January 2, 1939, Blind

if:

23a

Spouse was born before January 2, 1939, Blind 23a

b

23b

If you are married filing separately and your spouse itemizes

deductions, see page 34 and check here 

Tax,

credits,

and

payments

24 24

25 Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-. 25

26 Multiply $3,050 by the total number of exemptions claimed on line 6d. 26

Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.

This is your taxable income. 

27

27

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration

of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.



Enter your standard deduction (see left margin).

Form 1040A (2003)

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b

c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



41 Earned income credit (EIC). 41

Page 2

Form 1040A (2003)

If you have

a qualifying

child, attach

Schedule

EIC.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

● People who

checked any

box on line

23a or 23b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

34 34

Printed on recycled paper

Child tax credit (see page 38).

Type:

4

4

7

14

8

5

10

5

9

6

6

9

10 6

6

6

6

6

6

6

6

ENTER SITE

IDENTIFICATION

NUMBER ➤
Introduction and

Administrative Guidelines 15

 FORM 1040

Proof as of

July 21, 2003

(subject to change)

Department of the Treasury—Internal Revenue Service 1040 U.S. Individual Income Tax Return

For the year Jan. 1–Dec. 31, 2003, or other tax year beginning , 2003, ending , 20 OMB No. 1545-0074

Your first name and initial Last name Your social security number

(See

instructions

on page 21.)

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the IRS

label.

Otherwise,

please print

or type.

Home address (number and street). If you have a P.O. box, see page 21. Apt. no.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 21.

Presidential

Election Campaign

1 Single

Filing Status 2 Married filing jointly (even if only one had income)

Check only

one box.

3

Qualifying widow(er) with dependent child. (See page 21.)

6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax

Exemptions return, do not check box 6a

b Spouse

(4) if qualifying

child for child tax

credit (see page 22)

c Dependents: (2) Dependent’s

social security number

(3) Dependent’s

relationship to (1) First name Last name you

If more than five

dependents,

see page 22.

d Total number of exemptions claimed

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7

Income 8a Taxable interest. Attach Schedule B if required 8a

b Tax-exempt interest. Do not include on line 8a 8b Attach

Forms W-2 and

W-2G here.

Also attach

Form(s) 1099-R

if tax was

withheld.

9a Ordinary dividends. Attach Schedule B if required 9a

10 Taxable refunds, credits, or offsets of state and local income taxes (see page 25) 10

11 Alimony received 11

12 Business income or (loss). Attach Schedule C or C-EZ 12

Enclose, but do

not attach, any

payment. Also,

please use

Form 1040-V.

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions 15a 15b b Taxable amount (see page 25)

16a Pensions and annuities 16a b Taxable amount (see page 25) 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F 18

19 Unemployment compensation 19

20a Social security benefits 20a b Taxable amount (see page 27) 20b

21 21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income  22

IRA deduction (see page 29) 24

23

26

25

One-half of self-employment tax. Attach Schedule SE

27

Self-employed health insurance deduction (see page 33)

26

28

27

Self-employed SEP, SIMPLE, and qualified plans

29

28

Penalty on early withdrawal of savings

30

29

Alimony paid b Recipient’s SSN 

Add lines 23 through 32a 33

30

Subtract line 33 from line 22. This is your adjusted gross income 

31

Adjusted

Gross

Income

34

If you did not

get a W-2,

see page 23. Form

Married filing separately. Enter spouse’s SSN above

and full name here. 

Cat. No. 11320B





Label

Form 1040 (2003)

IRS Use Only—Do not write or staple in this space.

Head of household (with qualifying person). (See page 21.) If

the qualifying person is a child but not your dependent, enter

this child’s name here. 

Other income. List type and amount (see page 29)

Moving expenses. Attach Form 3903

24

25

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 76.

No. of boxes

checked on

6a and 6b

No. of children

on 6c who:

Dependents on 6c

not entered above

Add numbers

on lines

above 

● lived with you

● did not live with

you due to divorce

or separation

(see page 22)

32a 32a

Student loan interest deduction (see page 31)

31

33

Important!

Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund? 

You must enter

your SSN(s) above.

No Yes

You Spouse

(See page 21.)

(99)

Tuition and fees deduction (see page 32)

34

4

5

Educator expenses (see page 29) 23

2003

b Qualified dividends (see page 25) 9b

b If box on 13a is checked, enter post-May 5 capital gain distributions 13b

6

1

1

2

2

2

2

2

2

2

13

13

3

3

3

3
Introduction and 16 Administrative Guidelines

 FORM 1040

Proof as of

July 21, 2003

(subject to change)

Itemized deductions (from Schedule A) or your standard deduction (see left margin)

Add lines 61 through 67. These are your total payments 

Form 1040 (2003) Page 2

35 Amount from line 34 (adjusted gross income) 35

Check

if:

36a

Tax and

Credits

36a

Single or

Married filing

separately,

$4,750

If you are married filing separately and your spouse itemizes deductions, or

you were a dual-status alien, see page 34 and check here 

b

36b

37 37

38 Subtract line 37 from line 35 38

39

If line 35 is $104,625 or less, multiply $3,050 by the total number of exemptions claimed on

line 6d. If line 35 is over $104,625, see the worksheet on page 35

39

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 41

45

46

51

Education credits. Attach Form 8863

44

49

Other credits. Check applicable box(es):

48

53

54

Add lines 44 through 52. These are your total credits

48

Subtract line 53 from line 43. If line 53 is more than line 43, enter -0- 

53

Self-employment tax. Attach Schedule SE

54

Other

Taxes

55

69

Social security and Medicare tax on tip income not reported to employer. Attach Form 4137

Tax on qualified plans, including IRAs, and other tax-favored accounts. Attach Form 5329 if required 57

56

58

Add lines 54 through 59. This is your total tax 

59 59

61 Federal income tax withheld from Forms W-2 and 1099 61

62 2003 estimated tax payments and amount applied from 2002 return 62

Payments

63

Amount paid with request for extension to file (see page 56) 66

65

Excess social security and tier 1 RRTA tax withheld (see page 56) 64

66

68

67 Other payments from:

70a 70a

71 71

If line 68 is more than line 60, subtract line 60 from line 68. This is the amount you overpaid

72 72

Amount of line 69 you want refunded to you 

Refund

73

Amount of line 69 you want applied to your 2004 estimated tax 

Estimated tax penalty (see page 57)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and

belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

73

You were born before January 2, 1939, Blind.

Spouse was born before January 2, 1939, Blind.

a Form 3800

b Form 8801 c Specify

a Form 2439 b Form 4136

57

Household employment taxes. Attach Schedule H

58

67

Amount

You Owe

Sign

Here Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

Preparer’s

Use Only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation

Tax (see page 36). Check if any tax is from:

Amount you owe. Subtract line 68 from line 60. For details on how to pay, see page 57 

b

Direct deposit?

See page 56

and fill in 70b,

70c, and 70d.

Routing number

Account number

c Checking Savings

a Form(s) 8814 Form 4972

b

d





68

47

44

Retirement savings contributions credit. Attach Form 8880

55

56

Advance earned income credit payments from Form(s) W-2

69



Child tax credit (see page 39)

Credits from:

47

51

49

Additional child tax credit. Attach Form 8812

64

65

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

Joint return?

See page 21.

Daytime phone number

( )

Earned income credit (EIC)

Credit for the elderly or the disabled. Attach Schedule R

42

43

45

Alternative minimum tax (see page 37). Attach Form 6251

Add lines 41 and 42 

Credit for child and dependent care expenses. Attach Form 2441

46

If you have a

qualifying

child, attach

Schedule EIC.

42

43

63

Spouse’s occupation

( )

Form 1040 (2003)

● People who

checked any

box on line

36a or 36b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 58)? Third Party

Designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

52

Foreign tax credit. Attach Form 1116 if required

52

a Form 8396 b Form 8859

50 Adoption credit. Attach Form 8839 50

60 60

Type:

c Form 8885

Total boxes  checked 

4

6

6

6

6

10

9

6

6

13

2

10

5

8

14

7

5

4

4

ENTER SITE

IDENTIFICATION

NUMBER ➤
Introduction and

Administrative Guidelines 17

 TAXWISE HINTS

Each year the Internal Revenue Service contracts with a tax preparation 

software vendor to provide free software to our volunteers. You will 

find TAXWISE hints integrated throughout the text. They are located 

just before “Summing Up This Lesson” or “Summing Up This Segment”. 

They are also located, when appropriate, in the Military/International 

segments. 

  SUMMING UP THIS LESSON  

 Remember that the information used to prepare an individual’s income tax return must be treated as confidential.

 Use the Steps for effective interviewing.
Introduction and 18 Administrative Guidelines

STUDENT NOTES
Lesson 1 1-1

BASIC

GETTING STARTED

INTRODUCTION AND OBJECTIVES

In this lesson you will learn what you need to know 

when you begin to prepare an individual’s federal 

income tax return. Please note that two of the objectives concern the importance of insuring that the 

taxpayer’s (or dependent’s) name and social security 

number (SSN) match IRS records. 

Every U.S Federal tax return that is filed must have 

each person identified by a number. Each person 

refers to the taxpayer, the taxpayer’s spouse if the taxpayer is married, and any dependent claimed on the 

return. The identifying number will be a social security number for those persons who qualify to be issued 

one. All others must have an individual taxpayer identification number (ITIN).

After completing this lesson you should be able to: 

■ Explain the importance of requiring a social security card for the tax preparation. 

■ Determine which taxpayers need an Individual 

Taxpayer Identification Number (ITIN)

■ Use the 5 tests for a qualifying dependent. 

■ Apply the requirements for each of the five filing 

statuses. 

■ Select the correct filing status. 

■ Determine who must file. 

■ Determine who should file. 

■ Select the appropriate tax form to use.

SOCIAL SECURITY NUMBER

 It is extremely important that each person use 

the correct social security number. The most accurate information is usually located on the taxpayer’s 

original social security card. Each year hundreds 

of thousands of returns are delayed in processing 

or credit/deductions disallowed because names and 

social security numbers do not match Social Security 

Administration (SSA) records. To prevent processing 

delays in paper returns and rejected electronically 

filed returns, volunteers must check the accuracy of 

each Social Security number, as well as the spelling 

of the name associated with the number. If a taxLesson 1

POTENTIAL

PITFALLS

Canadians have a 

number that is like a 

social security number, 

but it is for their old age 

pension. Do not use this 

number on a U.S. tax 

return. Canadians often 

have both a U.S. and 

Canadian Social Security 

Number.
1-2 Lesson 1

BASIC

payer does not have a valid SSN, direct them to Form SS-5, Social 

Security Number Application. This form should be submitted to the 

nearest Social Security Administration Office. Explain to him/her 

that they must have a number before you can assist them with filing the tax return.

To do this volunteers should ask for one of the following documents 

for each individual on the return. 

■ Social Security Card (original or copy) 

■ SSA 1099 benefit statements 

■ SSA letter

Note: Driver’s licenses and passport may not depict the name or 

number as it appears on SSA records.

INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS

Important Note: ITIN information will be provided as a separate 

supplement. For additional information see your instructor or 

IRS coordinator.

SUMMING UP THIS LESSON

■ All taxpayers and dependents listed on a tax return must have 

an identification number. 

■ An Identification Number can be either a SSN or an ITIN. 

■ Use caution when completing the entity section of the tax 

return.

PERSONAL AND DEPENDENCY EXEMPTIONS

After completing this section, you will be able to: 

■ Define personal exemption.

■ Define dependency exemption.

■ Use the five tests to determine a qualifying dependent. 

There are two kinds of exemptions: personal and dependency. While 

both exemptions are worth the same amount, different rules apply 

to each type. 

Personal exemptions are allowed to the taxpayer and to the taxpayer’s spouse. 

Dependency exemptions are allowed to the taxpayer for qualifying dependents who meet five specific tests. 

The taxpayer can usually deduct the exemption amount ($3,050 

for 2003) when figuring taxable income.
Lesson 1 1-3

BASIC

PERSONAL EXEMPTIONS

The Taxpayer 

The taxpayer can claim a personal exemption for himself or herself unless the taxpayer is eligible to be claimed as a dependent on 

another person’s return. If this is true, the taxpayer cannot claim 

an exemption for himself or herself, even if the other taxpayer does 

not actually claim the dependency exemption. 

The Spouse 

Generally, if the taxpayer’s spouse is claimed as a dependent on 

another person’s return, the taxpayer cannot claim the spouse’s 

exemption on his or her return. (One spouse is never considered the 

dependent of the other.) 

To claim an exemption for a spouse, the taxpayers must be married by December 31, the last day of the year. If the taxpayer files 

a separate return, he or she can claim the exemption for his or her 

spouse only if his or her spouse had no gross income (defined later) 

and was not the dependent of another taxpayer. This is true even if 

the other taxpayer does not actually claim the taxpayer’s spouse’s 

exemption. If a taxpayer is divorced or legally separated at the end 

of the tax year, he or she cannot claim his or her (former) spouse’s 

exemption. 

If the taxpayer’s spouse died during the year and the taxpayer did 

not remarry by December 31, the taxpayer can generally claim the 

personal exemption for the deceased spouse. This exemption can be 

claimed only if the taxpayer was not divorced or legally separated 

from his or her spouse on the date of the death and would have 

been able to claim the exemption under regular circumstances.

DEPENDENCY EXEMPTIONS

A dependent is a person, other than the taxpayer or spouse, who 

entitles the taxpayer to claim a dependency exemption. A taxpayer 

can claim a dependency exemption only if all five of the following 

dependency tests are met. 

1. Member of Household or Relationship 

2. Citizen or Resident 

3. Joint Return 

4. Gross Income

5. Support 

1. The Member of Household or Relationship Test 

To meet this test, the person must either: 

ALERT

For 2003 the exemption 

amount increased to 

$3,050. 
1-4 Lesson 1

BASIC

A. Live with the taxpayer for the entire year as a member of his or 

her household, or 

B. Be related to the taxpayer in one of the ways listed later, under 

Relatives who do not have to live with the taxpayer. 

Note:

A person away on temporary absences is considered to live and be 

a member of the household the entire year. Temporary absences 

include attending school, taking vacations, hospital stays due to 

illness, and military service. In addition, the relationship must not 

violate local law.

Relatives who do not have to live with the taxpayer 

A person related to the taxpayer in any of the following ways does 

not have to live with the taxpayer the entire year as a member of 

his or her household to meet this test. 

■ Child, grandchild, great grandchild, etc. (A legally adopted child 

is considered the taxpayer’s child) 

■ Stepchild 

■ Brother, sister, half brother, half sister, stepbrother, stepsister 

■ Parent, grandparent, or other direct ancestor, but not foster 

parent

■ Stepmother or stepfather 

■ Brother or sister of your father or mother 

■ Son or daughter of your brother or sister 

■ Father-in-law, mother-in-law, son-in-law, daughter-in-law, 

brother-in-law, or sister-in-law 

If a child was born alive during the year and meets the dependency 

tests, the taxpayer can take the exemption, even if the child lived 

only for a moment. No exemption is allowed for a stillborn child. 

State or local laws determine if a child was born alive or stillborn. 

A legally adopted child is considered to be the taxpayer’s child. If 

an adoption is finalized and the child begins living with the taxpayer on or before December 31, member of the household test is 

met. 

If a foster child has lived with the taxpayer for the entire year 

(except for temporary absences) and the taxpayer cares for the 

child as his or her own, the child is treated as the taxpayer’s own 

child. 

A person who died during the year and was a member of the taxpayer’s household until death meets the member of household test. 

A cousin must live with the taxpayer for the entire year (except 

for temporary absences) to meet the member of household test. A 

cousin does not meet the relationship test. 
Lesson 1 1-5

BASIC

2. Citizen or Resident Test 

To meet this test, a person must be for some part of the year:

■ a U.S. citizen or resident, or 

■ a resident of Canada or Mexico. 

Children usually are citizens or residents of the country of their 

parents. A child born in a foreign country can be recognized as a 

U.S. citizen for tax purposes if either parent is a U.S. citizen. 

If a taxpayer (who is a U.S. citizen) legally adopts a child who is not 

a U.S. citizen or resident, and the other dependency tests are met, 

the taxpayer can take the exemption if the taxpayer’s home is the 

child’s main home and the child is a member of the household for 

the entire tax year. 

3. Joint Return Test 

To meet this test, generally, the taxpayer’s dependent cannot file a 

joint return. However, the joint return test does not apply if a joint 

return is filed by the dependent and his or her spouse merely as a 

claim for refund and no tax liability would exist for either spouse 

on separate returns. 

4. The Gross Income Test 

A taxpayer cannot take an exemption for a person whose gross

income equals or exceeds the exemption amount. The exemption

amount for 2003 is $3,050. 

Gross income is all taxable income in the form of money, goods, 

property, and services. It includes all unemployment compensation

and certain scholarships. It does not include welfare benefits or 

nontaxable social security benefits. 

There are two exceptions to the gross income test. The gross income 

test does not apply if: 

■ the taxpayer’s child is under 19 years of age at the end of the 

year, or 

■ the taxpayer’s child is under 24 years of age at the end of the 

year and is a full-time student 

To be considered a student, the taxpayer’s child must attend school 

full-time for some part of each of five calendar months of the 

year. The five months need not be consecutive in order to qualify. 

School generally does not include night schools, on-the-job training 

courses, or correspondence schools. 
1-6 Lesson 1

BASIC

5. The Support Test 

The support test requires that the taxpayer provide more than half 

of a person’s total support for the entire year in order to claim that 

person as a dependent. 

There are two exceptions to the support test: 

■ Multiple support, and 

■ Children of divorced or separated parents 

(Both of these exceptions will be covered later in this section.) 

To determine if the taxpayer provided more than half of the dependent’s support, compare the amount that the taxpayer contributed 

to the person’s support with the entire amount of support the person received from all sources. (Exhibit 1 provides a worksheet for 

figuring whether the taxpayer provided more than half of a dependent’s support.) 

State benefit payments like welfare, food stamps, and housing are 

considered support provided by the state, not by the parent, regardless of how the parent actually spends the funds. 

Support provided for the dependent includes support paid from 

these sources: amounts withdrawn from savings; borrowed 

amounts, such as student loans and car loans; and tax-exempt 

income, including social security benefits, life insurance proceeds, 

nontaxable pensions, gifts, and tax-exempt interest. 

Only the amount of a dependent’s own funds that is actually spent 

on support is counted. Scholarships received by fulltime students 

are not included in total support. 

Do not include in support any amounts that are: 

■ paid from a dependent’s own funds for income and social 

security taxes, 

■ paid as life insurance premiums, or 

■ not spent, but saved or invested. 

Total support items include food, clothing, shelter at fair rental 

value, education, medical and dental care, recreation, and transportation. Some support items, like food and rent, benefit more than 

one member of a household. Divide the value of these support items 

among the number of household members that benefit. Capital 

items like furniture, appliances, or autos should be included in support if the items are solely for the dependent’s own use or benefit. 

 Example 1 

Alexis, age 20, lived all year with her parents and younger sister 

in an apartment. Alexis earned $4,000 from her part-time job. She 

saved $1,000 for college and $500 was withheld for income and 

social security taxes. Alexis spent the remaining $2,500 on clothing, 

transportation, and recreation. 
Lesson 1 1-7

BASIC

Alexis provided $2,500 of her own support. The college savings will 

not be counted as support until the money is spent. The funds used 

to pay income and social security tax are not considered to be support. 

In order for Alexis’ parents to claim her as a dependent, they must 

provide additional support of more than $2,500. Included in support items are one-fourth of the family’s rent, utilities, grocery bills, 

and any additional amounts paid for Alexis’ medical expenses and 

education.
1-8 Lesson 1

BASIC

Exhibit 1 Worksheet for Determining Support

1)

Funds Belonging to the Person You Supported

Total funds belonging to the person you supported, including income received (taxable and

nontaxable) and amounts borrowed during the year, plus the amount in savings and other accounts at

the beginning of the year

2) Amount used for support $

3) Amount used for other purposes $

4) Amount in savings and other accounts at end of the year $

(The total of lines 2, 3, and 4 should equal line 1) $

5) Lodging (Complete item a or b)

Expenses for Entire Household (where the person you supported lived)

a) Rent paid $

b) If not rented, show fair rental value of home. If the person you supported owned the home, include

this amount in line 19. $

6) Food $

7) Utilities (heat, light, water, etc. not included in line 5a or 5b) $

8) Repairs (not included in line 5a or 5b) $

9) Other. Do not include expenses of maintaining home, such as mortgage interest, real estate taxes, and

insurance.

Total household expenses (Add lines 5 through 9) $

Total number of persons who lived in household

$

10)

11)

Expenses for the Person You Supported

12) Each person’s part of household expenses (line 10 divided by line 11) $

13) Clothing $

14) Education $

15) Medical, dental $

16) Travel, recreation $

Other (specify)

$

17)

18) Total cost of support for the year (Add lines 12 through 17) $

19) Amount the person provided for own support (line 2, plus line 5b if the person you supported owned

the home) $

20) Amount others provided for the person’s support. Include amounts provided by state, local, and other

welfare societies or agencies. Do not include any amounts included on line 1. $

21) Amount you provided for the person’s support (line 18 minus lines 19 and 20) $

22) 50% of line 18 $

Is line 21 more than line 22?

Did You Provide More Than Half?

Yes. You meet the support test for the person. If the other exemption tests are met, you may claim an exemption for the person.

No. You do not meet the support test for the person. You cannot claim an exemption for the person unless you can do so under a

multiple support agreement. See Multiple Support, later.

$
Lesson 1 1-9

BASIC

Multiple Support

Sometimes, no one person provides more than half of an individual’s support, but two or more persons together do. In this situation, 

anyone who separately provides over 10 percent of the person’s 

total support and meets the other tests can claim the exemption 

for the dependent. Nonetheless, only one person can claim the 

exemption. All other persons who provided more than 10 percent 

of the support and who meet the other tests must sign a written 

statement agreeing not to claim the exemption for that year. Form 

2120, Multiple Support Declaration, is used to identify each of 

the others not claiming the exemption. The person who claims the 

exemption attaches Form(s) 2120 to his or her current year’s tax 

return and must keep for his records the signed statement from the 

person agreeing not to claim the exemption. 

Example 2 

Henry E. and Harold S. Rust each provide more than 10 percent 

of the total support of their mother Margaret S. Rust, but neither 

provides more than 50 percent. Together, Henry and Harold provide more than 50 percent. They decide that Henry will claim the 

exemption this year. Exhibit 2 shows the completed Form 2120 that 

Henry will attach to his return.

Exhibit 2 Henry’s Form 2120
1-10 Lesson 1

BASIC

Children of Divorced or Separated Parents 

The parent who has custody of the child for the greater part of the 

year (the custodial parent) will generally be considered as having 

provided over half of the child’s support if all of the following 

conditions are met.

■ The child received over half of his or her total support from one 

or both parents. 

■ The parents are divorced, legally separated, separated under a 

written separation agreement, or have lived apart at all times 

during the last six months of the calendar year. 

■ The child was in the custody of one or both parents for more 

than half of the calendar year. 

The custodial parent will not be considered as having provided 

over half of the child’s support if any of the following conditions 

exist. 

■ Over half of the support of the child is considered to have been 

received from a third party, such as a relative or friend. 

■ The custodial parent signed Form 8332, Release of Claim to 

Exemption for Child of Divorced or Separated Parents, or a similar statement, that allows the noncustodial parent to claim the 

exemption (this statement must be attached to the noncustodial 

parent’s return). 

■ A decree or agreement that went into effect after 1984 unconditionally states that the noncustodial parent can claim the child 

as a dependent. 

■ A qualified pre-1985 agreement provides that the noncustodial 

parent shall be entitled to the exemption for the child and the 

noncustodial parent contributed at least $600 toward the child’s 

support during the tax year, unless the pre-1985 agreement is 

modified after 1984 to specify that this provision will not apply. 
Lesson 1 1-11

BASIC

Example 3 

Ellen M. and Richard A. Stonehill are divorced. Under the terms of 

the 1984 divorce, Richard has custody of their two children, Alan R. 

and Mary E. The divorce decree specifies that Ellen can claim the 

dependency exemptions. Ellen provided $1,500 of support for each 

child. Assuming all other tests are met, Ellen can claim both children as dependents. 

If Ellen had provided only $500 of support for each child, she could 

not claim dependency exemptions for the two children. To claim 

the exemptions, she must provide at least $600 of support for each 

child. 

If the divorce occurred after 1984 and Richard and Ellen had 

agreed that Ellen would claim the dependency exemptions for the 

children, Ellen would attach Form 8332 or a similar statement to 

her tax return. Exhibit 3 shows a completed Form 8332 for Ellen.

Exhibit 3 Ellen’s Form 8332

Richard A. Stonehill
1-12 Lesson 1

BASIC

Exhibit 4 Support Test for Children of Divorced or Separated Parents

Are the parents divorced or

legally separated, separated

under a written agreement, or

did they live apart the last 6

months of the year?

Is there a decree or

agreement executed

after 1984 that

unconditionally entitles

the noncustodial parent

to the exemption?

Start Here

No

Yes







Did one or both parents

furnish over half of the child’s

total support?

Is the child in the custody of

one or both parents for more

than half of the year?

Did the custodial parent sign

a Form 8332 or similar

statement releasing the

exemption?







Yes

Yes

Yes





No

No





Did any one person Yes

provide over half of the

child’s total support?

The person who provided over

half of the child’s support meets

the support test.

Is there a decree or

agreement executed

before 1985 (and not

modified after 1984)

that entitles the

noncustodial parent to

the exemption?

Did the noncustodial

parent provide at least

$600 of the child’s

support during the

year?

No







No

No



No

Yes

Yes







No

Yes

See Multiple Support.

The custodial parent meets the

support test.

The noncustodial parent meets

the support test.
Lesson 1 1-13

BASIC

DETERMINING THE NUMBER OF EXEMPTIONS TO CLAIM

When determining the number of exemptions to claim, first look 

at the personal exemptions and then review each of the tests for 

dependency exemptions. There are many factors to consider as well 

as several major exceptions.

REMEMBER: Do not claim an exemption for a person who 

can be claimed on another return.

Exhibit 5 Can You Claim an Exemption for a Dependent?

Was the person either a member of your household for the entire tax

year or related to you? (See Member of Household or Relationship

Test.)

You cannot

claim an

exemption

for this

person.

You can

claim an

exemption

for this

person.

Start Here

No

Yes

No

Yes









 Was the person a U.S. citizen or resident, or a resident of Canada or

Mexico, for any part of the tax year?1

Did the person file a joint return for the year?2

Did you provide more than half the person’s total support for the

year? (If you are a divorced or separated parent of the person, see

Support Test for Child of Divorced or Separated Parents.)

3

Did the person have gross income of $2,900 or more during the tax

year?4

Was the person your child?

Was your child under 19 at the end of the year?

Was your child under 24 at the end of the year and a full-time

student for some part of each of five months during the year? (See

Gross Income Test.)















Yes

Yes

No

Yes

Yes

Yes

No









No

No

No

No





Yes

1

If the person was your legally adopted child and lived in your home as a member of your household for the entire tax year, answer “yes” to this question. 2

If neither the person nor the person’s spouse is required to file a return, but they file a joint return only to claim a refund of tax withheld, answer “no” to this

question.

3

Answer “yes” to this question if you meet the multiple support requirements under Multiple Support Agreement.



4

Gross income for this purpose does not include income received by a permanently disabled individual at a sheltered workshop.

$3,050
1-14 Lesson 1

BASIC

COMPLETING THE EXEMPTION SECTION OF FORMS 1040A AND 1040

Exemptions are claimed on lines 6a through 6d. The taxpayer’s personal exemption is claimed on line 6a. The personal exemption for 

the taxpayer’s spouse is claimed on line 6b. The total of lines 6a and 

6b is entered on the line in the right-hand margin. The dependency

exemptions are claimed on line 6c. The columns on line 6c are self 

explanatory. In column 3, enter the specific relationship for each 

dependent: son, daughter, grandson, granddaughter, etc. Column 

4 is checked if the taxpayer’s dependent is also a qualifying child 

for the child tax credit (see lesson 10). The line 6c exemptions are 

totaled on the three right-hand-margin lines that relate to: 

■ Children who lived with the taxpayer, 

■ Children who did not live with the taxpayer due to divorce or 

 separation, and 

■ Other dependents not entered on the lines above. 

Line 6d shows the total number of exemptions (See Exhibit 6).

Exhibit 6 Form 1040/1040A, page 1 Dra

6/05/2

No. of boxes

checked on

6a and 6b

Yourself. If your parent (or someone else) can claim you as a

dependent on his or her tax return, do not check box 6a. Exemptions 6a

b Spouse No. of children

on 6c who: (4) if qualifying

child for child

tax credit (see

page 25)

(2) Dependent’s social

security number

c ● lived with

you

● did not live

with you due

to divorce or

separation

(see page 26)

If more than six

dependents,

see page 24.

Dependents

on 6c not

entered above

d

Add numbers

on lines Total number of exemptions claimed. above

Dependents:



(3) Dependent’s

relationship to

(1) First name Last name you

✔

✔

James Nicholson 000 00 3333 son ✔

2

1

3
Lesson 1 1-15

BASIC

 TAXWISE HINTS

If you are claiming Child Tax Credit (CTC), Earned Income Credit, 

and/or Dependent Care (DC), you must enter the date of birth for 

qualifying children and “X” the EIC and/or DC box(es). CTC is automatically calculated for you.

  Summing Up This Section  

There are two types of exemptions: personal and dependency. 

Each exemption reduces taxable income by $3,050 in 2003. 

A personal exemption can be claimed for a taxpayer and spouse 

if neither the taxpayer nor the spouse can be claimed on another 

taxpayer’s return. 

To claim a dependency exemption, the dependent must meet all 

of 5 tests. 

1. The Member of Household or Relationship Test. 

2. The Citizen or Resident Test. 

3. The Joint Return Test. 

4. The Gross Income Test. 

5. The Support Test. 

There are two exceptions to the gross income test. 

 Taxpayers’ children under age 19. 

 Taxpayers’ children under age 24 who are full-time students. 

There are two exceptions to the support test. 

 The multiple-support agreement.

 Children of divorced or separated parents.
1-16 Lesson 1

BASIC

Exercises 

1. Janice is 18 years old and a full-time student. She can be 

claimed as a dependent on her parents’ tax return. Janice will 

file Form 1040EZ to report income from her summer job. How 

many personal exemptions can Janice claim on her return? 

2. Tom Brown supports his wife’s uncle, Jim (her mother’s 

brother), who lives in another city. The Browns file a joint 

return. Can the Browns claim Jim as a dependent if all other 

tests are met?

3. Ruth filed a joint return with her husband whom she married 

in November. They claimed two personal exemptions on their 

return. Ruth had no income; her husband had $10,600 income. 

Can Ruth’s father, who supported her and paid for the wedding, 

claim her as a dependent on his return? 

4. Joe is 65 years old and lives with his son and daughter-in-law. 

In 2003, Joe’s taxable pension income was $4,700. Can Joe’s son 

and daughter-in-law claim a dependency exemption for Joe if all 

other tests are met?

5. Randy’s son, Paul, earned $4,300 last year. Paul is 18 years old 

and started college in September 2003. Is the gross income test 

met?

6. Traci’s mother received $3,500 in social security payments and 

$600 in interest. Traci paid $1,500 for her food and $500 for her 

medical bills. Her mother paid $2,400 for lodging, $300 for recreation, $150 for clothes, $100 for transportation, $400 for life 

insurance premiums, and $200 for a television set. 

A. What is the total support for Traci’s mother? 

B. How much did Traci contribute toward her mother’s support?

C. How much did Traci’s mother contribute toward her support?

D. Can Traci claim a dependency exemption for her mother?
Lesson 1 1-17

BASIC

7. Mrs. Wiley has three children, Mark, Tim, and Mary. Each child 

contributes toward Mrs. Wiley’s support. Mark provides 45 percent, Tim, 35 percent, and Mary, 10 percent. 

A. Which, if any, of her children can claim a dependency exemption for Mrs. Wiley under a multiple-support agreement? 

B. If Mark is to claim the dependency exemption, who must 

sign a statement waiving his/her right to claim Mrs. Wiley as 

a dependent?

8. Under the terms of Peter’s pre-1985 divorce decree, his former 

wife has custody of their child. The decree states that Peter can 

claim the exemption. He provided $700 toward the child’s support. Can he claim the exemption? 
1-18 Lesson 1

BASIC

Lesson 1 GETTING STARTED ANSWERS TO EXERCISES

Exercise 1 

0

Exercise 2 

Yes; Jim is related by blood to Mrs. Brown. 

Exercise 3 

No, the husband has a filing requirement 

Exercise 4 

No; His gross income equals or exceeds the exemption amount of 

$3,050. 

Exercise 5 

Yes; Paul is under the age of 19. 

Exercise 6 

A. $5,150 ($1,500 + $500 + $2,400 + $300 + $150 + $100 + $200) Note 

that life insurance premiums are not considered support. 

B. $2,000 ($1,500 + $500) 

C. $3,150 ($2,400 + $300 + $150 + $100 + $200) Note that life insurance premiums are not considered support. 

D. No; she did not pass the Gross Income Test. 

Exercise 7 

A. Mark or Tim are eligible to claim the exemption. Both provide more 

than 10 percent of Mrs. Wiley’s support. Mary is not eligible since 

she does not provide more than 10 percent of the support. 

B. Only Tim must sign. Mary is not eligible to take the exemption. 

Therefore, she does not have to sign a waiver. 

Exercise 8 

Yes; Peter provided at least $600 in support.
Lesson 1

Military Segment M-1-1

DEPENDENCY EXEMPTIONS

INTRODUCTION AND OBJECTIVE

The basic segment explained the tests that must be met before 

a person can be claimed as a dependent. In this segment you 

will find more information about the support and citizen or resident tests to help you assist members of the Armed Forces.

 SUPPORT TEST

Armed Forces Member as a Dependent

A person who has been in the Armed Forces for the entire year 

cannot be claimed as a dependent because the support test will 

not have been met. A person in the Armed Forces for only part 

of the year can be claimed as a dependent if all the dependency 

tests are met. All amounts received from the Armed Forces that 

are used for the person’s support must be taken into account.

If a person is appointed to one of the Armed Forces academies 

and is at the academy all year, he or she cannot be a dependent. 

An appointee at the academy for only part of the year may 

qualify as a dependent if all the tests are met.

Exercise 1

Kathleen Simmons is 18 and single. Kathleen graduated from 

high school in June 2003 and entered the U.S. Air Force in 

September 2003. Kathleen provided $3,400 (wages of $2,400 

and $1,000 for other items provided by the Air Force) for her 

own support, and her parents provided $3,600. Can Kathleen’s 

parents claim a dependency exemption for her for 2003?

Answer

Lesson 1

Military Segment
Lesson 1 M-1-2 Military Segment

Armed Forces Member Claiming a Dependent

If a member of the military has authorized a dependency allotment 

and the allotment is used to support dependents who did not live 

with him or her for reasons other than divorce or separation, the 

member can claim the exemptions if all the dependency tests are 

met.

Example

Army Pvt. Gary Fairfield authorized a dependency allotment for 

his mother. She used the amount received to support herself and 

Gary’s 10-year-old sister. Gary provided no other funds for their 

support. If the allotment provides more than half of their total support for the year and all other dependency tests are met, Gary can 

claim exemptions for both his mother and his sister, even though 

the allotment was authorized for his mother only.

Exercise 2

Cpl. Jim Mills authorized a dependency allotment for his son, 

John. The allotment ($150 a month) was in effect for all of 2003. 

How much support should Cpl. Mills consider he provided for 

John in 2003?

Answer

CITIZEN OR RESIDENT TEST

To meet the citizen or resident test, the taxpayer’s dependent must 

be a U.S. citizen, a U.S. resident, or a resident of Canada or Mexico 

for some part of the calendar year in which the taxpayer’s tax year 

begins.

Exercise 3

The wife of Col. William Bates is a Greek citizen. Her sister, 

Athena, who is also a Greek citizen, lived in the Bates’ home in 

Greece for the entire tax year. Col. Bates provided more than 50% 

of Athena’s total support.

a. Can Col. Bates claim his sister-in-law as a dependent?

Answer

b. What would be your answer to (a) if Athena were a Canadian 

citizen living in the Bates’ home in Greece for the entire year?

Answer
Lesson 1

Military Segment M-1-3

Children are usually citizens or residents of the country of their 

parents. If you were a U.S. citizen when your child was born, the 

child may be a U.S. citizen although the other parent was a nonresident alien and the child was born in a foreign country.

A U.S. citizen who has legally adopted a child who is not a U.S. 

citizen or resident can claim the child as a dependent if the other 

dependency tests are met and if, for the entire tax year:

1. The taxpayer’s home is the child’s main home, and

2. The child is a member of the taxpayer’s household.

Exercise 4

Sgt. John Ranger, a U.S. citizen who has been in the U.S. Army for 

13 years, is stationed in Germany. His wife is a German citizen 

who has never lived in the United States. Their 2-year-old son 

was born in Germany. Sgt. Ranger’s stepdaughter, a German citizen whom Sgt. Ranger has not adopted, also lives with them. The 

Rangers provide total support for the two children. How many 

dependency exemptions can Sgt. Ranger claim on a joint return?

Answer

  SUMMING UP THIS SEGMENT  

In this segment you have learned how the support and citizen or 

resident tests for the dependency exemption apply to some military situations.
Lesson 1 M-1-4 Military Segment

DEPENDENCY EXEMPTIONS

 ANSWERS TO EXERCISES

1. Yes. The support test is met.

 2. $1,800.

 3. a. No. His sister-in-law was not a citizen or resident of the 

 United States at any time during the year.

 b. No. Athena would have to reside in Canada for at least 

 some part of the year to qualify.

4. One. The stepdaughter does not qualify as a U.S. citizen or 

 resident. The son qualifies because his father is a U.S. citizen.

Lesson 1

Military Segment
Lesson 1

Military Segment M-1-5

EXEMPTION FOR A

FOREIGN SPOUSE Lesson 1

Military Segment

INTRODUCTION AND OBJECTIVES

There are special tax laws and filing procedures that must be 

followed in order to prepare to file federal income tax returns 

accurately for citizens or residents of the United States who have 

spouses who are nonresident aliens. When we are finished with 

this segment you will be able to determine if a taxpayer is entitled 

to claim the personal exemption for a foreign spouse.

PERSONAL EXEMPTIONS

Each taxpayer is allowed a personal exemption (unless the 

taxpayer is claimed by someone else). On a Married Filing Separate 

return a spouse’s personal exemption may be claimed by the 

taxpayer if the spouse had no gross income and is not claimed by 

anyone else. Remember: a spouse is never the dependent of 

the taxpayer.

If your spouse is a nonresident alien, he or she can choose to file 

a joint return with you (see Lesson 4, Travel Expenses, for more 

information). If the nonresident alien spouse makes this choice, 

they will be treated like a resident alien for tax purposes. This 

means that they will have to include all of their worldwide income 

on the joint U.S. tax return. Your spouse does not have to be from 

Canada or Mexico to make this choice.

Example 1

Pat Simpson, a U.S. citizen, is married to Frank, a nonresident 

alien. Pat and Frank make the choice to treat Frank as a resident alien by attaching a statement to their joint return. Pat and 

Frank must report their worldwide income for the year they make 

the choice and for all later years unless the choice is ended or 

suspended. Although Pat and Frank must file a joint return for the 

year they make the choice, they can file either joint or separate 

returns for later years. If your nonresident alien spouse does not 

choose to be treated as a resident alien, you may be able to claim 

an exemption for the spouse on a married filing separate return. 

The nonresident spouse must not have any gross income for U.S. 

tax purposes and cannot be the dependent of another U.S. taxpayer. 

The spouse must have a Taxpayer Identification Number.
Lesson 1 M-1-6 Military Segment

  SUMMING UP THIS SEGMENT  

 In general, a taxpayer can claim an exemption for a nonresident alien spouse if he or she chooses to file a joint return 

with them and be taxed as a resident alien. 

 A taxpayer can claim a nonresident alien spouse on his or her 

married filing separate return if the nonresident alien spouse 

has no income for U.S. tax purposes and is not the dependent 

of another U.S. taxpayer. 

 Every person claimed on a return must have a Taxpayer 

Identification Number.
Lesson 1

International Segment I-1-1

 EXEMPTION FOR FOREIGN

SPOUSE OR DEPENDENT Lesson 1

International Segment

INTRODUCTION AND OBJECTIVES

This lesson will explain the special rules that may affect a taxpayer’s ability to claim a foreign spouse and/or dependent on their 

return.

After completing this lesson, you should be able to:

■ Determine whether the taxpayer is a non-resident alien or resident alien

■ Differentiate between a resident for tax purposes and a resident 

for immigration purposes

■ Apply the dependency test for taxpayer living overseas

PERSONAL AND DEPENDENCY EXEMPTIONS

Each taxpayer is allowed a personal exemption (unless the taxpayer is claimed by someone else). On a Married Filing Separate 

return a spouse’s personal exemption may be claimed by the taxpayer if the spouse had no gross income and is not claimed by 

anyone else. Remember: a spouse is never the dependent of the taxpayer. 

The five dependency tests are essentially the same for taxpay ers

living overseas. 

Citizenship Test. To meet this test a person must be a U.S. citizen or national, or a resident of the U.S., Canada or Mexico for 

some part of the tax year. If a U.S. citizen marries a nonres ident

alien, any child born to them may be entitled to U.S. citi zenship. 

In most instances the U.S. parent will register the child with the 

U.S. Embassy or Consulate closest to where they live. If the child 

may claim U.S. citizenship, the child meets the citizenship test for 

dependency purposes, even though the fam ily is living in a foreign 

country. Proof of citizenship is not required to be atttached to the 

return. But if the item is ques tioned by the IRS, the U.S. citizen 

parent will have to obtain the necessary documentation from the 

U.S. government. 
Lesson 1 I-1-2 International Segment

Example 2

Betty Glinn, a U.S. citizen, is married to Giovanni Glinn, an Italian 

citizen. They are currently living in Rome. Their daugh ter, Patricia, 

meets the citizenship test for dependency since she is entitled to 

U.S. citizenship because of her U.S. parent.

Occasionally, you will encounter a situation where a U.S. citi zen

adopts a child who is not a U.S. citizen. In those circum stances, the 

adopted child can meet the citizenship test if he or she lives with 

the U.S. citizen parent for the entire tax year (except for temporary 

absences). 

DETERMINING ALIEN STATUS

Throughout this course material, we refer to U.S. citizens or resident aliens. In order to apply the tax law correctly, you need to 

determine alien status. 

The first issue that must be decided is whether the taxpayer is a 

nonresident alien. If he/she is a nonresident alien then the taxpayer must be referred to get specialized help. Your training covers 

only the tax law as it applies to a citizen or a resident alien so this 

determination is very important. Remember that we are discussing 

taxes here. A resident for tax purposes is not necessarily a resident 

for immigration purposes. 

The following is an excerpt from Publication 519 (U.S. Tax Guide 

for Aliens). This section discusses the rules for determin ing alien 

status. These issues are complex. In this lesson, we will use examples to review the differences between resident and non-resident 

aliens. 

Glance or read over the following material, especially the flow 

chart, and get a feel for what is involved.
Lesson 1

International Segment I-1-3

Exhibit 1. Nonresident Alien or Resident Alien?

Were you a lawful permanent resident of the United 

States (had a “green card”) at any time during 2003?

Start here to determine your status for 2003

Were you physically present in the United States on at 

least 31 days during 2003?

Were you physically present in the United States on at 

least 183 days during the 3-year period consisting of 

2001, 2002, and 2003, counting all days of presence in 

2003, 1/3 the days of presence in 2002, and 1/6 the days 

of presence in 2001?3

Were you physically present in the United States on at 

least 183 days during 2003?

Can you show that for 2003 you have a tax home in a 

foreign country and have a closer connection to that 

country than to the United States?

You are a 

resident alien 

for U.S. tax 

purposes.1, 2

You are a 

nonresident

alien for U.S. 

tax purposes.4

YES NO

YES

YES

YES

NO YES

NO

NO4

NO

1 If this is your fi rst or last year of residency, you may have a dual status for the year. See Dual Status Aliens in Pub. 519. 2 In some circumstances you may still be considered a nonresident alien under an income tax treaty between the U.S. and your 

country. Check the provisions of the treaty carefully.

3 Do not count the days you were unable to leave the United States because of a medical condition that arose while you were in 

the United States.

4 If you meet the substantial presence test for 2004, you may be able to choose treatment as a U.S. resident alien for part of 

2003. For details, see Substantial Presence Test under Resident Aliens and First-Year Choice under Dual-Status Aliens in Pub 

519.

If the taxpayer is an alien (not a U.S. citizen), he or she is considered a nonresident alien unless he or she meets either the green 

card test or the substantial presence test.

Green Card Test 

You are a resident for tax purposes if you are a lawful permanent 

resident of the United States at any time during the calendar year. 

(However, see Dual Status, later.) This is known as the “green 

card” test. You are a lawful permanent resident of the United 

States at any time if you have been given the privilege, according to 

the immigration laws, of residing permanently in the United States 

as an immigrant. You generally have this status if the Bureau of 

Citizenship and Immigration Services (BCIS) has issued you an 

alien registration card, also known as a “green card.” You continue 

to have resident status under this test unless it is taken away from 

you or is administratively or judicially determined to have been 

abandoned.
Lesson 1 I-1-4 International Segment

Substantial Presence Test

You will be considered a U.S. resident for tax purposes if you meet 

the substantial presence test for the calendar year. To meet this 

test, you must be physically present in the United States on at 

least:

1. 31 days during the current year, and

2. 183 days during the 3-year period that includes the current year 

and the two years immediately before that, counting:

a. All the days you were present in the current year (2003) and

b. 1/3 of the days you were present in the first year before the 

current year (2002) and

c. 1/6 of the days you were present in the second year before 

the current year (2001).

Example 1

You were physically present in the United States on 120 days in 

each of the years 2001, 2002, and 2003. To determine if you meet 

the substantial presence test for 2003, count the full 120 days of 

presence in 2003, 40 days in 2002 (1/3 of 120), and 20 days in 2001 

(1/6 of 120). Since the total for the 3-year period is 180 days, you 

are not considered a resident under the substantial presence test 

for 2003.

The term United States includes the following:

1. All 50 states and the District of Columbia

2. The territorial waters of the United States, and

3. The seabed and subsoil of those submarine areas that are adjacent to the U.S. territorial waters and over which the United 

States has exclusive rights under international law to explore 

and exploit natural resources.

The term does not include U.S. possessions and territories or U.S. 

air space.

Days of Presence in the United States

You are treated as present in the United States on any day if you 

are physically present in the country at any time during the day. 

However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial 

presence test:

1. Days you regularly commute to work in the United States from 

a residence in Canada or Mexico.

2. Days you are in the United States for less than 24 hours when 

you are in transit between two places outside the United States.

3. Days you were unable to leave the United States because of a 

medical condition that developed while you were in the United 

States.
Lesson 1

International Segment I-1-5

4. Days you were an exempt individual.

Regular commuters from Canada or Mexico. Do not count the 

days on which you regularly commute to work in the United States 

from your residence in Canada or Mexico. You are considered to 

commute regularly if you commute to work in the United States on 

more than 75 percent of the workdays during your working period.

For this purpose, commute means to travel to work and return to 

your residence within a 24-hour period. Workdays are the days 

on which you work in the United States or Canada or Mexico. 

Working period means the period beginning with the first day 

in 2003 which you are physically present in the United States to 

work. If your work requires you to be present in the United States 

only on a seasonal or cyclical basis, your working period begins 

on the first day of the season or cycle on which you are present in 

the United States to work and ends on the last day of the season 

or cycle on which you are in the United States to work. Thus, you 

may have more than one working period in 2003, and your working 

period may begin in one calendar year and end in the following calendar year.

Exempt individual. For the substantial presence test, do not 

count days for which you are an exempt individual. The term 

“exempt individual “ does not refer to someone exempt from U.S. 

tax, but to anyone in the following categories.

1. An individual temporarily present in the United States as a foreign government-related individual.

2. A teacher or trainee, temporarily present in the United States 

under a “J” or “Q” visa, who substantially complies with the 

requirements of the visa.

3. A student, temporarily present in the United States under an 

“F,” “J,” “M,” or “Q” visa, who substantially complies with the 

requirements of the visa.

4. A professional athlete temporarily in the United States to compete in a charitable sports event.

After reviewing the rules above, if there are still questions, refer 

the taxpayer to Publication 519 or to the IRS Information line for 

alien status determination.

DUAL STATUS

In general, for the first and last year of resident alien status the 

taxpayer will be considered a “dual status” alien (both resident and 

nonresident) and special rules apply. Generally, dual status aliens 

should be referred to the IRS or paid tax professional.
Lesson 1 I-1-6 International Segment

  SUMMING UP THIS SEGMENT  

A resident alien is treated the same as a citizen for tax 

purposes. The main issues are:

1. Does the taxpayer have a “green card”? If so, then the taxpayer will be considered a resident alien and will meet the 

citizenship test.

2. Has the taxpayer been here in the U.S. long enough to qualify 

for the substantial presence test? If so, then the taxpayer 

is considered a resident alien on a year by year basis (this 

applies even though the person may be considered “illegal”) 

and would meet the citizenship test.

3. Remember that certain people are “exempt individuals” and 

do not count days toward the substantial presence test. They 

will not be treated as a resident and will not meet the citizenship test for dependency.
Lesson 1 1-19

BASIC

FILING STATUS

 SINGLE

A taxpayer is considered single if, on the last day of the year, 

either of the following is true. 

■ The taxpayer was never married. 

■ The taxpayer was legally separated, according to state law, 

under a decree of divorce or separate maintenance. 

A taxpayer can also be considered single if the taxpayer was 

widowed before January 1, 2003, and did not remarry in 2003. 

However, the taxpayer may be able to use another filing status 

that will give a lower tax. See Head of Household and Qualifying

Widow(er) with Dependent Child, later.

MARRIED FILING A JOINT RETURN

Taxpayers may use the married filing jointly status if they are 

married. They are considered married if, on the last day of the 

year, one of the following applies: 

■ They are married and live together as husband and wife. 

■ They live together in a common-law marriage recognized in 

the state where they now live or in the state where the common-law marriage began. 

■ They are married and live apart but are not legally separated 

under a decree of divorce or separate maintenance. 

■ They are separated under an interlocutory (not final) divorce 

decree. 

■ The taxpayer’s spouse died during the year and the taxpayer 

has not remarried. 

If taxpayers file a joint return, combine the husband’s and wife’s 

tax items (for example, income) on the same return. Both the husband and wife must sign the return and both are responsible for 

any tax owed on that return. Taxpayers can choose the married 

filing joint status even if only one spouse has income. 

Taxpayers filing a joint return generally have a lower tax than 

their combined tax for any other filing status.

Lesson 1

POTENTIAL

PITFALLS

A common-law marriage 

is recognized for federal 

tax purposes if the 

marriage is recognized 

by the state where 

the taxpayers now 

live or in the state in 

which the common-law 

marriage was entered. 

Legal advice may be 

required to determine if 

a common-law marriage 

exists.
1-20 Lesson 1

BASIC

MARRIED FILING A SEPARATE RETURN

Taxpayers who are married may choose to file separately. The husband and wife report their own incomes and deductions on separate 

returns. Taxpayers may choose the married filing separately

status even if one spouse had no income. 

If the taxpayers live in a community property state, they must follow state law to determine their separate income. For more information, see Publication 555, Community Property.

If a married couple files separately and one spouse itemizes deductions, the other spouse must also itemize deductions because he 

or she cannot take the standard deduction. See Lesson 4 for more 

information on itemized deductions. 

Taxpayers filing separate returns generally have a higher tax than 

when filing jointly. Occasionally, however, separate returns may 

result in a lower tax. If you think this might be the case, compute 

the tax liability for (a) married filing jointly and (b) married filing 

separately. Choose the filing status that results in the lower tax. 

When a married taxpayer files separately, the taxpayer must show 

his or her spouse’s name and social security number on the return 

in the label section or line 6a.

 HEAD OF HOUSEHOLD

In general, the head of household status is for unmarried taxpayers (or those considered unmarried) who pay more than half the 

cost of keeping up a home for a qualified relative during the year. 

Generally, taxpayers who file under the head of household filing 

status have a lower tax than if they file as single. If they qualify, 

taxpayers should use the head of household status instead of the 

single status. 

 Head of Household Qualifications 

1. The taxpayer must be unmarried (single, divorced, or legally 

separated) on the last day of the year 

OR

 The taxpayer must meet the tests for married persons living 

 apart with dependent children (explained later in this lesson) 

AND

2. The taxpayer must have paid more than half the cost of keeping 

up a home that was the main home for more than half the year 

(except for temporary absences) of any of the following: 
Lesson 1 1-21

BASIC

A. The taxpayer’s unmarried child who must have lived with 

the taxpayer but does not have to have been the taxpayer’s 

dependent, 

B. The taxpayer’s foster child who must have lived with the 

taxpayer and must have been the taxpayer’s dependent (To 

qualify as a dependent, a foster child must live with the taxpayer for the entire tax year.), or 

C. Certain relatives (see the list at the end of this discussion) 

who lived with the taxpayer and who were the taxpayer’s 

dependents.

 EXCEPTION: The taxpayer may claim head of household filing status if the taxpayer’s parent is claimed as a dependent, 

even if the parent does not live with the taxpayer. However, 

the taxpayer must pay more than half the cost of maintaining the parent’s home for the entire year. 

D. The taxpayer’s married child—who must have lived with the 

taxpayer and who must have been the taxpayer’s dependent 

unless: 

■ The child is not a dependent because the taxpayer signed 

a written declaration allowing the noncustodial parent to 

claim the child as a dependent, or 

■ The child is not a dependent because the noncustodial 

parent provides at least $600 of support for the child and 

claims the child as a dependent under a pre-1985 divorce 

decree or agreement. 

“Child” includes: 

 ■ Grandchild; stepchild; adopted child 

“Relative” includes: 

 ■ Parent, grandparent 

 ■ Brother, sister, stepbrother, stepsister 

 ■ Half brother, half sister 

 ■ Stepmother, stepfather 

 ■ Mother-in-law, father-in-law 

 ■ Brother-in-law, sister-in-law 

 ■ Son-in-law, daughter-in-law 

AND (if related by blood) 

 ■ Uncle, or aunt, nephew, or niece 

“Relative” does not include cousins and more distant relatives.
1-22 Lesson 1

BASIC

Keeping Up the Home 

The taxpayer must pay more than half the cost of keeping up the 

home. The cost of keeping up a home includes: rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, 

domestic help, and food eaten in the home. Welfare payments are 

not considered amounts that the taxpayer furnishes to keep up a 

home. 

The home must have been the main home for more than half the 

year except for temporary absences. Temporary absences include 

those for school, vacation, illness, business, or military service. 

The following chart may help you decide who is eligible to claim 

head of household filing status. 

Exhibit 7

Qualifying Relations for Head of Household

Relationship to 

Taxpayer

Must Live with 

Taxpayer?

Must be 

Taxpayer’s 

Dependent?

1. Unmarried child, 

 grandchild, or step

 child

Yes No

2. Married child, 

 grandchild, or step

 child

Yes Yes*

3. Foster child Yes*** Yes

4. Mother or father No Yes

5. Other relatives Yes** Yes

Exceptions:

* The married child does not have to be the taxpayer’s dependent if a noncustodial parent claims the child as a dependent 

under the rules for children of divorced or separated parents.

** Cousins and more distant relatives do not qualify as “relatives” in determining head of household status.

 NOTE: The taxpayer’s home must be the main home of the 

relative for more than half the year. The relative cannot be a 

person who files a joint return.

***The foster child must live with the taxpayer for the entire 

year.
Lesson 1 1-23

BASIC

Married Persons Living Apart With Dependent Children 

Some married taxpayers who live apart from their spouses may be 

considered unmarried for tax purposes. If so, these taxpayers are 

permitted to file as head of household and receive the benefit of 

lower tax amounts.

A married taxpayer can file as head of household if: 

1. The taxpayer files a separate return, 

2. The taxpayer paid more than half the cost of keeping up his or 

her home for the year, 

3. The taxpayer’s spouse did not live in the home during the last 

six months of the year, 

4. The taxpayer’s home was the main home of the taxpayer’s child, 

stepchild, or adopted child for more than half of the year or of 

the taxpayer’s foster child for the entire year, and

5. The taxpayer claims the child, stepchild, adopted child, or foster

child as a dependent, unless one of the following exceptions for 

divorced or separated parents applies:

■ the taxpayer signed a statement allowing the noncustodial 

parent to claim the child as a dependent, or 

■ the noncustodial parent provided at least $600 for the child’s 

support and can claim the dependent under a pre-1985 

agreement.

Reporting Head of Household Filing Status

Taxpayers must enter the name of the person who qualifies them 

for the head of household status. If the person is a dependent, enter 

the dependent’s name on line 6c of the exemption section of the tax 

return. If the qualifying person is not a dependent, enter the name 

of the nondependent person on line 4 in the filing status section of 

the tax return.

Example 4 

Samantha is divorced and provided over half the cost of keeping up 

a home. Her five-year-old daughter, Pam, lived with her for seven 

months last year. Samantha does not claim Pam as a dependent; 

her ex-husband does.

Samantha may use head of household status. Samantha must write 

Pam’s name in the space on Form 1040 or 1040A, on line 4.

Exhibit 8 Samantha’s Form 1040A, page 1 Draft a 5/2002

Filing

status

Check only

one box.

1 Single

2 Married filing jointly (even if only one had income)

3

Qualifying widow(er) with dependent child

(year spouse died  ). (See page 24.)

Married filing separately. Enter spouse’s SSN above and

full name here. 

Head of household (with qualifying person). (See page 23.)

If the qualifying person is a child but not your dependent,

enter this child’s name here. 

4

5

Pam

x
1-24 Lesson 1

BASIC

 QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD

A widow or widower, with one or more dependent children, may be 

able to use the qualifying widow(er) with dependent child filing status. This filing status yields the lowest tax (the same tax for 

married filing jointly). 

If the taxpayer’s spouse died during 2001 or 2002 and the taxpayer 

did not remarry before the end of 2003, the taxpayer may be able to 

file as a qualifying widow(er) with dependent child. To qualify, the 

taxpayer must: 

■ Have been entitled to file a joint return for the year the spouse 

died (It does not matter whether or not a joint return was actually filed.), 

AND

■ Have a child, foster child, adopted child, or stepchild who qualifies as the taxpayer’s dependent for the year, 

AND

■ Have furnished over half the cost of keeping up a home that was 

the main home of the child for the entire year.

An “ adopted child” includes a child placed with the taxpayer by an 

authorized placement agency for legal adoption.

Social Security survivor benefits received on behalf of the child are 

considered to be amounts furnished by the child, not by the parent.

In the year a taxpayer’s spouse dies, if the taxpayer does not 

remarry, he or she can use the married filing jointly filing status or 

married filing separately filing status and can claim an exemption 

for the deceased spouse. For two years after the year of death, the 

taxpayer may file as a qualifying widow(er) with dependent child, 

but may not claim an exemption for the deceased spouse. After the 

second year following the year of death, the taxpayer can no longer 

use the qualifying widow(er) filing status. The taxpayer may use 

either the head of household or single filing status depending on 

his or her situation then. 

The following chart may help you decide which filing status to 

use for a taxpayer with a qualifying dependent if the spouse is 

deceased and the taxpayer has not remarried.
Lesson 1 1-25

BASIC

Exhibit 9

Filing Status After Death of Spouse

Tax Year Filing Status

Exemption for

Deceased

Spouse?

1. Year of Death Married (joint)

 OR

Yes

Married (separate) Yes

2. First Year

after death 

Qualifying widow(er)* No

3. Second year

after death

Qualifying widow(er)* No

4. After the second

 year after death

Head of household**

 OR

No

Single No

 * With a qualifying dependent.

 ** With a qualifying relative.

Taxpayers who use the qualifying widow(er) status must list the 

year of the spouse’s death on line 5 of Form 1040A or 1040. 

You may find the following flowchart helpful in determining the 

correct filing status.

Exhibit 10 Determination of Filing Status

Did you pay more than 

half of household costs

and maintain a home

for more than 6 months

for:

Unmarried child

Married child

Other relative2

Foster child3

Parent

Grandchild?

Single

Were you married on the 

last day of the year?

Did you and your spouse

live apart during the last 6

months of the year?

Did you pay more than half of

household costs for a dependent 

child who lived with you for more 

than 6 months?

YES

YES YES

NO

NO

NO

NO

Head of Household

Married Filing

Jointly or Married 

Filing Separately1

1 Qualifying Widow(er) - If you paid over half of the household costs for a dependent child, you can use this filing status for 2 years after the year of death of spouse. 2 Parent, grandparent, brother, sister, stepbrother, stepsister, half brother, half sister, stepmother, stepfather, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-inlaw, daughter-in-law AND (if related by blood) uncle or aunt, nephew or niece.

3 The foster child must live with the taxpayer for the entire year and the taxpayer cares for the child as his or her own. 

YES
1-26 Lesson 1

BASIC

 TAXWISE HINTS

When using TaxWise to prepare a tax return, you will need to have 

the Social Security Number of anyone who qualifies the taxpayer 

for Head of Household filing status and is not the taxpayer’s dependent.

For Qualifying Widow(er) filing status, you must enter the year of 

death of the deceased spouse.

For Married Filing Separate status, you will need the spouse’s full 

name and Social Security number.

  Summing Up This Section  

When completing their tax returns, taxpayers can use one of five 

filing statuses:

Tax Status

(from lowest tax to highest tax)

1. Married filing jointly*

2. Qualifying widow(er) with dependent child*

3. Head of household

4. Single

5. Married filing separately 

* Numbers 1 and 2 yield the same (lowest) tax.

Filing status is indicated on lines 1 through 5 of Forms 1040A 

and 1040. Selecting the correct filing status is one of the most 

important aspects of completing a tax return because the filing 

status factors in how much tax will be due. Remember that filing status requirements do not change, regardless of the tax form 

used. If a taxpayer is qualified to use more than one filing status, 

choose the one that will result in the lowest tax.
Lesson 1 1-27

BASIC

Exercises

9. Carol and Roger were married in 2002. They are not divorced, 

but lived apart all of 2003. They are not legally separated under 

a decree of divorce or separate maintenance. They have no children. Can they use the married filing jointly status? 

10. Martin does not know which filing status to use. You ask if he is 

married. He answers that he got divorced in December but supported his wife all year and has not remarried. Can Martin and 

his ex-wife file a joint return?

11. Ginger is single and paid more than half the cost of keeping 

up her home. Her grandmother lived with her all year. Ginger 

claims her grandmother as a dependent. What is Ginger’s filing 

status?

12. Bill is single and lives alone. He paid over half the cost of maintaining a home for his father for the entire year. He claims his 

father as a dependent. What is Bill’s filing status? 

13. Franklin is single and lives alone. He paid over half the cost of 

maintaining a separate home for his father. He does not claim 

his father as a dependent. What is Franklin’s filing status?

14. Mrs. Calvin tells you that she is divorced and that her 21-yearold unmarried son lived with her all year. She paid for their 

rent and food and provided over half of her son’s total support. 

She cannot claim her son as a dependent because he earned 

$4,000 and is not a student. Her son used his earnings to pay 

for his car, clothing, and entertainment. Can Mrs. Calvin file as 

head of household?

15. Kathy lived with her unemployed roommate, Sandra, for the 

entire year. Kathy had to pay more than half of the cost of keeping up their apartment. Can Kathy file as head of household?
1-28 Lesson 1

BASIC

16. Jack has lived apart from his wife for several years. Their children live with his wife but Jack pays over half the children’s 

support. What filing status can Jack use? 

17. Lily left her husband in August 2003. She took her children 

with her. She supported the children during all of 2003 and will 

claim them as dependents. Lily will not file a joint return with 

her husband. Which filing status should Lily use in 2003? 

18. Rose and her husband separated in October 2003, but were still 

married on December 31, 2003. What filing status can she use?

19. Dick’s wife died in 2001. Dick has not remarried. Dick provides 

all of the support for his two dependent children. What will be 

Dick’s filing status for 2004? 
Lesson 1 1-29

BASIC

FILING STATUS ANSWERS TO EXERCISES

Exercise 9 

Yes 

Exercise 10 

No

Exercise 11 

Head of household 

Exercise 12 

Head of household 

Exercise 13 

Single

Exercise 14 

Yes 

Exercise 15 

No; Sandra is not a qualifying person. 

Exercise 16 

Married filing jointly or married filing separately. 

Exercise 17 

Married filing separately; she lived with her husband during part 

of the last six months of 2003. 

Exercise 18 

Either married filing jointly or married filing separately. 

Exercise 19 

Head of household; he could claim qualifying widower for 2002 and 

2003 only.
STUDENT NOTES
Lesson 1

Military Segment M-1-7

FILING STATUS

INTRODUCTION AND OBJECTIVES

As you have learned, many areas of a tax return are directly tied 

to the filing status of the taxpayer. After completing this segment 

you will be able to apply special rules for Head of Household status 

when the spouse is a nonresident alien.

 HEAD OF HOUSEHOLD (H OF H)

Because of the complexity of this issue errors often occur. In general, in order to claim Head of Household status, the taxpayer must 

be unmarried or considered unmarried on the last day of the year 

and pay more than half the cost of keeping up a home, for over six 

months, that includes the taxpayer and a qualifying individual.

SPECIAL RULE

For Head of Household purposes, “you are considered unmarried if 

your spouse was a nonresident alien at any time during the year, 

and you do not choose to treat your spouse as a resident alien.” All 

of the other qualifications for Head of Household must also be met.

Example 1

Raul is in the U.S. Army in Japan. His wife and children live with 

him and he is able to claim the children as dependents. Raul’s wife 

(a citizen of Japan) chooses not to be treated as a resident alien. 

Even though Raul is married, he can claim Head of Household 

status because of the rule above. If Raul had not passed all of the 

other qualifications for Head of Household, he would have to file 

as a married person (either as Married Filing Separate or Married 

Filing Joint).

  SUMMING UP THIS SEGMENT  

 The taxpayer may be considered unmarried if the spouse was 

a nonresident alien at any time during the year and the taxpayer does not choose to treat the spouse as a resident alien.

Lesson 1

Military Segment
Lesson 1 M-1-8 Military Segment

STUDENT NOTES
Lesson 1

International Segment I-1-7

FILING STATUS

ISSUES Lesson 1

International Segment

INTRODUCTION AND OBJECTIVES

This lesson will explain additional factors to consider in selecting the married filing joint and head of household filing status for 

taxpayers who are U.S. citizens or resident aliens. The criteria for 

selecting the married filing separate, single and head of household 

filing status are the same as discussed in the basic text.

At the end of this segment, you will be able to:

■ Determine the correct filing status for resident aliens.

■ Explain how to treat a nonresident alien’s spouse as a resident.

MARRIED NON-RESIDENTS FILING JOINTLY

In order to file Married Filing Jointly, the taxpayers must be married on the last day of the tax year and agree to file a joint return. 

However, “A joint return generally cannot be made if either spouse 

is a nonresident alien at any time during the tax year ” (Pub 17).

Treating Non-Resident Spouse as a U.S. Resident 

If, at the end of the tax year, the taxpayer is married and one 

spouse is a U.S. citizen or a resident alien and the other spouse is a 

nonresident alien, the taxpayer can elect to treat the non-resident 

spouse as a U.S. resident. This includes situations in which one 

spouse is a nonresident alien at the beginning of the tax year, but a 

resident alien at the end of the year, and the other spouse is a nonresident alien at the end of the year.

If this choice is made, the taxpayer and spouse are treated 

for income tax purposes as residents for the entire tax year.

For example, neither the taxpayer nor the spouse can claim tax 

treaty benefits as a resident of a foreign country for a tax year for 

which the choice is in effect. Taxpayers must file a joint income tax 

return for the year the choice is made,but the taxpayer and spouse 

can file joint or separate returns in later years.
Lesson 1 I-1-8 International Segment

Example 1

Debra Green, a U.S. citizen for all of tax year 2003, is married to 

Charles, a nonresident alien. Debra and Charles make the choice to 

treat Charles as a resident alien by attaching a statement to their 

joint return for 2003. Debra and Charles must report their worldwide income in 2003 and later years unless the choice is ended or 

suspended. Although they must file a joint return for 2003, they 

can file joint or separate returns for later years.

Example 2

Jim and Judy Adams are married and both are nonresident aliens. 

In June 2003, Jim became a resident alien and remained a resident 

for the rest of the year. Jim and Judy both choose to be treated as 

resident aliens by attaching a statement to the 2003 joint return. 

Jim and Judy must report their world-wide income in 2003 and 

later years unless the choice is ended or suspended. They must file 

a joint return for 2003, but they can file either joint or separate 

returns for later years.

THE “CHOICE” DECLARATION

A statement containing the following information must be signed 

by both spouses and attached to the joint return for the first tax 

year for which the choice applies. 

1. A declaration that one spouse was a nonresident alien and the 

other spouse a U.S. citizen or resident alien on the last day 

of the tax year, and that the taxpayer and spouse chose to be 

treated as U.S. residents for the entire tax year, and

2. The name, address, and social security number or ITIN of each 

spouse. (If one spouse died,include the name and address of the 

person making the choice for the deceased spouse.)

The choice can also be made by filing a joint amended return. 

Publication 54 contains specifics on this option.

Suspending the Choice

The choice to be treated as a resident alien does not apply to any 

later tax year if neither spouse is a U.S. citizen or resident alien at 

any time during the tax year.

Example 3

Dick Brown was a resident alien on December 31, 2000, and married to Judy, a nonresident alien. They chose to treat Judy as a 

resident alien and filed joint returns for tax years 2000 and 2001. 

On January 10, 2002, Dick became a nonresident alien. Judy had 

remained a nonresident alien throughout the period. Dick and Judy 

can file joint or separate returns for 2002. However, since neither 

Dick nor Judy is a resident alien at any time during 2003, their 

choice is suspended for that year. If either has U.S. source income 

or foreign source income effectively connected with a U.S. trade or 
Lesson 1

International Segment I-1-9

business in 2003, they must file separate returns as nonresident 

aliens. If Dick becomes a resident alien again in 2004, their choice 

is no longer suspended.

Ending the Choice

Once made, the choice to be treated as a resident applies to all later 

years unless suspended or ended in one of the ways shown below. 

If the choice is ended for any of these reasons, neither spouse can 

make a choice in any later tax year.

Revocation • Either spouse can revoke the choice for any tax year.

• The revocation must be made by the due date for filing the tax return for that year.

• The spouse who revokes must attach a signed statement declaring that the choice is being revoked. If the 

spouse revoking the choice does not have to file a return and does not file a claim for refund, send the statement to the Internal Revenue Service Center where the last joint return was filed.

• The statement revoking the choice must include the following:

• The name, address, and social security number (or taxpayer identification number) of each spouse.

• The name and address of any person who is revoking the choice for a deceased spouse.

• A list of any states, foreign countries, and possessions that have community property laws in which either 

spouse is domiciled or where real property is located from which either spouse receives income.

Death • The death of either spouse ends the choice, beginning with the first tax year following the year the spouse 

died.

• If the surviving spouse is a U.S. citizen or resident and is entitled to the joint tax rates as a surviving spouse, 

the choice will not end until the close of the last year for which these joint rates may be used.

• If both spouses die in the same tax year, the choice ends on the first day after the close of the tax year in 

which the spouses died.

Divorce or

Legal

Separation

• A divorce or legal separation ends the choice as of the beginning of the tax year in which the legal separation 

occurs.

Inadequate

records

• The Internal Revenue Service can end the choice for any tax year that either spouse has failed to keep 

adequate books, records, and other information necessary to determine the correct income tax liability, or to 

provide adequate access to those records.

 HEAD OF HOUSEHOLD

In general, in order to claim Head of Household status, the taxpayer must:

1. Be unmarried or considered unmarried on the last day of the 

year and

2. Have paid more than half the cost of keeping up a home for the 

year and

3. Have a qualifying person in the home for more than half the 

year.

These general rules for discussed in the basic text and in more 

detail in Publication 17.

A U .S. citizen or resident alien (for all 12 months of the tax year ) is 

considered unmarried for if their spouse was a nonresident alien at 

any time during the year and the taxpayer did not make one of the 

choices discussed earlier in this segment to treat their spouse as a 

resident alien for the entire year.
Lesson 1 I-1-10 International Segment

STUDENT NOTES
STUDENT NOTES
1-30 Lesson 1

BASIC

WHO MUST FILE—WHO SHOULD FILE

WHO MUST FILE

To decide who must file a tax return, you will need to know the 

individual’s: 

■ filing status, 

■ age, 

■ gross income, 

and if: 

■ special taxes might be owed on different types of income, 

■ some of the income is excludable or exempt, 

■ the individual can be claimed as a dependent on another’s tax 

return, 

■ the individual is blind, or 

■ the individual received advance earned income credit payments. 

You may not be familiar with some of the terms used on the list. 

These terms will be explained in later lessons. For now, concentrate 

on learning how to use the charts and checklists. 

How to Use the Charts and Flowcharts 

You will use a set of charts to determine who must file. An individual who cannot be claimed as a dependent on another taxpayer’s 

return will use Chart A—For Most People. Based on the individual’s 

circumstances, a person who can be claimed as a dependent on 

another taxpayer’s return will use one of the other charts. Chart

C—Other Situations When You Must File should be reviewed for 

every individual.

Lesson 1
Lesson 1 1-31

BASIC

Exhibit 11

Chart A—For Most People

If your fi ling status 

is...

AND at the end of 2003 

you were*

THEN fi le a 

return if your gross

income** was at 

least...

Single Under 65

65 or older

 $ 7,800

 8,950

Married fi ling 

jointly***

under 65 (both spouses)

65 or older (one spouse)

65 or older (both spouses)

 $15,600

 16,550

 17,500

Married fi ling 

separately

Any age $ 3,050***

Head of household 

(see page 19)

Under age 65

65 or older

 $10,050

 11,200

Qualifying Widow(er) 

with dependent child 

(see page 19)

Under 65

65 or older

 $12,550

 13,500

* If you turned age 65 on January 1, 2003, you are considered to 

be age 65 at the end of 2003

** Gross Income means all income you received in the form of 

money, goods, property, and services that are not exempt from 

tax including any income from sources outside the United 

States (even if you may exclude part or all of it). Do not

include social security benefits unless you are married filing a 

separate return and you lived with your spouse at any time in 

2003.

*** If you did not live with your spouse at the end of 2003 (or on 

the date your spouse died) and your gross income was at least 

$3,050, you must file a return regardless of your age.

POTENTIAL

PITFALLS

If a checklist or chart 

indicates that a person 

must fi le a return, he or 

she should do so even 

if no tax is owed. If a 

minor child must fi le a 

return but cannot do 

so, the child’s parent or 

guardian must complete 

and sign a return for the 

child.
1-32 Lesson 1

BASIC

Exhibit 12

Draft as of

08/27/2003

Chart B—For Children and Other Dependents

See the instructions for line 6c that begin on page 21 to find out if someone can claim you as a dependent.

If your parent (or someone else) can claim you as a dependent, use this chart to see if you must file a return.

In this chart, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. Earned

income includes wages, tips, and taxable scholarship and fellowship grants. Gross income is the total of your unearned and

earned income.

If your gross income was $3,050 or more, you usually cannot be claimed as a dependent unless you were under

CAUTION age 19 or a student and under age 24. For details, see Test 4—Income on page 22. !

Single dependents. Were you either age 65 or older or blind?

No. You must file a return if any of the following apply.

• Your unearned income was over $750.

• Your earned income was over $4,750.

• Your gross income was more than the larger of—

• $750 or

• Your earned income (up to $4,500) plus $250.

Yes. You must file a return if any of the following apply.

• Your earned income was over $1,900 ($3,050 if 65 or older and blind).

• Your earned income was over $5,900 ($7,050 if 65 or older and blind).

• Your gross income was more than—

The larger of: Plus This amount:

• $750 or $1,150 ($2,300 if

• Your earned income (up to $4,500) plus $250. } 65 or older and

blind)

Married dependents. Were you either age 65 or older or blind?

No. You must file a return if any of the following apply.

• Your unearned income was over $750.

• Your earned income was over $4,750.

• Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.

• Your gross income was more than the larger of—

• $750 or

• Your earned income (up to $4,500) plus $250.

Yes. You must file a return if any of the following apply.

• Your unearned income was over $1,700 ($2,650 if 65 or older and blind.)

• Your earned income was over $5,700 ($6,650 if 65 or older and blind.)

• Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.

• Your gross income was more than—

The larger of: Plus This amount:

• $750 or $950 ($1,900 if 65

• Your earned income (up to $4,500) plus $250. } or older and blind)
Lesson 1 1-33

BASIC

DEPENDENTS WHO MUST OR SHOULD FILE A RETURN—CHECKLIST

The dependents listed in the following checklist must or should file 

a return.

Exhibit 13

Checklist—Children and Other Dependents

■ A married dependent with at least $5 of income whose spouse 

itemizes deductions on a separate return on Form 1040 must 

file a return.

■ A dependent with at least $400 of net self-employment income 

must file a return. (Self-employment income is earned 

income from a trade, business, farming or profession that is 

not paid by an employer. For example, seamstresses and lawncare workers who work for themselves (and not for someone 

else) are considered self-employed.

■ A dependent who is not required to file but had income tax 

withheld should file a return to get a refund.

■ A dependent who has to pay a tax, such as the alternative 

minimum tax, must file a return.

OTHER SITUATIONS

Remember to review the Chart C—Other Situations When You 

Must File chart after you use the other charts.
1-34 Lesson 1

BASIC

Exhibit 14

Chart C — Other Situations When You Must File

You must file a return if any of the four conditions below apply for 2003.

1. You owe any special taxes, such as:

 • Social security and Medicare tax on tips you did not report to your employer,

 • Uncollected social security and Medicare or RRTA tax on tips you reported to 

 your employer or on group-term life insurance,

 • Alternative minimum tax,

 • Recapture taxes (see the instructions for lines 41 and 60 that begin on pages 

 33 and 40), or

 • Tax on a qualified plan, including an individual retirement arrangement 

 (IRA), or other tax-favored account. But if you are filing a return only because 

 you owe this tax, you can file Form 5329 by itself.

2. You received any advance earned income credit (EIC) payments from your 

 employer. These payments are shown in box 9 of your Form W-2.

3. You had net earnings from self-employment of at least $400.

4. You had wages of $108.28 or more from a church or qualified church-controlled 

 organization that is exempt from employer social security and Medicare taxes.

WHO SHOULD FILE A RETURN?

The charts, noted previously in this lesson, may indicate that an 

individual does not have to file a tax return. However, in three 

instances, individuals should file a return:

■ to claim a refund of withheld taxes,

■ to claim a earned income credit, and

■ to claim the additional child tax credit.

HELPING THOSE WHO DON’T NEED TO FILE

The Reduce Unnecessary Filing Program (RUF) is intended to help 

certain individuals determine their need to file a federal income 

tax return. Use Form 9452, Filing Assistance Program Worksheet,

to help potential unnecessary filers determine whether or not they 

need to file.

Thank you for helping to save time and effort for your VITA and 

TCE clients and for helping to reduce the cost to all taxpayers of 

procesing unnecessary returns by helping your clients with Form 

9452 and related materials, as needed.

 TAXWISE HINT

After completing the tax return refer back to the Main Information 

screen and select the appropriate tax form.
Lesson 1 1-35

BASIC

  SUMMING UP THIS SECTION  

Use the charts provided in this section to determine who must

and who should file a tax return.

Exercises

20. Emily is married and has one dependent child. She has not 

lived with her husband since May and is head of household. 

She is under 65 and not blind. Her gross income from wages is 

$15,000. Is she required to file a tax return? 

21. Larry and Zelda are married but will not file a joint return. 

Both are under 65 and not blind. Larry’s gross income from 

wages is $30,150. Zelda’s gross income is $3,500.

A. Is Larry required to file? 

B. Is Zelda required to file? 
1-36 Lesson 1

BASIC

WHO MUST FILE

WHO SHOULD FILE ANSWERS TO EXERCISES

Exercise 20

Yes

Exercise 21

A. Yes

B. Yes
Lesson 1 1-37

BASIC

WHICH FORM TO USE?

 FORM 1040EZ 

Form 1040EZ is for single and joint filers with no dependents. 

The form is no longer designed to be read by an optical scanning 

machine. The form instructions booklet has a worksheet for taxpayers who can be claimed as dependents.

 FORM 1040A 

Form 1040A is a two-page form. Page 1 of the form shows the filing status, exemptions, income, and adjusted gross income. Page 2 

of the form shows the standard deduction, exemption amount, taxable income, tax, credits, payments, amount owed or refund, and 

signature. Form 1040A may have four schedules. Use Schedule 1

to report interest and/or dividend income that is more than $1,500. 

Use Schedule 2 to report child and dependent care expenses and 

to figure the credit. Claim the credit for the elderly or the disabled 

on Schedule 3. This credit is explained in Lesson 14. If the taxpayer can take the earned income credit and has a qualifying child, 

use Schedule EIC to give information about that child. Schedule 

EIC is discussed and illustrated in Lesson 9.

 FORM 1040 

Form 1040 is a two-page form. Page 1 of the form shows the 

filing status, exemptions, income, and adjusted gross income. Page 

2 shows the standard deduction or itemized deductions, the exemption amount, taxable income, tax, credits, other taxes, payments, 

and the amount owed or refund due.
1-38 Lesson 1

BASIC

IRS E-FILE

IRS e-file offers quick and easy options to traditional paper returns. 

These options include filing electronically through an authorized 

tax practitioner, over the telephone, and by personal computer. For 

those expecting a refund, these options all offer Direct Deposit to a 

bank account. For those with a balance due, paying is made easier 

with the option of payment by credit card or a direct debit to their 

bank account. 

Why e-file? Because IRS e-file makes filing faster and more 

accurate and gets the taxpayer their refund in half the usual 

time....even faster with Direct Deposit! 

As a volunteer, you should become familiar with these options as 

there will be occasions when you are called upon to answer questions from taxpayers regarding one or more of them. You may even 

have the opportunity to volunteer at a VITA or TCE site that has 

been set up to offer electronic tax filing. If so, you will receive additional specialized training on using return preparation software 

and on other procedures unique to this type of site. 

TeleFile 

Eligible 1040EZ filers, single or married filing jointly, who receive 

a TeleFile tax booklet and have the same address as the previous 

year, can file their federal income taxes by using a touch tone telephone and dialing a toll-free telephone number found in the tax 

booklet. (Note: Taxpayers in Georgia, Indiana, Kentucky, Maryland, 

Oklahoma, Oregon, or West Virginia have the option to TeleFile 

both their federal and state tax returns in the same toll-free telephone call.) 

Here’s how it works: the taxpayer completes the TeleFile Tax 

Record found in the booklet before making the call. The call, which 

prompts the taxpayer through recorded instructions, takes less 

than ten minutes. The TeleFile system calculates the tax and 

refund (or balance due) and then files the tax return. If the taxpayer requests Direct Deposit, a refund can be issued in as little 

as 10 days. TeleFile is completely paperless; no forms are 

mailed to IRS, not even W-2s! The taxpayer “signs” the return 

with a special Customer Service Number (CSN) provided in the 

booklet. 

TeleFile is available 24 hours a day, seven days a week, through 

August 15. It is also available to users of TDD/TTY equipment. 

Credit card and direct debit payment options are available for balance due returns. 

Because TeleFile is so easy to use, and because it is completely 

paperless, its use should be encouraged at every VITA and TCE site 

that encounters an eligible taxpayer with a TeleFile tax booklet. 

Even if there is no touch tone telephone available at the site, you 

should do everything possible to convince the taxpayer to file from 

home, or wherever a touch tone phone is available.
Lesson 2 2-1

BASIC

 INCOME Lesson 2

INTRODUCTION AND OBJECTIVES

In this lesson you will learn to distinguish between 

taxable and nontaxable income. You will also learn 

where to report the different types of income. In 

addition, you will learn to make income entries on 

Forms 1040EZ, 1040A, and 1040.

This lesson will help you achieve the following 

objectives.

■ Determine what is taxable and nontaxable income.

■ Determine where to report income on Forms 1040, 

1040A, and 1040EZ.

■ Identify who can file Schedule C-EZ.

■ Identify who must file Schedule SE.

TAXABLE AND NONTAXABLE INCOME

Taxable income is any income that is subject to 

tax. It must be reported on a tax return, unless the 

amount is so small that the individual is not required 

to file a return.

The following types of income are taxable:

■ Wages, salaries, bonuses, and commissions

■ Certain fringe benefits

■ Tips and other compensation for personal services

■ Interest*

■ Dividends

■ Refunds of state and local taxes**

■ Alimony received or separate maintenance 

payments received

■ Business income

■ Hobby income (a hobby loss is not deductible)

■ Capital gains

■ Gain from the sale of property

■ Pensions and annuities (part may be nontaxable)

■ IRA distributions (part or all may be nontaxable)

■ Rents received

■ Royalties
2-2 Lesson 2

BASIC

■ Estate or trust income

■ Supplemental unemployment benefits 

■ Unemployment compensation

■ Railroad retirement benefits (part may be taxable)

■ Social security benefits (part may be taxable)

■ Jury duty pay

■ Executors’ fees

■ Gambling winnings (including lotteries, contests, raffles, etc.)

■ Nonqualifying scholarships and fellowships

■ Payments for punitive damages and compensatory damages not 

attributable to physical injuries or sickness

■ Certain long-term care benefits. If the taxpayer received copy B 

of Form 1099-LTC, refer him or her to a paid professional preparer because some of the benefits may be taxable.

*Some interest is not taxable (for example, interest on certain state 

and local bonds and on qualified Series EE and Series I savings 

bonds used to pay for higher education expenses).

**Refunds of state and local taxes are taxable only if the taxpayer 

itemized deductions in the year the taxes were paid and the individual’s tax liability was REDUCED because of the deduction. 

Nontaxable income is income that is exempt from tax. If a return 

must be filed, some types of nontaxable income will be shown on 

the return but will not be added into the amount of income subject 

to tax.

The following types of income are nontaxable:

■ Child support

■ Federal income tax refunds

■ Certain dividends on life insurance

■ Gifts, bequests, and inheritances (may be subject to other taxes)

■ Insurance and certain other payments for physical injury and 

sickness

■ Interest on certain Series EE and Series I savings bonds 

redeemed to pay for qualified higher education expenses

■ Interest on certain state and local obligations (municipal bonds)

■ Most life insurance proceeds paid upon death (and certain 

accelerated death benefits or payments received under a life 

insurance contract on the life of a terminally or chronically ill 

individual before the individual’s death)

■ Public assistance payments (certain TANF payments)

■ Certain railroad retirement benefits (part may be exempt)

■ Social security benefits (part may be exempt)
Lesson 2 2-3

BASIC

■ Veterans’ disability benefits

■ Workers’ compensation

■ Qualified scholarships and fellowships

■ Certain dependent care services provided by employer

■ Interest on insurance dividends left with VA

■ Certain employer-provided educational benefits (up to $5,250)

■ Employer-provided assistance for qualifying adoption expenses. 

(Refer taxpayers with adoption expenses to a paid professional 

tax preparer and to Publication 968, Tax Benefits for Adoption)

■ Restitution payments and excludable interest received by 

Holocaust victims, their heirs, or their estates, for persecutions 

are not taxable.

■ Certain long-term care benefits. If the taxpayer received copy C 

of Form 1099-LTC, he or she is not the policyholder. The form is 

for information only and should be disregarded because none of 

the benefits are taxable to him or her. If the taxpayer received 

copy B of Form 1099-LTC, refer him or her to a paid professional 

preparer because some of the benefits may be taxable.

Example 1

Robert received the following income: wages, interest, child support, 

alimony, inheritance, workers’ compensation, and lottery 

winnings.

The wages, interest, alimony, and lottery winnings are taxable

income and will appear on Robert’s tax return.

Child support, inheritance, and workers’ compensation are 

nontaxable income and will not appear on Robert’s tax return.
2-4 Lesson 2

BASIC

WHERE TO REPORT INCOME

Taxpayers can report only wages, salaries, tips, unemployment

compensation, qualified state tuition program payments, Alaska 

Permanent Fund dividends, taxable scholarship and fellowship 

grants, and interest income of $1,500 or less on Form 1040EZ.

In addition to the types of income that can be reported on Form 

1040EZ, ordinary and qualified dividends, capital gains distribution, interest income greater than $1,500, IRA distributions, 

pension and annuity income, and taxable social security and equivalent railroad retirement benefits can be reported on Form 1040A.

These and all other types of income can be reported on Form 1040.

EARNED INCOME

Wages and Salaries

The total of wages, salaries, tips, and taxable scholarships and fellowships are reported on Form 1040EZ, line 1, Form 1040A or Form 

1040, line 7.

Wages, salaries, and tips are primary examples of earned income 

received for services performed. Wages and salaries are compensation received. Tips are money and goods received as a gratuity by 

food servers, maids, porters, etc.

ALERT

New line added to Forms 

1040 and 1040A for 

qualifi ed dividends. 

Qualifi ed dividends are 

eligible for the capital 

gains rates.

Exercise 1

Indicate whether the income listed is taxable or nontaxable.

Type of Income Nontaxable Taxable

1. Wages 

2. Dividends from stock 

3. Veterans’ disability

benefits 

4. Child Support 

5. Credit union 

dividends 

6. Cash bonuses 

7. Inheritances 

8. Tips 

9. Worker’s 

compensation 

10. Veteran’s life insurance 

dividends 
Lesson 2 2-5

BASIC

Form W-2. Form W-2, Wages and Tax Statement, reports the 

employee’s earned income for the year. Employers should issue 

Form W-2 to every employee and a copy to the Social Security 

Administration. Box 1, Wages, tips, and other compensation, shows 

the amount of payments received in cash, goods and services, 

bonuses, supplemental unemployment benefits, awards, and taxable employee benefits. This amount should be included on the 

return.

An individual taxpayer or a couple filing jointly might have one 

or more Forms W-2s from various employers. When the taxpayer 

and/or spouse receive Forms W-2s from their employers, add the 

amounts from Box 1 of each Form W-2 and report the total amount 

on the return.

Generally, if a household employee earned less than $1,400 a 

year while working in the employer’s home, the employer is not 

required to provide the taxpayer with a Form W-2 but, the income 

must be included on line 7 ( Form 1040A or 1040) or line 1 ( Form 

1040EZ). However, a Form W-2 is required if the employer withheld 

federal income taxes.

If a taxpayer does not get a Form W-2, or if the one he or she gets is 

not correct, the taxpayer will have to contact his or her employer as 

soon as possible. Only an employer can issue a Form W-2 or a Form 

W-2c.

In the event that the employer prepared an incorrect W-2, a Form 

W2c, Corrected Wage and Tax Statement, should be issued. Use the 

W-2c amounts on the return. Be sure to attach the Form W-2c to 

the taxpayer’s return.

All wage, salary, and tip income must be reported on the 

return, even if the employee did not receive a Form W-2.

If the taxpayer does not receive a Form W-2 by January 31, he or 

she should first contact the employer and find out if or when the 

Form W-2 was mailed. If after allowing a reasonable amount of 

time for the employer to issue or reissue the Form W-2, the Form 

W-2 still has not been received, he or she should contact the IRS for 

assistance at 1-800-829-1040, but not before February 15.

If after requesting a Form W-2 from the employer the taxpayer does 

not receive it by the due date of the return, he or she should file a 

Form 4852, Substitute for Form W-2, Wage and Tax Statement or 

Form 1099-R, Distributions from Pensions, Annuities, Retirement or 

Profit-Sharing Plans, IRA’s, Insurance Contracts, Etc.

The taxpayer should keep a copy of Form 4852 for his or her 

records and file a copy with the Social Security Administration to 

ensure proper social security credit.

POTENTIAL

PITFALLS

Volunteers should be 

alert to the following 

possible indications of 

fraudulent activity:

■ Forms W-2 that are 

typed, handwritten 

or have noticeable 

corrections

■ Form W-2 from a 

fi rm in the area that 

is different from 

other Forms W-2s 

issued by the same 

fi rm

■ Suspicious person 

accompanying 

the taxpayer and 

observed on other 

occasions

■ Multiple refunds 

directed to the same 

address or P.O. Box

■ Employment or 

earnings, that are a 

basis for refundable 

credits, that are not 

well documented

■ Similar returns 

(e.g. same amount 

of refund, or 

same number of 

dependents, or same 

number of Forms W2s)

ALERT

In 2003, household 

employers are required 

to issue a Form W-2 

to employees whose 

earnings are $1,400 or 

more.
2-6 Lesson 2

BASIC

Form 1099-MISC. Taxpayers with earnings reported on Form 

1099-MISC, Miscellaneous Income, may be considered selfemployed. These amounts are reported on Schedule C-EZ or 

Schedule C. Net losses and profits are reported on line 12 of Form 

1040. Self-employment income is discussed later in this lesson.

Some employers misclassify workers as independent contractors 

and report their earnings on Form 1099-MISC. Taxpayers who 

believe they have been misclassified should contact the IRS.

Exhibit 1

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.
Lesson 2 2-7

BASIC

Exhibit 2 Reserved for 2003 Form 1099-MISC.

11 12

(keep for your records)

Nonemployee compensation

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. 1 Rents OMB No. 1545-0115

$

2 Royalties

$

3 Other income

RECIPIENT’S identification

number

PAYER’S Federal identification

number

5 Fishing boat proceeds 6 Medical and health care payments

$ $

RECIPIENT’S name Substitute payments in lieu of

dividends or interest

7 8

$ $

Street address (including apt. no.) 9 10 Crop insurance proceeds

City, state, and ZIP code

Gross proceeds paid to

an attorney

Excess golden parachute 14

payments

Account number (optional) 13

$

16 State tax withheld 17 State/Payer’s state no.

$

Department of the Treasury - Internal Revenue Service

18 State income

$

$

$ $

4

$ $

Payer made direct sales of

$5,000 or more of consumer

products to a buyer

(recipient) for resale 

Form 1099-MISC

Form 1099-MISC

Miscellaneous

Income

15

$

Copy B

For Recipient

This is important tax

information and is

being furnished to

the Internal Revenue

Service. If you are

required to file a

return, a negligence

penalty or other

sanction may be

imposed on you if

this income is

taxable and the IRS

determines that it

has not been

reported.

Federal income tax withheld

2003

Tip Income

All tip income is taxable. Individuals who receive $20 or more per 

month in tips while working one job must report their tip income 

to their employer. Tips that are reported to employers are included 

with wages on Form W-2, box 1. If the taxpayer received tip income 

of $20 or more in a month and did not report all of those tips to the 

employer, he or she must report the social security and Medicare 

taxes on the unreported tips as additional tax on Form 1040. Form 

4137, Social Security and Medicare Tax on Unreported Tip Income,

should be used to compute and report the additional tax.

Individuals who receive less than $20 per month in tips while 

working one job do not have to report their tip income to their 

employer. Additionally, noncash tips (for example, tickets or passes) 

do not have to be reported to the employer. Tips of less than $20 

per month or noncash tips are not subject to social security and 

Medicare taxes. However, this tip income is subject to federal 

income taxes and must be reported on line 7 of Form 1040 or Form 

1040A, or line 1 of Form 1040EZ.

POTENTIAL

PITFALLS

If the taxpayer fails to 

report tip income as 

required to the employer, 

the taxpayer may be 

subject to a penalty 

equal to 50% of the 

social security and 

Medicare taxes owed on 

unreported tips.
2-8 Lesson 2

BASIC

Allocated tips are tips an employer assigns to an employee. They 

are in addition to the tips the employee reported to the employer. 

The taxpayer may have allocated tips if he or she worked in a restaurant, cocktail lounge, or similar business that must allocate tips 

to employees.

Allocated tips are shown separately in box 8 of Form W-2. They 

are not included in the amount in box 1. The taxpayer must report 

allocated tips on his or her tax return unless either of the following 

exceptions applies.

1) The taxpayer kept a daily tip record, or other evidence that is 

as credible and as reliable as a daily tip record, as required. 

(See Pub. 531, Reporting Tip Income).

2) The taxpayer’s tip record is incomplete, but it shows that his 

or her actual tips were more than the tips reported to his or 

her employer plus the allocated tips.

If either exception applies, report actual tips on the return. Do not 

report the allocated tips.

If the taxpayer is required to report allocated tips on the return, 

the amount on Form W-2, box 8, should be added to the amount in 

box 1. The total is reported on line 7 of Form 1040. Allocated tips 

cannot be reported on Form 1040EZ or 1040A, and are subject to 

social security and Medicare taxes. Form 4137 should be used to 

compute and report the additional tax.

The taxpayer should keep a copy for his or her records and file a 

copy with the local Social Security Administration to ensure proper 

social security credit.

Example 2

Fred works as a repairman during the week and as a barber on 

alternate Saturdays. His tips are less than $20 in any month and 

he does not report them to his employer. The amounts from box 1 

on his Forms W-2 show income of $23,500 (repairman) and $1,950 

(barber). His unreported tip income was $200. 

Fred will report $25,650 on Form 1040A, line 7. This is the total of 

his Form W-2, box 1 income and his unreported tip income ($23,500 

plus $1,950 plus $200).

If Fred reported his tip income to his employer, the tips would be 

included in box 1 of the Form W-2. The amount in box 1 of that 

Form W-2 would be $2,150 ($1,950 plus $200). Fred would still 

enter $25,650 on line 7 ($23,500 plus $2,150).

Scholarships and Fellowships

Some scholarships and fellowships may be partially taxable. If the 

taxpayer received a Form W-2 for the scholarship or fellowship, add 

the amount in box 1 to any other box 1 amounts. Enter the total on 

line 1, Form 1040EZ, or line 7, Form 1040A or 1040.

POTENTIAL

PITFALLS

The following individuals 

cannot fi le Form 1040EZ 

or 1040A; they must fi le 

Form 1040: 

(1) Individuals who 

received $20 or more 

in tips in any month 

while working for one 

employer and who 

did not report the full 

amount to the employer. 

(These tips are subject 

to social security and 

Medicare tax.) (2) 

Taxpayers whose Form 

W-2 has an amount 

entered in box 8, 

Allocated tips, that they 

must report as income. 

For more information, 

see Publication 531, 

Reporting Tip Income.
Lesson 2 2-9

BASIC

Even if the taxpayer did not receive a Form W-2 for the scholarship or fellowship, the taxable portion of the scholarship or fellowship must be reported. Add the taxable portion to other Form W-2, 

box 1 amounts and unreported tip income. Enter the total on line 

7 ( Form 1040 or 1040A) or line 1 ( Form 1040EZ). Write “SCH” and 

the amount not reported on Form W-2 in the space to the left of line 

7 or line 1, whichever applies. 

Exercise 2

A. Mike worked two jobs. He was a quality inspector during the

week and a bartender on the weekends. He reported all of 

his tip income ($3,000) to his employer. His Forms W-2, box 

1, showed income of $21,000 (quality inspector) and $8,250 

(bartender). What amount will Mike report on his Form 1040A, 

line 7? 

B. John works as a food server in an expensive restaurant. He 

tells you that he did not report his tip income of $18,100 to his 

employer. Can John file Form 1040A? 

C. Randy had several employers during the tax year. On February 

3, 2004, he comes into the VITA site to have his return 

prepared. He tells you that he has not received the Form W-2 

for XYZ Inc. What should you tell Randy? 

 INTEREST INCOME

Money earns interest when it:

■ is deposited in accounts in banks, savings and loans, credit 

unions,

■ is used to buy certificates of deposit or bonds, or

■ is lent to another person or business.

Interest income is considered unearned income. Money, not a person, is working to earn the income.

TAXABLE INTEREST INCOME

Savings Accounts

Interest is reported in the year that it is credited to the taxpayer’s 

account and is available for withdrawal by the taxpayer. The taxpayer should report all interest received during the year, even if the 

interest is not entered in the taxpayer’s passbook.

POTENTIAL

PITFALLS

Some savings and 

loans, credit unions, 

cooperative banks, and 

mutual savings banks 

call their distributions 

“ dividends.” These 

“ dividends” are really 

interest and are reported 

as interest. True 

dividends are different 

and will be discussed 

later in this lesson.
2-10 Lesson 2

BASIC

U.S. Savings Bonds

Interest on U.S. savings bonds is earned in one of two ways. 

■ Some bonds are issued at a “discount” and the interest earned 

equals the increase in the bond’s value over a period of time.

■ Some bonds pay interest at stated intervals of time.

Series EE and Series I Bonds. Series EE bonds are the most 

common type. They are issued at a discount; this means that the 

purchase price is less than the face value (the amount shown on 

the bond). The interest is the difference between the purchase price 

and the amount received when the bonds are redeemed (cashed in).

Series I bonds were first offered in 1998. They are issued at face 

value with a maturity period of 30 years. Interest on these bonds is 

paid when the bond is redeemed.

Taxpayers can choose one of two ways to report interest income 

from these bonds.

■ Report the increase in value when the bond is cashed in or 

when the bond matures, whichever is earlier.

■ Report the increase in the bond’s value each year.

Generally, taxpayers must use the same method for all Series EE 

and Series I bonds they own.

If a U.S. savings bond is issued in the names of co-owners, such as 

the taxpayer and child, or the taxpayer and spouse, interest on the 

bond is generally taxable to the co-owner who purchased the bond. 

To determine who is responsible for paying the tax on a bond see 

the table below.

Exhibit 3

Who Pays Tax on U.S. Savings Bond Interest

IF... THEN tax on the bond

interest must be paid by...

You use your funds to buy a 

bond in your name and the 

name of another person as 

co-owners.

You.

You buy a bond in the name of 

another person, who is the sole 

owner of the bond.

The person for whom you 

bought the bond.

You and another person buy a 

bond as co-owners, each contributing part of the purchase 

price.

Both you and the other coowner, in proportion to the 

amount each paid for the bond.

You and your spouse, who live 

in a community property state, 

buy a bond that is community 

property.

You and your spouse. If you fi le 

separate returns, both you and 

your spouse generally pay tax 

on one-half.
Lesson 2 2-11

BASIC

Example 3

Barbara owns a $500 U.S. Series EE savings bond. She paid $250 

for the bond. When the bond matures, Barbara will receive $500. At 

the end of the first year, the bond was worth $265.

Barbara can report interest income in one of two ways.

■ She can report $250 of interest income when the bond matures. 

This is the difference between the $500 value at maturity and 

the $250 she paid for the bond. Barbara would report interest

income only once, at maturity.

■ She can report $15 of interest income at the end of the first year. 

This is the increase in value at the end of the year ($265 minus 

$250). Barbara would report interest income each year until 

maturity.

Excludable Interest on U.S. Savings Bonds. Taxpayers may be 

able to exclude from income all or part of the interest received from 

certain qualified U.S. savings bonds. The taxpayer must have paid 

for qualified higher education expenses the same year the bonds 

are cashed. The bonds must be either Series EE bonds issued after 

1989 or Series I bonds in the taxpayer’s name or, if married, the 

taxpayer’s name or spouse’s name. The individual in whose name 

the bonds were issued must be 24 years of age or older before the 

bonds were issued. The taxpayer cannot file married filing separately.

Qualified higher education expenses include tuition and fees paid 

to an eligible educational institution for the bond owner, the bond 

owner’s spouse, or the bond owner’s dependent for whom the bond 

owner claims an exemption. An eligible educational institution is 

any college, university, vocational school, or other postsecondary 

educational institution eligible to participate in a student aid program administered by the Department of Education.

Qualified expenses include any contribution to a qualified state 

tuition program or to a Coverdell ESA. (For more information, see 

Publication 970, Tax Benefits for Higher Education).

Use Form 8815, Exclusion of Interest From Series EE and I U.S. 

Savings Bonds Issued After 1989 (For Filers with Qualified Higher 

Education Expenses), to report the exclusion of interest income. The 

excludable amount is transferred from Form 8815 to Part I, line 3 

of Schedule 1 ( Form 1040A) or to Schedule B ( Form 1040).

Series HH Bonds. The interest on these bonds is paid twice a 

year. Report the interest on these bonds in the year in which it is 

received.

Other U.S. Obligations. Interest on other U.S. obligations, such 

as U.S. Treasury notes and bonds, is fully taxable when received.
2-12 Lesson 2

BASIC

Savings Certificates, Money Market Certificates, and Other Deferred 

Interest Accounts

Interest that is paid at fixed intervals of one year or less is included 

in taxable income when it is received or when the taxpayer could 

receive it (that is, when it is credited to the account, even if it is 

not withdrawn) without paying a substantial penalty. If an account 

matures in one year or less and provides a single interest payment at maturity, include the interest in taxable income when the 

account matures and the interest is received.

Example 4

Duane has a six-month certificate of deposit (CD) that matures in 

January 2004. He will receive $75 in interest income.

Duane will report the interest income on the certificate of deposit 

on his 2004 tax return. It matures in one year or less with a single 

interest payment at maturity.

Certificates of Deposit with Maturities of Over One Year

If interest on a CD is deferred for more than one year, the taxpayer 

must include a part of the interest in income each year. The taxpayer should receive Form 1099-INT stating the amount to report.

Example 5

Deborah has a two-year CD that pays interest every three months. 

She bought the CD on March 1, 2003. It matures on February 29, 

2005.

For 2003, Deborah reports the interest income earned from March 

through December. For 2004, she will report 12 months of interest. 

For 2005, she will report two months of interest.

Original Issue Discount. Long-term obligations that pay no 

interest before maturity are considered to be issued at a discount. 

Original Issue Discount (OID) is the amount by which the 

principal amount (redemption price at maturity) of a long-term 

debt instrument, such as a bond or note, exceeds its issue price. 

Taxpayers generally report a portion of the OID each year until the 

obligation matures.

Example 6

Roger purchased a $1,000 U.S. Treasury Zero Coupon Bond for 

$350. When the bond matures, Roger will receive $1,000. He will 

receive no interest income until the bond matures many years later.

The difference between the redemption amount ($1,000) and the 

issue price ($350) is the OID ($650). Each year until maturity, 

Roger must recognize part of the OID as taxable interest income.
Lesson 2 2-13

BASIC

Interest on Insurance Proceeds

Life insurance proceeds include interest. Taxpayers can receive 

life insurance policy benefits paid upon the death of the insured 

either in a lump sum or in installments. Generally, if the payments 

are received in installments, the portion that is interest must be 

included in the taxpayer’s income. However, if the insured individual died before October 23, 1986, and was the taxpayer’s spouse, 

the first $1,000 of interest income received each year is not taxed if 

the payments are received in installments. This exclusion does not 

apply if proceeds are left on deposit with the insurance company 

and only interest is paid.

Life insurance dividends generally are not taxable. These dividends

may be used to reduce life insurance premiums due, purchase additional paid-up insurance, or earn interest. In general, the interest 

earned on life insurance dividends is taxable when it is credited to 

the taxpayer’s account.

Interest on insurance dividends that have been left on deposit with 

the Department of Veterans Affairs (VA) is not taxable. Do not 

include this interest in taxable income. 

COVERDELL ESA

Contributions to a Coverdell ESA are not deductible. Amounts in 

the ESA grow (tax deferred) until they are distributed. Generally, 

if the beneficiary has qualified education expenses that are greater 

than the distribution during the year, then no tax is due.

If the taxpayer received Form 1099-Q, showing a distribution 

from a Coverdell ESA, ask the taxpayer if the funds were used for 

qualified education expenses. Coverdell ESA qualified education 

expenses include elementary, secondary, and postsecondary (higher) 

education expenses. 

If the entire amount of the distribution was spent on qualified 

elementary and secondary expenses, the distribution is tax-free. 

Tax-free distributions are not reported. If the taxpayer paid for 

qualified higher (postsecondary) education expenses, the taxpayer 

may be eligible for the Hope Credit or Lifetime Learning Credit, 

which may be more beneficial.

Refer the taxpayer/beneficiary to a paid professional tax preparer 

and/or Publication 970, Tax Benefits for Higher Education, if: 

■ The funds were not used for qualified education expenses.

■ The distribution is more than the amount spent for qualified 

expenses.

ALERT

Starting in 2003, 

Coverdell ESA 

distributions are no 

longer reported on 

Form 1099-R. They are 

reported on Form 

1099-Q.
2-14 Lesson 2

BASIC

■ Part or all of the distribution is taxable and earnings must be 

computed.

■ The taxpayer/beneficiary received other education benefits such 

as a distribution from a Qualified Tuition Program, employer 

provided educational assistance, or a scholarship, or used U.S. 

Savings Bonds to pay for qualified education expenses.

■ If any amount needs to be reported, report it on Form 1040, 

line 21. Additional tax may be due. Use Part II of Form 5329, 

Additional Taxes on Qualified Plans (including IRAs) and Other 

Tax Favored Accounts, to figure any additional tax.

TAX-EXEMPT INTEREST

Certain types of interest are exempt from federal income tax. 

Bonds issued by the following entities generally pay tax-exempt

interest:

■ State and political subdivisions (county or city),

■ District of Columbia, and

■ U.S. possessions and political subdivisions.

Examples of tax-exempt bonds are those issued by:

■ Port authorities

■ Toll-road commissions

■ Utility service authorities

■ Community redevelopment agencies

■ Qualified volunteer fire departments

■ Amounts indicated on broker statements as tax-exempt interest 

or dividends

Although tax-exempt interest is not taxable, the taxpayer must 

report all tax-exempt interest on Form 1040, 1040A or 1040EZ.

Form 1099-INT

Interest income is reported to the taxpayer on Form 1099-INT, 

Interest Income. A copy of Form 1099-INT is also sent to the IRS.

Box 1 shows taxable interest income from various institutions.

Some taxpayers withdraw funds from a time deposit before the 

maturity date of the account and, therefore, incur an interest penalty. The early withdrawal penalty is reported on Form 1099-INT 

in box 2. Report the total interest earned, shown in box 1 of Form 

1099-INT, on line 8a of Form 1040. Do not subtract the penalty 

from the total interest. The early withdrawal penalty is an adjustment to income and is entered on line 31 of Form 1040.
Lesson 2 2-15

BASIC

Box 3 shows U.S. savings bond and Treasury obligations interest. 

Be sure to ask the taxpayer about this interest income. The amount 

shown on Form 1099-INT may be too high if the taxpayer was not 

the original owner of the bond or if the taxpayer has reported the 

interest income each year as it was earned.

Some Forms 1099-INT will have entries in box 4 indicating that 

federal income tax has been withheld from the interest paid. Be 

sure to include the amount shown in box 4 with other tax withheld 

on Form 1040A, line 39, or Form 1040, line 61.

Exhibit 4

Form 1099-OID

Form 1099-OID, Original Issue Discount, reports the amount of 

Original Issue Discount income that a taxpayer should report as 

income for the year. A copy of Form 1099-OID is also sent to the 

IRS.

Box 1 shows the amount of interest (OID) for the year if the taxpayer bought the obligation at its original issue and held the issue 

all year.

Box 2 shows regular interest paid on the obligation other than the 

OID income.

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0112 Payer’s RTN (optional)

Interest Income

PAYER’S Federal identification number RECIPIENT’S identification number 1 Interest income not included in box 3

$

Early withdrawal penalty Interest on U.S. Savings

Bonds and Treas. obligations

RECIPIENT’S name 2 3

$ $

Street address (including apt. no.) 4 Federal income tax withheld

$

Foreign country or U.S.

possession

City, state, and ZIP code 6 Foreign tax paid 7

Account number (optional)

$

Form 1099-INT Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-INT

5 Investment expenses

$

2003
2-16 Lesson 2

BASIC

Reporting Interest Income

If the taxpayer is a 1040EZ filer, taxable interest income is 

reported on line 2. 1040EZ filers should report tax-exempt interest 

by writing “TEI” and the amount of tax-exempt interest on line 2 

as shown in the example below. Do not include tax-exempt interest in the Dollars/Cents portion of line 2. If the taxpayer’s interest

income is more than $1500, he or she cannot file a Form 1040EZ.

Example 7

Jennifer received taxable interest income of $65 and tax-exempt

interest income of $23. She would report her interest income on 

Form 1040EZ as shown in the exhibit below. 

Exhibit 5 Jennifer’s 1040EZ

Dra

Taxable interest. If the total is over $400, you cannot use Form 1040EZ. ft

Total wages, salaries, and tips. This should be shown in box 1 of your W-2

form(s). Attach your W-2 form(s).

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check Yes. No.

Income



4 4

Unemployment compensation, qualified state tuition program earnings, and

Alaska Permanent Fund dividends (see page 14).

3

3

Enter amount from

kh b k

If single, enter 7,450.00.

If i d 13 400 00

TEI=$23.00 6 5 0 0

Taxpayers who file Forms 1040A or 1040, report taxable interest

income on line 8a and tax-exempt interest on line 8b. 

If the taxpayer files Forms 1040A or 1040 and:

■ Has interest income of more than $1500,

■ Wants to claim an exclusion for savings bond interest in the 

same year that he or she paid for qualified higher education 

expenses, or

■ Receives a Form 1099-INT for tax-exempt interest,

Schedule 1, Part I (1040A) or Schedule B, Part I (1040) must be 

completed, before making an entry on line 8a or 8b.

If the tax-exempt interest is shown on a Form 1099-INT, and a 

Schedule 1 or B must be filed, the taxpayer must include taxexempt interest on Schedule 1 or B. It should be reported on line 1 

but it should not be included in the total on line 2. Instead, under 

the last entry on line 1, a subtotal of all interest listed should be 

made. Below the subtotal, the taxpayer should write “Tax-exempt 

interest” and show the amount. Subtract it from the subtotal and 

the result should be entered on line 2.

On Schedule 1 or Schedule B, Part I, list the interest payers’ names 

and the various amounts received for each form, even if there are 

two or more forms from the same source.
Lesson 2 2-17

BASIC

Exercise 3

A. Randy and Ann have three Forms 1099-INT: Epping National 

Bank, $62; Epping Credit Union, $178; and Brenton Savings 

and Loan, $760.

1. How much interest income will be reported on Schedule 1 

(Form 1040A)? 

2. How much interest income will be reported on Form 1040A, 

line 8a?

B. Catherine received $398 interest income this year. She files 

Form 1040EZ. How much interest income is reported on her 

return, and where is it reported? 

C. Emily and Andrew file a joint return on Form 1040. They have 

the following interest income: City Savings and Loan (joint), 

$320; Third National Bank (Andrew), $100; U.S. Series HH 

Savings Bonds (joint), $45; and Welder’s Credit Union (Emily), 

$30. 

How much interest is reported on their Form 1040, and where 

is it reported? 

DIVIDEND INCOME AND OTHER CORPORATE DISTRIBUTIONS

Dividends are payments made by corporations to shareholders. 

Dividends can also be paid through partnerships, estates, or trusts.

There are several types of corporate distributions, including ordinary and qualified dividends, capital gain distributions, nontaxable 

distributions, stock dividends, and others. Most dividends are paid 

in cash. Some dividends, however, are paid in property, services, 

or additional shares of stock. Only ordinary and qualified dividends can be reported on Form 1040A. Any other dividends or 

distributions received are reported on Form 1040. Taxpayers with 

dividend income may not use Form 1040EZ. Other types of dividends and distributions include the following:

■ Dividend reinvestment — Through dividend reinvestment,

instead of receiving cash (a dividend check), some stockholders ask the corporation to use their dividends to purchase more 

shares of the corporation’s stock. The shareholders “reinvest” 

their dividends. The dividend is taxable at the time it would be 

paid if it were in cash.

■ Capital gain distributions — Mutual funds (regulated investment companies) and real estate investment trusts (REITs) 

pass capital gains to their investors in the form of capital gain 

distributions. Capital gain distributions are treated as longterm capital gains, regardless of how long the taxpayer holds 

the shares. See Lesson 11, Sale of Stock, for more information 

on capital gains.

ALERT

In 2003, line 9b is 

added to Forms 1040 

and 1040A for qualifi ed 

dividends.
2-18 Lesson 2

BASIC

■ Return of capital — A return of capital represents a return of 

part of the taxpayer’s investment in the stock of the company. A 

return of capital reduces the basis of the stock and is not taxed 

until the taxpayer’s basis in the stock is fully recovered. Any 

return of capital in excess of basis is treated as a capital gain 

and is reported on Schedule D, Capital Gains and Losses.

■ Stock dividends — Stock dividends increase the taxpayer’s 

number of shares in the company. Generally, stock dividends are 

not taxable.

Other types of nontaxable dividends are:

■ Exempt-interest dividends paid by mutual funds (This interest 

is listed on Form 1040, line 8b.)

■ Dividends on insurance policies, as long as they do not exceed 

the total of all net premiums paid by the taxpayer

■ Dividends on veterans’ insurance

■ Certain patronage dividends

Reporting Dividends and Capital Gain Distributions

The payer reports dividends and certain other distributions on 

Form 1099-DIV, Dividends and Distributions.

Ordinary dividends are reported in box 1a of Form 1099-DIV. 

Add the amounts in box 1a from all the Forms 1099-DIV the taxpayer received. If the total is:

■ $1500 or less, enter the total on line 9a of Form 1040A or 1040.

■ over $1500, complete Schedule 1 ( Form 1040A), Part II, or 

Schedule B ( Form 1040), Part II. Transfer the result to line 9a of 

Form 1040A or 1040.

On Schedule 1 or Schedule B enter the payer’s name and the 

amount received for each Form 1099-DIV even if the same corporation used separate forms to report more than one distribution. 

If the taxpayer has a substitute Form 1099-DIV from a brokerage 

firm, it may show a total for dividends received. Enter the brokerage firm as the payer of the dividends and enter the total dividend 

amount. Do not list the dividends individually.

Some taxpayers receive dividend income from shares that the 

husband and wife own jointly. If they file a joint return, enter the 

total dividend in the appropriate place on the return. If they file 

separate tax returns, divide the dividend by two. Report half on the 

husband’s return and half on the wife’s return.

Capital gain distributions occur when a mutual fund (regulated 

investment company) sells assets for more than their cost, and the 

realized capital gain is distributed to the fund’s shareholders. This 

should not be confused with a capital gain that occurs when the 

owner of a mutual fund or a capital asset sells shares in the fund 

ALERT

In 2003, Line 1 of Form 

1099-DIV was changed 

to Line 1a–Ordinary 

dividends and Line 1b–

Qualifi ed dividends.
Lesson 2 2-19

BASIC

or the asset for more than the cost and realizes a capital gain. For 

more information on capital gains and losses, see Lesson 11, Sale of 

Stock.

Payers report capital gain distributions in box 2a of Form 1099- 

DIV. Taxpayers can report capital gain distributions directly on 

Form 1040A or Form 1040 if:

■ The only amounts the taxpayer has to report on Schedule D are 

capital gain distributions (box 2a),

■ The taxpayer does not have any Post-May 5 capital gain distributions (box 2b), qualified 5-year gain (box 2c) unrecaptured 

section 1250 gain (box 2d), or section 1202 gain (box 2e), and

■ If the taxpayer files Form 4952, Investment Interest Expense 

Deduction, the amount on line 4e of Form 4952 is not more than 

zero.

Exhibit 6

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no.

RECIPIENT’S identification

number

PAYER’S Federal identification

number

RECIPIENT’S name

Street address (including apt. no.)

City, state, and ZIP code

Account number (optional)

Dividends and

Distributions

Form 1099-DIV (keep for your records) Department of the Treasury - Internal Revenue Service

Copy B

This is important

tax information

and is being

furnished to the

Internal Revenue

Service. If you

are required to

file a return, a

negligence

penalty or other

sanction may be

imposed on you

if this income is

taxable and the

IRS determines

that it has not

been reported.

For Recipient

Unrecap. Sec. 1250 gain

1a Total ordinary dividends OMB No. 1545-0110

$

1b Qualified dividends

$

2a Total capital gain distr. Post-May 5 capital gain distr.

2c

Collectibles (28%) gain

Qualified 5-year gain 2d

$ $

2e Section 1202 gain 2f

$

3

5 Investment expenses

Noncash liquidation

distributions

Cash liquidation 9

distributions

8

$

$

2b

$ $

Nontaxable distributions

Form 1099-DIV

$

6 7

2003

$

Foreign tax paid Foreign country or U.S. possession

$

$

4 Federal income tax withheld

$
2-20 Lesson 2

BASIC

If the taxpayer does not meet the requirements to report the 

capital gain distribution directly on Form 1040A or Form 1040, a 

Schedule D, Capital Gains and Losses must be filed. If a Schedule 

D is not required, the capital gain distributions can be reported 

directly on line 13a of Form 1040, or line 10 of Form 1040A. Capital 

gain distributions are not reported on Form 1040EZ.

If capital gain distributions are reported directly on Form 1040 or 

Form 1040A:

■ Check the box next to line 13a, Form 1040 and 

■ Use the Capital Gain Tax Worksheet from either the Form 

1040A or 1040 instruction booklet to compute tax.

The volunteer should be careful not to ignore other boxes on the 

Form 1099-DIV.

■ Box 2c, Qualified 5-year gain. If the taxpayer has an entry in 

box 2c, see Lesson 11 for the proper treatment of the gain.

■ Box 4, Federal income tax withheld. Be sure to include this 

amount on line 39 of Form 1040A or line 61 of Form 1040.

■ Box 5, Investment expenses. If the taxpayer files Form 1040 and 

itemizes deductions on Schedule A, report the amount from box 

5 as a miscellaneous itemized deduction subject to the 2%-ofadjusted-gross-income limit. (See Itemized Deductions in Lesson 

4.)

■ Box 6, Foreign tax paid. If the taxpayer has an entry in box 6, 

see Lesson 5 for the proper treatment of the tax. The taxpayer 

may be able to claim the Foreign Tax Credit.

A capital gain distribution is reported on a Schedule D when the 

taxpayer has more than capital gain distributions to report, for 

example when boxes 2b, 2d, 2e, 3, 8, or 9 have entries, or when the 

taxpayer has sold a capital asset. Capital gain distributions are 

always treated as long-term capital gains, regardless of how long 

the taxpayer holds the shares, and are reported on line 13, column 

(f) of the Schedule D. If the taxpayer has an entry in box 2b or 2c, 

then that number is reported on line 13 column (g).

STATE AND LOCAL TAX REFUNDS

Taxpayers who receive a refund of state or local taxes may receive 

a Form 1099-G, Certain Government Payments. If the taxpayer 

claimed the standard deduction on the 2002 return and received 

a refund of 2002 state or local tax, the taxpayer does not have to 

include the refund in taxable income for tax year 2003. However, if 

the taxpayer itemized deductions and received a state or local tax 

refund, the taxpayer may have to include part or all of the refund 

in taxable income in 2003. Use the State and Local Income Tax 

Refund Worksheet—Line 10 in the Form 1040 instruction booklet to 

determine what part, if any, of the refund is taxable. Enter the taxable portion of state and local refunds on Form 1040, line 10.

POTENTIAL

PITFALLS

If the state or local 

income tax refund 

refl ects any deductions, 

credits, or payments for 

years other than 2002, 

refer the taxpayer to 

a paid professional tax 

preparer.
Lesson 2 2-21

BASIC

Exhibit 7

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0120 1 Unemployment compensation

Certain

Government

Payments

$

State or local income tax

refunds, credits, or offsets

2

$

PAYER’S Federal identification number RECIPIENT’S identification number 3 Box 2 amount is for tax year 4 Federal income tax withheld

$

RECIPIENT’S name 6 Taxable grants

$

Street address (including apt. no.) 7 Agriculture payments

$

City, state, and ZIP code

Account number (optional)

Form 1099-G Department of the Treasury - Internal Revenue Service

Copy B

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

For Recipient

Form 1099-G

5

8 Box 2 is trade or

business income 

2003

 ALIMONY RECEIVED

Alimony or separate maintenance payments made under a court 

decree are taxable income to the person receiving them. They are 

reported on Form 1040, line 11. The person making the payments 

deducts them on Form 1040, line 32a, as an adjustment to gross

income.

Child support payments are not alimony. The person making the 

payments cannot deduct them. The person receiving child support 

payments does not have to include them in income.

 INCOME FROM BUSINESS (OPTIONAL TOPIC)

Business income or loss is reported first on Schedule C ( Form 

1040), Profit or Loss From Business, or Schedule C-EZ, Net Profit 

From Business, and then transferred to Form 1040, line 12. 

Taxpayers who must file a Schedule C should see a paid professional tax preparer.

VITA and TCE volunteers who have received training on this topic, 

at the discretion of the site coordinator, may assist self-employed

individuals who qualify to use Schedule C-EZ.

Who Can Use Schedule C-EZ

A taxpayer can use Schedule C-EZ only if he or she:

■ Had business expenses of $2,500 or less,

■ Uses the cash method of accounting,

■ Did not have an inventory at any time during the year,

■ Did not have a net loss from his or her business,

■ Had only one business as a sole proprietor,
2-22 Lesson 2

BASIC

■ Had no employees during the year,

■ Is not required to file Form 4562, Depreciation and 

Amortization, for this business (See the instructions for 

Schedule C, line 13, to find out if the taxpayer must file.),

■ Does not deduct expenses for business use of his or her home, 

and

■ Does not have prior year unallowed passive activity losses from 

this business.

Completing Schedule C-EZ

Schedule C-EZ has three parts:

Part I: General Information

Part II: Figure Your Net Profit

Part III: Information on Your Vehicle

Part I: General Information

Part I is used to determine whether or not the taxpayer is eligible 

to use this form instead of Schedule C for reporting self-employment income. If all the criteria are met, the taxpayer then completes Part I.

Line B, Principal Business Code, is determined by looking at the 

code list in the Instructions for Schedule C, Profit or Loss From 

Business.

Line D, Employer ID Number, is a number that the Internal 

Revenue Service supplies to businesses and other professional 

activities. If the taxpayer does not have one, the space should be 

left blank. The taxpayer cannot use the taxpayer’s social security 

number.

Part II: Figure Your Net Profit

Gross receipts are all receipts from a trade or business including 

income reported on a Form 1099-MISC, Miscellaneous Income. All 

items of taxable income actually or constructively received during 

the year are included. Gross receipts are entered on line 1.

Total expenses include the total amount of all deductible business expenses actually paid during the year. Examples of these 

expenses include advertising, car and truck expenses, commissions, 

insurance, interest, legal and professional services and fees, office 

expense, rent or lease expense, repairs and maintenance, supplies, taxes, travel, 50% of business meals and entertainment, and 

utilities (including telephone). Total expenses of $2,500 or less are 

entered on line 2.

POTENTIAL

PITFALLS

Many taxpayers 

erroneously report 

amounts from 

Form 1099-MISC, 

Miscellaneous Income, 

with wages or other 

income. This income 

should instead be 

reported on Schdule C 

or C-EZ and on Schedule 

SE, Self-Employment 

Tax. If the income is 

reported incorrectly, IRS 

may later issue a notice 

of proposed tax increase 

for the self-employment 

income and tax.
Lesson 2 2-23

BASIC

If the taxpayer uses his or her car or truck for business purposes, 

he or she can deduct expenses related to using the car or truck. 

To determine the amount of car and truck expenses that can be 

deducted, the taxpayer must use either the:

• Standard Mileage Rate, or

• Actual Car Expenses.

Standard Mileage Rate. If the taxpayer can and does choose to 

use the standard mileage rate, business miles are multiplied by the 

applicable mileage rate and added to the deductible parking and 

tolls. Car expenses using the standard mileage rate are computed 

as follows:

Business miles incurred during the year × 36¢ per mile

+ Parking and tolls incurred while on business

Actual Car Expenses. If the taxpayer chooses to use the actual 

car expenses, only the business portion of the expenses is deductible. Deductible expenses under the actual method are computed as 

follows:

1. Compute the percentage of business use:

Business miles

Total miles = % of business use

2. Determine the deductible expenses:

(% of business use × total actual expenses)

+ Parking and tolls incurred while on business

NOTE: If taxpayers depreciate their car or truck, or their total 

expenses are more than $2,500, they cannot use Schedule C-EZ and 

should be referred to a paid professional tax preparer.

Subtracting line 2 from line 1 and entering the net amount on line 

3 determine net profit or loss.

If line 3 shows a profit, transfer this amount to Form 1040, line 12, 

and to Schedule SE, line 2 (except statutory employees). Attach 

Schedule C-EZ to Form 1040 in the correct sequence.

If line 3 is zero, show zero amount on Form 1040, line 12.

If line 3 shows a loss, the taxpayer cannot use Schedule C-EZ and 

should be referred to a paid professional tax preparer. 

Part III: Information on Your Vehicle

Part III should be completed if the taxpayer is claiming car and 

truck expenses in Part II.

ALERT

The 2003 rate for 

business use of your 

vehicle is 36 cents a 

mile.
2-24 Lesson 2

BASIC

Exhibit 8

Proof as of

July 21, 2003

(subject to change)

SCHEDULE C-EZ OMB No. 1545-0074

(Form 1040)

Net Profit From Business

(Sole Proprietorship)

 Partnerships, joint ventures, etc., must file Form 1065 or 1065-B.

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040 or 1041.  See instructions on back. Sequence No. 09A

Business name. If no separate business name, leave blank. D Employer ID number (EIN), if any

Business address (including suite or room no.). Address not required if same as on Form 1040, page 1.

C

E

Gross receipts. Caution. If this income was reported to you on Form W-2 and the “Statutory

employee” box on that form was checked, see Statutory Employees in the instructions for

Schedule C, line 1, on page C-3 and check here  1

2 Total expenses (see instructions). If more than $2,500, you must use Schedule C 2

3

3 Net profit. Subtract line 2 from line 1. If less than zero, you must use Schedule C. Enter on

Form 1040, line 12, and also on Schedule SE, line 2. (Statutory employees do not report this

amount on Schedule SE, line 2. Estates and trusts, enter on Form 1041, line 3.)

For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 14374D Schedule C-EZ (Form 1040) 2003

City, town or post office, state, and ZIP code

You May Use

Schedule C-EZ

Instead of

Schedule C

Only If You:

And You:

● Use the cash method of accounting.

● Had only one business as a sole

proprietor.

● Had business expenses of $2,500 or

less. ● Are not required to file Form 4562,

Depreciation and Amortization, for

this business. See the instructions

for Schedule C, line 13, on page

C-4 to find out if you must file.

● Do not deduct expenses for

business use of your home.

● Do not have prior year unallowed

passive activity losses from this

business.

 

Name of proprietor Social security number (SSN)

General Information

A Principal business or profession, including product or service B Enter code from pages C-7, 8, & 9



Figure Your Net Profit

Part I

Part II

● Did not have a net loss from your

business.

● Had no employees during the year.

1

● Did not have an inventory at any

time during the year.

6 Do you (or your spouse) have another vehicle available for personal use? Yes No

8a Do you have evidence to support your deduction? Yes No

If “Yes,” is the evidence written? Yes No

7 Was your vehicle available for personal use during off-duty hours? Yes No

5 Of the total number of miles you drove your vehicle during 2003, enter the number of miles you used your vehicle for:

Business b Commuting c Other

4

Part III Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 2.

a

b

(99)

When did you place your vehicle in service for business purposes? (month, day, year)  . / /

2003
Lesson 2 2-25

BASIC

Self-Employment Tax

Self-employment tax is a social security tax for persons who work 

for themselves. It is similar to the social security tax and Medicare 

tax withheld from employees’ wages.

Special exemptions from self-employment tax may apply to members of the clergy, members of certain religious sects, and certain 

nonclergy church employees.

The tax is computed on Schedule SE and transferred to the Form 

1040 to be added to other taxes owed. The Schedule SE is attached 

to the Form 1040.

Who Must File Schedule SE

A taxpayer must file Schedule SE if he or she has:

■ Net earnings from self-employment of $400 or more, other than 

church employee income (line 4 of Short Schedule SE),

OR

■ Church employee income of $108.28 or more (line 5a of Long 

Schedule SE).

Exception: If the only self-employment income was from earnings 

as a minister, member of a religious order, or Christian Science 

practitioner AND the taxpayer has filed Form 4361, Application 

for Exemption From Self-Employment Tax for Use by Ministers, 

Members of Religious Orders and Christian Science Practitioners, 

and has received IRS approval not to be taxed on these earnings, he 

or she does not have to file Schedule SE. Instead, write “Exempt—

Form 4361” on Form 1040, line 55.

Most taxpayers will need to complete only Section A of Schedule 

SE, also known as the Short Schedule SE. Follow the chart on the 

form to determine whether the taxpayer qualifies to file the short 

form. Anyone who does not qualify and who must file the long form 

should be referred to a paid professional tax preparer.

If the taxpayer qualifies for the short form, enter the net profit 

from Schedule C-EZ, line 3, on lines 2 and 3 of the Schedule SE.

Follow the instructions on the form to determine net earnings from 

self-employment on line 4 and the self-employment tax on line 5.

Enter the amount from line 5 on Form 1040, line 55.

Deduction of Self-Employment Tax

Self-employed people may claim an adjustment to income of onehalf of the social security and Medicare taxes they pay.

Enter the amount from Schedule SE, line 6, on Form 1040, line 28 

as an adjustment to income.
2-26 Lesson 2

BASIC

Exhibit 9

Proof as of

July 21, 2003

(subject to change)

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003
Lesson 2 2-27

BASIC

 CAPITAL GAINS AND LOSSES

Both the sale of stock and the sale of a home are reported on 

Form 1040, line 13a. The amount entered on Form 1040, line 13a, 

is transferred from Schedule D ( Form 1040), Capital Gains and 

Losses. See Lessons 11 and 12 for more information about these 

types of sales.

SALE OF BUSINESS PROPERTY

The sale or involuntary conversion of business property is reported 

on Form 1040, line 14. If taxpayers are reporting the sale of business property, they should be referred to a paid professional tax 

preparer.

PENSION AND ANNUITY INCOME

Generally, payers of pension and annuity income send Form 1099-R 

to the recipients. The total pension or annuity income is reported 

on Form 1040A, line 12a, or Form 1040, line 16a; the taxable portion is reported on line 12b (1040A) or 16b (1040). If all of the pension or annuity is taxable, make an entry on line 12b or 16b only.

For more information on pension and annuity income, see Lesson 

13, Pensions.

RENTS, ROYALTIES, PARTNERSHIPS, ESTATES, AND TRUSTS

Income from rental property, royalties, partnerships, estates, and/or 

trusts is reported on Form 1040, line 17. Refer any taxpayer who 

receives income from these sources to a paid professional tax preparer.

FARM INCOME

Farm income is reported on Form 1040, line 18. Advise taxpayers 

with farm income to see a paid professional tax preparer.

 UNEMPLOYMENT COMPENSATION

Unemployment compensation includes benefits to unemployed 

individuals that a state or the District of Columbia paid from the 

Federal Unemployment Trust Fund. It is reported to the recipient 

on Form 1099-G, Certain Government Payments. All unemployment compensation is taxable. Transfer the amount in (See Exhibit 

7) box 1 of Form 1099-G to line 3 of Form 1040EZ, line 13 of Form 

1040A, or line 19 of Form 1040.

Supplemental benefits provided from an employer’s fund to which 

the employee did not contribute are sometimes thought of as unemployment benefits also. They are reported to the employee on Form 

W-2. Include them on line 7 of Form 1040A or 1040, or on line 1 of 

Form 1040EZ.

POTENTIAL

PITFALLS

Form 1099-R reports 

pension income, not 

earned income. Form 

1099-R amounts are 

not included on line 7 

of Form 1040. They 

are reported on Form 

1040A, lines 12a and 

12b or Form 1040, 

lines 16a and 16b. You 

will learn how to report 

pensions in Lesson 13, 

Pensions..
2-28 Lesson 2

BASIC

 TAXWISE HINTS

■ When entering income for the taxpayer you have the following 

three choices:

 Go to Line 7 and click F9 ( (Link),

 Click the right mouse and select “Link” or

 Click on add form and select “W-2”.

■ All the information entered into TaxWise should be exactly 

what is on the W-2.

Note: TaxWise automatically rounds numbers.

■ When an entry is made for Alimony paid, TaxWise requires the 

Social Security Number of the spouse receiving the alimony.

■ Form 4852, Substitute for Form W-2, Wage and Tax Statement 

or Form 1099-R, Distributions from Pensions, Annuities, 

Retirement or Profit-Sharing Plans, IRA’s, Insurance Contracts, 

etc. is available and can be completed in TaxWise.
Lesson 2 2-29

BASIC

  SUMMING UP THIS LESSON  

Form 1040EZ can be used to report only income from wages, salaries, tips, qualified tuition program earnings, Alaska Permanent 

Fund dividends, taxable scholarships and fellowship grants, 

interest of $1500 or less, and unemployment compensation.

You can report several types of income on Form 1040A:

 Wages, salaries, tips, scholarships and fellowship grants, 

 qualified tuition program payments, and Alaska Permanent 

 Fund dividends

 Interest income 

 Dividend income

 Capital gain distributions

 Unemployment compensation

Use Form 1040A, Schedule 1, or Form 1040, Schedule B, to 

report: 

 Interest and/or dividend income over $1500 and

 Interest from Series I and/or Series EE savings bonds, issued 

 after 1989, that is excluded from taxable income.

Report any early withdrawal penalties on Form 1040, line 31, as 

an adjustment to income. Do not subtract penalties from interest

income.

Report captial gain distributions directly on Form 1040, line 13a 

or Form 1040A, line 10, if the taxpayer is not required to file 

Schedule D.

State and local tax refunds are included in taxable income if:

 the taxpayer itemized deductions AND

 received a tax benefit by including the state and local tax in 

 itemized deductions.

Alimony and separate maintenance payments are taxable

income ot the person recieving these payments. The person 

paying these payments can subtract them as an adjustment to 

income.
2-30 Lesson 2

BASIC

  SUMMING UP THIS LESSON  

(continued)

Business income or loss is generally beyond the scope of VITA or 

TCE. However, in some cases, trained volunteers may help selfemployed taxpayers who qualify to use Schedule C-EZ.

Taxpayers with net self-employment income of $400 or more 

must complete Schedule SE to compute self-employment tax.

Some nontaxable income is reported but is not included in taxable income:

 Tax-exempt interest 

 Nontaxable portion of IRA distributions, including rollovers

Other income, such as prizes, awards, lottery winnings, and 

jury duty pay, is reported on line 21 of Form 1040, including the 

amount and description.

Volunteers should refer taxpayers with any of the following 

items to paid professional tax preparers: 

 Sales of business property

 Income from rental property, royalties, partnerships, estates, 

 or trusts

 Farm income
Lesson 2 2-31

BASIC

 INCOME ANSWERS TO EXERCISES Lesson 2

Exercise 1

1. Taxable

2. Taxable

3. Nontaxable

4. Nontaxable

5. Taxable

6. Taxable

7. Nontaxable

8. Taxable

9. Nontaxable

10. Nontaxable

Exercise 2

(A) Mike will report $29,250 on line 7. The tip income is included 

in the $8,250.

(B) No; John must file Form 1040 to pay social security and 

Medicare tax on his tip income.

(C) Randy should be advised to contact the employer and request 

that a Form W-2 be issued or reissued. If after waiting a reasonable amount of time, it still has not been received, Randy 

should contact the IRS (but not before February 15th).

Exercise 3

(A) 1. None

 2. $1,000

(B) $398 is reported on line 2 of Form 1040EZ.

(C) $495 is reported on line 8a of Form 1040.
2-32 Lesson 2

BASIC

STUDENT NOTES
Lesson 2

Military Segment M-2-1

 INCOME Lesson 2

Military Segment

INTRODUCTION AND OBJECTIVES

This segment discusses whether to include specific 

items in gross income. You should be aware, however, that certain items related to moving or travel 

expenses generally must be accounted for even if they 

are not considered income.

This lesson includes information about the combat 

zone exclusion. For additional tax benefits, see Lesson 

16, Tax Options for Combat Zone Participants.

This segment will help you to achieve the following 

objectives:

1. Determine which items received by Armed Forces 

members are includible in gross income.

2. Determine if an amended return must be filed for 

a taxpayer who received medical separation pay.

3. Determine who qualifies for exclusion of pay from 

income because of service in a combat zone.

4. Identify qualifying items of military pay received 

for service in a combat zone.

FORM W-2

Includible military income will generally be the 

amount shown in box 1 of Form W-2, Wage and Tax 

Statement. If this amount differs from the last Leave 

and Earnings Statement for 2003, advise the person 

to contact his or her local accounting and finance or 

payroll office for an explanation. 

The wages shown in box 1 of the 2003 Form W-2 

should not include military pay excluded from an individual’s income under the combat zone exclusion provisions. Tax exempt earned income, basic allowance 

for subsistence (BAS), basic allowance for housing 

(BAH), and certain in-kind allowances are no longer 

reported in box 12 of Form W-2.
Lesson 2 M-2-2 Military Segment

INCLUDIBLE INCOME

Members of the Armed Forces receive many different types of pay 

and allowances. Some are includible in gross income while others 

are excludable from gross income. Includible items are subject to 

tax and must be reported on the taxpayer’s tax return. Excludable 

items are not subject to tax, but may have to be shown on the tax 

return. The following items are includible in gross income, unless

the pay is for service in a combat zone declared by an executive order of the President or in a qualified hazardous duty area 

declared by statute:

Accrued Leave Payment Aviation Career Incentive Pay

Basic Pay Continuation Pay

Diving Pay Enlistment Bonus *

Flight Duty Pay Foreign Duty Pay

Hostile Fire Pay Imminent Danger Pay

Medical/Dental Officer Pay Medical Separation Pay

Nuclear Qualified Officer Pay Overseas Extension Bonus

Personal Money Allowance Proficiency Pay

Reenlistment Bonus * Responsibility Pay

Scholarships (AFHPSP) Sea Duty Pay

Separation Pay Student Loan Repayments

Veterinary Officer Pay

* Enlistment and reenlistment bonuses fall under the category of 

taxable income. Income tax will be deducted from these entitlements before they are paid to the service member. Income tax is 

withheld at a flat rate of 27% as bonuses are treated as supplemental wages. Service members will not need to account for enlistment 

and reenlistment bonuses separately when preparing their tax 

returns as the payments and withholdings will be reflected on their 

Form W-2. If a service member feels this information is incorrect 

they will need to contact their local accounting and finance or payroll office.

A reenlistment bonus may be tax free if the voluntary extension 

or reenlistment occurs in a month the service member served in a 

combat zone.

Lesson 2

Military Segment
Lesson 2

Military Segment M-2-3

EXCLUDABLE INCOME

The following qualified military benefits do not have to be reported 

as income on Form 1040, 1040A, or 1040EZ. The exclusion applies 

whether the item is furnished in kind or is a reimbursement or 

allowance. The personal use of a vehicle cannot be excluded from 

gross income as a qualified military benefit. 

Basic Allowance for Housing 

(BAH)

Basic Allowance for 

Subsistence (BAS)

Combat Zone Compensation 

(including hostile fire pay or 

imminent danger pay) (limited 

amount for officers)

Congressional Medal of 

Honor Pension

Death Allowances Defense Counseling

Dislocation Allowances Evacuation Allowance

Family Allowances Group-term Life Insurance

Interment Allowance Medical Benefits

Moving and Storage Other Quarters Allowances

Overseas Housing 

Allowance (OHA)

Per Diem (Including reservist)

Professional Education Qualified Hazardous

Duty Pay

ROTC Educational and 

Subsistence Allowances

Survivor and Retirement 

Protection Plan Premiums 

Deducted from Military 

Retired Pay

Trailer Allowance Veterans’ Benefits

Note: If the person you are helping is a member of the Armed 

Forces and was provided a commuter highway vehicle (such 

as a van) by his or her employer in 2003, refer the taxpayer to 

Publication 525, Taxable and Nontaxable Income, and to a paid 

professional preparer.

MEDICAL SEPARATION PAY

Service members who have been separated from the service for 

years of service or medical reasons are given severance pay, which 

are taxable as wages. If any portion of their pay is subject to medical disability, only the Veteran’s Affairs (VA) can make that determination and assign what percentage is attributable to medical 

disability pension due. This process takes several months and 

sometimes years. The service member will receive the total “pension” which is taxable until the VA makes the determination and 

sends the discharged service member a letter of determination. 
Lesson 2 M-2-4 Military Segment

Disability compensation is a monetary benefit paid to veterans who 

are disabled by injury or disease incurred or aggravated during 

active military service. The service of the veteran must have been 

terminated through separation or discharge under conditions that 

were other than dishonorable. Disability compensation varies with 

the degree of disability and the number of dependents, and is paid 

monthly. The benefits are not subject to federal or state income tax. 

Once the letter of determination is received, any future pension 

payments will be off-set by that percentage and paid directly from 

the VA. The payments received directly from the VA are not taxable 

and will not be include in the Form W-2. However, the payments 

received prior to the letter of determination being issued have 

already been taxed and the letter also exempts that percentage of 

pay already received from taxes. The service member needs to file 

an amended return, if a return has already been filed, and attach a 

copy of the letter of determination to the Form 1040X. 

The payment of military retirement pay, disability severance pay 

and separation incentive payments known as SSB and VSI (Special 

Separation Benefits and Voluntary Separation Incentives) also 

affects the amount of VA compensation paid. 

Example

Anita Bennett, an active duty service member, was separated due 

to a medical condition in February 2002. At the time of her separation she was given medical separation pay or severance pay in the 

amount of $10,000.00. She receives a service pension in the amount 

of $3000 per month. Her 2002 Form W-2 showed $48,000 in wages 

of which $43,000 ($10,000 + ($3000 x 11 months)) was considered 

pension. She filed and claimed the full amount on her 2002 tax 

return. In 2003 the Veteran’s Administration (VA) determined that 

due to her medical condition she was entitled to a VA disability

pension of 50% from the date of her discharge. She receives her 

determination letter from the VA in March 2003, the tax return 

that includes her severance pay should be amended to exclude the 

50% of the pension pay she received in 2002, $21,500.00 (($10,000 

+ 33,000) x 50%). She would attach a copy of the letter of determination to the amended return. She also will need to adjust her 

pension received January thru March 2003 by the 50%., the other 

months will reflect the correct taxable amount. In 2003 she will 

also need to attach a copy of the letter to her return to show why 

the amount is different from the Form W-2. The Form W-2 that she 

receives in 2004 and forward will show the correct amount of taxable wages.

 COMBAT ZONE EXCLUSION

Members of the U.S. Armed Forces who serve in a combat zone 

(defined later) may exclude certain pay from their income. They do 

not have to receive the pay while in a combat zone, in a hospital, 

or in the same year they served in a combat zone. However, the 

entitlement to the pay must have fully accrued in a month dur-
Lesson 2

Military Segment M-2-5

ing which they served in the combat zone or were hospitalized as 

a result of wounds, disease, or injury incurred while serving in the 

combat zone. The following military pay can be excluded from their 

income.

• Active duty pay earned in any month during which they served 

in a combat zone.

• Imminent danger/hostile fire pay

• A reenlistment bonus if the voluntary extension or reenlistment 

occurs in a month during which they served in a combat zone.

• Pay for accrued leave earned in any month during which they 

served in a combat zone. The Department of Defense must 

determine that the unused leave was earned during that period.

• Pay received for duties as a member of the Armed Forces in 

clubs, messes, post and station theaters, and other nonappropriated fund activities. The pay must be earned in a month during 

which they served in a combat zone.

• Awards for suggestions, inventions, or scientific achievements 

to which members are entitled to because of a submission they 

made in a month during which they served in a combat zone.

• Student loan repayments that are attributable to their period of 

service in a combat zone.

Retirement pay does not qualify for the combat zone exclusion.

Partial (month) service. Members of the U.S. Armed Forces who 

serve in a combat zone for one or more days during a particular 

month, are entitled to an exclusion for that entire month.

 Combat Zone

A combat zone is any area the President of the United States designates by Executive Order as an area in which the U.S. Armed 

Forces are engaging or have engaged in combat. An area usually 

becomes a combat zone and ceases to be a combat zone on the dates 

the President designates by Executive Order.

Afghanistan area. By Executive Order No. 13239, Afghanistan 

(and airspace above) is designated as a combat zone beginning 

September 19, 2001.

Yemen area. Executive Order No. 13239 was extended to include 

Yemen as a designated combat zone beginning April 10, 2002.

The Kosovo area. By Executive Order No. 13119 and Public Law 

106-21, the following locations (including air space above) were 

designated as a combat zone and a qualified hazardous duty area 

beginning March 24, 1999.

• Federal Republic of Yugoslavia (Serbia/Montenegro)

• Albania

• The Adriatic Sea
Lesson 2 M-2-6 Military Segment

• The Ionian Sea—north of the 39th parallel (including all of the 

airspace in connection with the Kosovo operation.)

Persian Gulf area. By Executive Order No. 12744, the following 

locations (and airspace above) were designated as a combat zone 

beginning January 17, 1991.

• The Persian Gulf,

• The Red Sea,

• The Gulf of Oman,

• The part of the Arabian Sea that is north of 10 degrees north 

latitude and west of 68 degrees east longitude,

• The Gulf of Aden, and

• The total land areas of Iraq, Kuwait, Saudi Arabia, Oman, 

Bahrain, Qatar, and the United Arab Emirates.

In addition, the Department of Defense has certified these locations 

for combat zone tax benefits due to their direct support of military 

operations, beginning on the listed dates:

In support of Operation Enduring Freedom (Afghanistan combat 

zone):

• Pakistan, Tajikistan and Jordan – September 19, 2001

• Incirlik Air Base, Turkey – September 21, 2001

• Kyrgyzstan and Uzbekistan – October 1, 2001

• Philippines – January 9, 2002

• Yemen – April 10, 2002

• Djibouti – July 1, 2002

In support of Operation Iraqi Freedom (Arabian Peninsula Areas 

combat zone):

• Israel and Turkey – January 1, 2003

• The Mediterranean

Qualified hazardous duty area. Beginning November 21, 1995, 

a qualified hazardous duty area in the former Yugoslavia is treated 

as if it were a combat zone. The qualified hazardous duty area 

includes:

• Bosnia and Herzegovina,

• Croatia, and

• Macedonia.

Members of the Armed Forces deployed overseas away from their 

permanent duty station in support of operations in a qualified hazardous duty area, or performing qualifying service outside the qualified hazardous duty area, are treated as if they are in a combat 

zone solely for the purposes of the extension of deadlines discussed 

in Lesson 16. These personnel are not entitled to other combat 

zone tax benefits.
Lesson 2

Military Segment M-2-7

Serving in a Combat Zone

Service in a combat zone includes any periods that military members are absent from duty because of sickness, wounds, or leave. If, 

as a result of serving in a combat zone, a person becomes a prisoner 

of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for 

military pay purposes.

Qualifying service outside combat zone. Military service outside a combat zone is considered to be performed in a combat zone 

if:

• The service is in direct support of military operations in the 

combat zone, and

• The service qualifies a member for special military pay for duty 

subject to hostile fire or imminent danger. 

Military pay received for this service will qualify for the combat 

zone exclusion if the other requirements are met. 

Non-qualifying presence in combat zone. The following military service does not qualify as service in a combat zone.

• Presence in a combat zone while on leave from a duty station 

located outside the combat zone,

• Passage over or through a combat zone during a trip between 2 

points that are outside a combat zone, and 

• Presence in a combat zone solely for a member’s personal 

convenience.

Note. Military Members are considered to be serving in a combat 

zone if they are either assigned on official temporary duty to a combat zone or they qualify for hostile fire/imminent danger pay while 

in a combat zone.

Amount of Exclusion

Enlisted members. Enlisted members, warrant officers, or commissioned warrant officers who serve in a combat zone during 

any part of a month, can exclude all of their military pay for that 

month from their income. They can also exclude military pay 

earned while they are hospitalized as a result of wounds, disease, 

or injury incurred in the combat zone. The exclusion of their military pay while they are hospitalized does not apply to any month 

that begins more than 2 years after the end of combat activities in 

that combat zone. Their hospitalization does not have to be in the 

combat zone.

Officers. Commissioned officers (including Limited Duty Officers), 

may exclude their pay according to the rules just discussed. 

However, the amount of their exclusion is limited to the highest 
Lesson 2 M-2-8 Military Segment

rate of enlisted pay (plus imminent danger/hostile fire pay they 

received) for each month during any part of which they served in a 

combat zone or were hospitalized as a result of their service there.

Hospitalized while serving in the combat zone. If a member is 

hospitalized while serving in the combat zone, the wound, disease, 

or injury causing the hospitalization will be presumed to have been 

incurred while serving in the combat zone unless there is clear evidence to the contrary.

Example

Ron Brady is hospitalized for a specific disease after serving in a 

combat zone for 3 weeks, and the disease for which he is hospitalized has an incubation period of 2 to 4 weeks. The disease is presumed to have been incurred while he was serving in the combat 

zone. On the other hand, if the incubation period of the disease 

were one year, the disease would not have been incurred while he 

was serving in the combat zone.

Hospitalized after leaving the combat zone. In some cases the 

wound, disease, or injury may have been incurred while serving 

in the combat zone, even though the member was not hospitalized 

until after he/she left.

Example

Martha Marshall was hospitalized for a specific disease 3 weeks 

after she left the combat zone. The incubation period of the disease 

is from 2 to 4 weeks. The disease was considered incurred while 

serving in the combat zone.

COMMUNITY PROPERTY

The community property states are Arizona, California, Idaho, 

Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 

Special rules apply to married persons who file separate returns 

or who were divorced during the tax year and were domiciled in a 

community property state.

For military personnel in community property states, the key word 

is “domicile.” Domicile describes someone’s legal, permanent residence. It is not always where the person presently lives. 

Whether an item is subject to community property laws depends on 

the nature of the payment.

Armed Forces pay. State community property laws apply to 

active military pay. Generally, the character of the pay as separate to community income is determined by the marital status and 

domicile of the Armed Forces member and his or her spouse while 

the member is in active military service.

Armed Forces retired or retainer pay. Retired or retainer payments to a member of the Armed Forces may be subject to community property laws.
Lesson 2

Military Segment M-2-9

For more information, see Publication 555, Community Property.

Exercise 1

Which of the following should be included in gross income?

A. Basic Allowance for Subsistence (BAS)

B. Overseas Housing Allowance

C. Lump sum for accrued leave, paid on separation

D. Foreign language proficiency pay 

E. Uniform allowance

F. Foreign duty pay

G. Reenlistment Bonus received while a service member was 

deployed to Qatar

H. Hazardous duty pay

I. Family Separation Allowance received while a service member 

was deployed to Italy

Answer

Exercise 2

Sergeant James Wells was medically separated, in November 

2002, from active duty military service due to a medical condition that interfered with his ability to perform his military duties. 

James was entitled to and received $12,000 in medical separation 

pay. After taxes he received $8,640. Prior to his separation he submitted the required documentation to the Veteran’s Affairs applying for disability pay. James filed his tax return in March 2003 

and received a $567 refund. In August of 2003 James received his 

determination letter from VA informing him he was entitled to an 

$800 disability pension per month from the date of his discharge. 

A. Does James need to file an amended tax return?

Answer

B. What amount of pay will James need to exclude from his pay 

when he files an amended tax return?

Answer

C. When will James start receiving his disability pension?

Answer
Lesson 2 M-2-10 Military Segment

  SUMMING UP THIS SEGMENT  

You have learned that certain items received by members of the 

Armed Forces are included in their gross income. Certain other 

items are specifically excluded by law. Pay for service in a combat zone is not taxed for an enlisted member of the U.S. military. 

The amount of income that is not taxed for commissioned officers 

serving in a combat zone is limited to the highest rate of enlisted 

pay plus the amount of imminent danger pay per month. 
Lesson 2

Military Segment M-2-11

 INCOME ANSWERS TO EXERCISES

Lesson 2

Military Segment

Exercise 1 C, D, F, and H

Exercise 2 A — yes

 B — $12,000

 C — 15 months or March of 2004
Lesson 2 M-2-12 Military Segment

STUDENT NOTES
Lesson 2

Military Segment M-2-13

OTHER INCOME Lesson 2

Military Segment

INTRODUCTION AND OBJECTIVES

In the first part of this lesson we discussed what the definition of 

gross income is. Included in this definition was self-employment

income and rental income. In this segment we will learn how to 

handle self-employment income and what is required in order to 

prepare a tax return with a Schedule C-EZ. Many military members and their spouses may earn additional income as sole proprietors and not be aware of their responsibility to report it. In some 

cases, income received is reported to those individuals by means of 

Form 1099-MISC. In many cases no Form 1099-MISC is received, 

just cash or checks paid to the taxpayer. We will learn about rental 

income and how to report it.

When this segment is completed, we will be able to:

1. Determine when business income must be reported using 

Schedule C-EZ.

2 Determine when Schedule SE must be filed.

3. Explain when Schedule E must be filed.

DETERMINING WHICH TAX YEAR TO REPORT THE BUSINESS INCOME

Under the cash method, a self-employed taxpayer includes in his or 

her business gross income all items of income actually or constructively received during the tax year. If a taxpayer received property 

or services, he or she must include the fair market value of those 

items received in income.

Example

On December 30, 2002, a customer mailed a check for interior decorating services provided by Kathy (your taxpayer). Kathy received 

the check on January 2, 2003. Kathy must include the amount of 

the check in income for 2003.

Constructive receipt. You have constructive receipt of income 

when an amount is credited to your account or made available to 

you without restriction. You do not need to have possession of it. If 

you authorize someone to be your agent and receive income for you, 

you are treated as having received it when your agent received it.

Example 

Interest is credited to your bank account in December 2003. You do 

not withdraw it or enter it into your passbook until 2004. You must 

include it in your gross income for 2003.
Lesson 2 M-2-14 Military Segment

Delaying receipt of income. You cannot hold checks or postpone 

taking possession of similar property from one tax year to another 

to avoid paying tax on the income. You must report the income in 

the year the property is received or made available to you without 

restriction.

Example

Frances Jackson, a service contractor, was entitled to received a 

$10,000 payment on a contract in December 2003. She was told in 

December that her payment was available. At her request, she was 

not paid until January 2004. She must include this payment in her 

2003 income because it was constructively received in 2003.

Checks. Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or 

deposit the check untl the following year. 

Example

Mrs. Reed received a check for $500 on December 31, 2003, from a 

parent in her day care business. She could not deposit the check in 

her business account until January 2, 2004. She must include this 

fee in her income for 2003.

 INCOME

Business income may be reported to taxpayers in various ways or 

even not at all. Some taxpayers receive informational returns such 

as the Form 1099-MISC other times it may be just a check or cash 

for services performed. Regardless of how income is received, selfemployed taxpayers are responsible for recording the amount of 

income received, and related expenses, in their permanent books of 

record. Normally, the easiest record keeping is maintaining a separate business checking account. 

From these records the taxpayer should be able to state to you the 

total gross receipts or sales for the year, any returns and allowances (although normally a cash based taxpayer should not have 

any of these since income is reported at the end of the year) and the 

Cost of Goods Sold. We will discuss deductions for expenses later in 

the lesson.

DEDUCTIONS FOR EXPENSES

In earlier chapters you learned about deductions from gross

income. The same concept applies to business gross income. Selfemployed taxpayers are allowed to deduct from income those “ordinary and necessary” expenses paid or incurred during the taxable 

year in carrying out a trade or business.
Lesson 2

Military Segment M-2-15

Auto Expenses

Business auto expenses can be calculated by either the actual cost 

method or the standard mileage method. The taxpayer usually 

makes the choice of which method to use the first year that the 

vehicle is used for the business. It is permissible to switch from 

the standard mileage method to the actual expense method; however, taxpayers generally are not permitted to switch from actual 

method to the standard mileage method.

The Standard Mileage Method is available for both owned and 

leased autos. However, the vehicle must not be used for hire (such 

as a taxi or shuttle van). The election to use the standard mileage 

method must generally be made in the year the auto is first used 

in business. In a later year the taxpayer may switch to the actual 

expense method but cannot claim any depreciation, if the vehicle is 

considered fully depreciated. In leased cars the standard mileage 

method must be for the entire lease period of the auto.

In 2003 the standard mileage rate is 36¢.

Expenses not included in the standard mileage allowance and 

deductible in addition to the standard mileage allowance are business parking fees and tolls, and interest on auto loan (business portion).

A taxpayer is limited to the actual expense method if any of the following are true:

1. ACRS or MACRS Depreciation has previously been claimed on 

the auto.

2. A section 179 expense has been claimed on the auto.

3. Any method of depreciation on the auto other than straight line 

over the estimated useful life of the auto.

Under this method the taxpayer determines the actual cost of those 

items listed under the standard mileage rate and deducts that 

amount. Both methods should be considered to determine which 

gives the most beneficial deduction to the taxpayer.

CRITERIA FOR FILING SCHEDULE C-EZ 

In order to file the EZ version of the Schedule C the taxpayer must 

meet the criteria listed below:

1. Have less than $2,500 in business expenses

2. Use the Cash method of accounting

3. Have no inventory at any time during the year

4. Have positive net income (not have a net loss)

5. Operate only one business as a sole proprietor during the tax 

year

6. Have no employees during the year.
Lesson 2 M-2-16 Military Segment

Example

Jerry owns and operates a one-person tax preparation business 

during the filing season. His income is $1,500 accounted for via the 

cash method; this is the only business he operated during the year. 

He has the following expenses, paper $400 and ink $200. Since 

Jerry’s expenses total $600 Jerry has met all the requirements and 

therefore can use the Schedule C-EZ for reporting his business 

income.

Exercise 1

Jim is the civilian spouse of Lt. Carry Ann. He operates a business 

(sole proprietorship) as a lawyer. His gross income from business 

is $70,000. His total business expenses amount to $1,800. Can he 

use the Schedule C-EZ, yes or no?

Answer 

Exercise 2

Martha is the wife of Stuart, a Marine stationed in California. 

During the year Martha operates a sole proprietorship called 

Squared Away Child Care services. She comes to you for help with 

her return. A review of her records reflect the following:

Income: $6,700

Expenses:

Advertising $600

Car & Truck $150

Office Expense $500

Toys and Games $200

Telephone $800

Utilities $300

Total Expenses $2,550

Net Income $4,150

Can Martha file a Schedule C-EZ?

Answer 

 SCHEDULE SE

If the net income on the Schedule C or Schedule C-EZ is $400 or 

more, you will need to file a Schedule SE. The Schedule SE calculates the self-employment tax, which is comprised of the Social 

Security and Medicare taxes.
Lesson 2

Military Segment M-2-17

SCHEDULE E

For the military, rental income and expenses is a frequent occurrence since many military members are not able to sell their homes 

when they get orders to relocate. Many homeowners rent out their 

old home. The income and the expenses from the rental of the property are recorded on Schedule E. This section will provide basic 

guidance on how to complete the Schedule E.

We will not discuss the calculation of depreciation. Depreciation 

is a complex subject. If the taxpayer provides you with the depreciation amount, you can enter it on the tax return. If the taxpayer 

does not know the depreciation amount, you may need to refer 

them to the military legal assistance office. 

In the first year of the rental, you might have to divide the mortgage interest and real estate taxes between Schedule A and 

Schedule E. You simply divide the total mortgage interest and 

property taxes by twelve and multiply by the number of months the 

home was used for each purpose.

Example

Sgt. Judson lived in his home through September 2003. He received 

orders and rented his home out in October. Nine months of the 

mortgage interest and property taxes would go on his Schedule 

A and the other three months would go on the Schedule E. 

Remember, also, that three months of his property insurance is also 

a deductible item on Schedule E, even though this expense is not 

deductible when the home is his residence. 

Other expenses that are deductible for rental property are: cleaning and maintenance, repairs, utilities that are paid for the tenant, 

legal and professional fees, management fees you pay a real estate 

company or individual to care for your property in your absence, 

auto and travel expense to check on the property, long distance 

phone calls, etc.

Once you deduct all of the expenses and the depreciation from the 

rent received, you may come up with a loss. The net income or loss 

from rental property is usually considered passive. If the taxpayer 

actively participates in the renting of the property (such as making 

decisions, determining who can rent the property), the loss is fully 

deductible.

  SUMMING UP THIS SEGMENT  

 Business income is reported on either a Schedule C or C-EZ. 

 The Schedule C-EZ has limited use. 

 Schedule SE is used to calculate the self-employment tax 

when the net business income exceeds $400.

 Schedule E is used to report rent and royalty income.
Lesson 2 M-2-18 Military Segment

STUDENT NOTES
Lesson 2

International Segment I-2-1

INTRODUCTION AND OBJECTIVES

This lesson will provide insights into the misconception that a 

U.S. citizen or resident alien only file a U.S. tax return if he or she 

has income from the United States, especially if taxes are paid to 

another country.

At the end of this segment, you will be able to:

■ Define worldwide income and compute the U.S. dollar value of a 

foreign currency if given an exchange rate table.

■ Determine when to use average annual exchange figures.

WORLDWIDE INCOME

U.S. citizens and U.S. resident aliens are required to file a U.S. tax 

return based on their worldwide income. It has been a pop ular

misconception that a person only has to file a U.S. tax return if he 

or she has income from the United States, espe cially if he or she 

pays taxes to another country. While U.S. citi zens and U.S. resident aliens living abroad can claim tax benefits such as the foreign 

earned income exclusion and the foreign tax credit (later lessons), 

they have the same filing requirements as U.S. citizens living in 

the United States. This applies whether their income is from within 

or outside the U.S. Types of income, such as child support, which 

would not be taxed in the U.S., are generally not taxed if from outside the U.S. But, types of income which would be taxable if from 

within the U.S. are also taxable if from outside the U.S.

You may wish to refer to the lists of taxable and nontaxable income 

on the applicable pages of the basic Military Section of the text.

Example 1 

In 2003, Joe Adams earned $40,000 while working in Austin, Texas, 

for XYZ Corporation. In September 2003, he transferred to their 

office in Stuttgart, Germany. While in Germany, he earned $30,000. 

His worldwide wages earned in 2003 would be $70,000. Line 7 of 

his Form 1040 would show $70,000. 

WORLDWIDE INCOME Lesson 2

International Segment
Lesson 2 I-2-2 International Segment

Exercise 1 

Marta Brener lives in Mussbach, Germany. Her 2003 income 

included $22,000 in wages earned in Germany. She earned $3,000 

in interest from her U.S. bank and $2,000 unemployment compensation from the state of Iowa. What is Marta’s worldwide gross

income?

Exercise 2 

Mary Carlton lives in Belgium. Her 2003 income included $10,000 

in wages from her Belgian employer. She received $2,000 interest 

from her U.S. bank, $8,000 in alimony pay ments and $8,000 in 

child support payments from her ex-spouse. What is her worldwide gross income? 

Exercise 3 

Would Marta Brener (Exercise 1) have to file a U.S. tax return 

for 2003? Would Mary Carlton (Exercise 2) have to file a U.S. tax 

return?

Exchange Rates

Another question that you will frequently be asked is “What 

exchange rate do I use?” The exchange rates of foreign curren cies

to the U.S. tax dollar change on a daily basis. All amounts on 

the U.S. tax return must be stated in U.S. dollars. Since most 

taxpayers abroad receive some kind of income in foreign currency, 

you will find situations when you will need to convert foreign 

income into U.S. dollars in order to put these income amounts on 

the return. Most countries have a medium of currency compared 

to which the value of the dollar is larger. Very few countries have 

mediums compared to which the U.S. dollar is smaller. Exchange 

rates are stated in two ways: the foreign currency to the U.S. dollar, 

and the dollar’s value in the foreign currency.

When making a conversion, you should make sure that the 

exchange rate is stated in foreign currency to one U.S. dollar. To 

convert a sum of money into U.S. dollars, you would divide the foreign currency by the exchange rate. 

Example 2 

If you received 3,000 Euros on a day that the exchange rate was 

1.7115 Euros to $1 U.S., you would have $1,752.85 in equivalent 
Lesson 2

International Segment I-2-3

U.S. dollar value (3,000/1.7115 = 1,752.85). To convert a sum of 

money into U.S. dollars when the currency unit is larger in value, 

you can use the same process. 

Example 3 

Caryn received 200 Euros on a day that the exchange rate was

.5514 Euros to one U.S. dollar. In U.S. dollars, she would have 

$362.71 (200/.5514 = 362.71).

Exercise 4

Convert the following amounts to U.S. dollars. 

a. 36,000 Euros (1.7115 exchange rate) ________ 

b. 800 Euros (.5514 exchange rate) ____________ 

When to Convert. Now that you have information on how to calculate exchange rates, we now need to discuss what exchange rates 

to use. Actually, what exchange rate to use is determined by the 

date of the transactions; that is the date on the check or the date 

money is credited to the taxpayer’s account. If the taxpayer has 

income which was received evenly throughout the year, he or she 

can use the average annual exchange rate if the foreign exchange 

rate was relatively stable during the year. The average annual 

exchange rate is available from IRS offices throughout the world 

generally starting around January 15. 

IRS also distributes information to its worldwide offices con cerning

the quarterly exchange rates for various currencies.

Example 4 

Edward Pasco worked in Dallas for Megacorp Incorporated from 

January until September 2003. On September 29, he was transferred to their Mexico City office where he will be working for 3 

years. While in the U.S., Edward earned his salary in U.S. dollars. 

When he moved to Mexico, he was paid in Mexican pesos. Since he 

did not receive his salary in foreign currency throughout the year, 

he should not use the annual average exchange rate. He should use 

the average rates for October, November, and December. 

Where to Obtain Exchange Rates

To obtain exchange rates, you can call the IRS International office 

at 215-516-2000, or the overseas IRS offices. The phone numbers 

of these offices are listed in Publication 54. You may also contact 

banks who pro vide international currency exchange services. Since 

a taxpayer “should use the rate that most nearly reflects the value 

of the foreign currency” (Publication 54) at the time he or she 

receives the income, the taxpayer may use an exchange rate that is 

different from the rates posted in our worldwide offices if he finds it 

to be a truer representation. 
Lesson 2 I-2-4 International Segment

Exercise 5 

Deborah Vance lives and works in Manila, Philippines. In 2003, 

she had the following income: 16,000 Filipino pesos in wages, 

1,200 Filipino pesos interest income and $500 in U.S. interest 

from her U.S. bank. On June 7, 2003, she sold her car and made 

a profit of 2,000 Philippine pesos (fully taxable capi tal gain). 

Since these items are fully taxable, what is the total income to be 

reported on her U.S. tax return (in U.S. dollars)? 

For this exercise assume that the 2003 average annual exchange 

rate for the Philippine peso is 40.25 pesos to 1.00 

U.S. dollar and the exchange rate for June 7, 2003 was 32.55 pesos 

to 1.00 U.S. dollar.

Wages ______________________________

Interest ____________________________

Capital Gain ________________________

Total 2003 Income ___________________

Sometimes, you may get questions on exchanging money when 

there is “blocked income” or “soft currency”. Questions on these 

issues should be referred to IRS. “Blocked income” refers to a situation where a taxpayer cannot convert foreign currency to U.S. dollars. This is generally due to local law or local government policy. 

There are special tax rules that exist when there is blocked income 

which allows a person to choose to put off report ing part of their 

income. “Soft currency” refers to a situation where a person can 

only convert back to U.S. dollars an amount that equals what he 

brought into that country in U.S. dollars. 

  SUMMING UP THIS SEGMENT  

 U.S. citizens (and resident aliens) are taxed on worldwide 

income and must file U.S. tax returns even if all the income is 

from foreign sources.

 You have learned how to convert foreign currency to U.S. dollar equivalent values.

 Exchange rates used should reflect the closest accurate rate.
Lesson 2

International Segment I-2-5

WORLDWIDE INCOME

ANSWERS TO EXERCISES Lesson 2

International Segment

1. $27,000 

2. $20,000 

3. Yes. Yes. 

4. a. $21,034.18 

 b. $1,450.85 

5. Wages 16,000.00 ÷ 40.25 = $397.52 

 Interest 1,200.00 ÷ 40.25 = $29.81 from Philippines plus $500

interest from U.S. = $529.81

 Capital Gain 2,000.00 ÷ 32.55 = $61.44

 Total 2003 Income – $988.77
Lesson 2 I-2-6 International Segment

STUDENT NOTES
Lesson 2

International Segment I-2-7

SELF-EMPLOYMENT TAX Lesson 2

International Segment

INTRODUCTION AND OBJECTIVES

This lesson will explain when a self-employed taxpayer living 

abroad is subject to U.S. income tax requirements and their filing 

obligations.

At the end of the segment, you will be able to:

1. Determine who is a self-employed individual.

2. Compute the self-employment tax for a U.S. citizen or resident 

abroad.

3. Compute the deduction for self-employment tax.

EMPLOYEE OR SELF-EMPLOYED

A self-employed person is generally one who either: 

1. Carries on a trade or business as a sole proprietor or independent contractor. 

2. Is a member of a partnership that carries on a trade or business. 

3. Otherwise in business for himself or herself. 

SELF-EMPLOYMENT TAX

The self-employment tax is a social security tax for individuals who 

work for themselves. It is similar to the social security tax withheld 

from the pay of wage earners. 

Social security benefits are available to individuals who are 

self-employed just as they are to wage earners. Payments of selfemployment tax contribute to an individual’s coverage under the 

social security system.

Income Limits. You must pay self-employment tax if you have net 

earnings from self-employment of $400 or more a year. 

Self-employment tax consists of two parts, social security and medicare. For 2003, social security tax is paid on the first $87,000 of 

net income. The medicare tax is imposed on the full amount of net 

earnings. 

Note: If your self-employment income is $400 or more, you must 

file a return even though your income is below the mini mum

amount for income tax filing purposes. 
Lesson 2 I-2-8 International Segment

Effect of Foreign Earned Income Exclusion. You must take all 

of your earned income into account in figuring your self-employment tax, even though the income is exempt from income tax 

because of the foreign earned income exclusion.

Example 1 

You are in business abroad as a consultant and qualify for the 

foreign earned income exclusion. Your foreign earned income is 

$70,000, business expenses $20,000, resulting in net earnings of 

$50,000. You must pay self-employment tax on the net income even 

though you excluded all of your earned income. 

Exemption from U.S. Self-Employment Tax. The United States 

may reach agreements with foreign countries to elimi nate dual coverage and dual contributions (taxes) to social security systems for 

the same work. As a general rule, self-employed persons who are 

subject to dual taxation will only be covered by the social security 

system of the country where they reside. 

For more information, consult Publication 54, “Tax Guide for U.S. 

Citizens and Resident Aliens Abroad.” 

WHICH FORMS TO USE

Form 1040, U.S. Individual Income Tax Return, is used to report 

self-employment tax. Both income tax and self-employment tax 

are due at the same time. Schedule SE, Social Security SelfEmployment Tax, is used to figure the tax. Even if the taxpayer is 

not otherwise required to file an income tax return, he or she must 

file both Form 1040 and Schedule SE to pay self-employment tax. 

The Schedule SE includes a flowchart to determine if the short or 

long form is required. 

COMPUTING THE SELF-EMPLOYMENT TAX

Although there are three methods available to compute selfemployment tax, VITA volunteers will only use the regular method. 

Taxpayers who wish to use the other methods should seek paid professional assistance. There are no limits on who may use the regular method. Most taxpayers use this method. 

Under the regular method, the net income from your business or 

profession is generally your net self-employment earnings from 

Schedules C, C-EZ, F. and K-1 (Form 1065). 

If you have more than one trade or business, your net earnings 

from self-employment are the combined net earnings from each 

of your businesses. A loss in one business will reduce the income 

earned in another. You must claim all allowable deduc tions including depreciation when figuring your net earnings from self-employment. 
Lesson 2

International Segment I-2-9

Even though the income may be exempt from income tax because of 

foreign earned income exclusion, you must take all of your earned 

income into account in figuring your self-employment tax. Refer 

to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens

Abroad, regarding the effect of the foreign earned income exclusion 

on U.S. self-employment tax. 

Example 1 

Susan J. Brown is sole proprietor of a dress shop, “Milady 

Fashions.” Her Schedule C shows a net profit of $35,100. Susan’s 

completed Schedule SE is shown at the end of this sec tion. 

If Susan were the proprietor of more than one business, she would 

have combined the profits and losses from all of them and filled out 

only one Schedule SE. If, in addition to operating her dress shop, 

Susan had worked for wages totaling $87,000 or more, she would 

have already paid the maximum amount of social security tax owed 

on her wages, but she would still be sub ject to the medicare portion 

(2.9%) of self employment tax. In this case, she would use the long 

Schedule SE. 

The line numbers shown below in bold type refer to the line numbers on the sample filled-in Schedule SE on the following page. 

Line 1. Since Susan has no earnings from farm self-employment, 

she leaves line 1 blank. 

Line 2. Susan enters the net profit from her Schedule C, $35,100. 

Line 3. Since Susan has no farm income, she enters the same 

amount on line 3. 

Line 4. Multiply the amount of line 3 by .9235 and enter the result. 

Line 5. Susan determines her self-employment tax by using the 

first option on Line 5. She multiplies $32,415 on Line 4 by 15.3%. 

She enters $4,959 on Line 5. This is her self-employment tax. She 

also enters this amount on Line 55 of Form 1040. 
Lesson 2 I-2-10 International Segment

 Form 1040 Schedule SE

Proof as of

July 21, 2003

(subject to change)

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003

0

$35,100

$35,100

$32,415

$4,959

$2,480
Lesson 2

International Segment I-2-11

This deduction for one-half of the SE tax will reduce Susan’s 

income subject to income tax. However, if all of Susan’s self-employment income qualifies for the foreign earned income exclusion, this 

deduction is allocable to the excluded income and must be included 

on line 42 the Form 2555. This prevents the deduction from reducing other taxable income. See the ear lier chapter on foreign earned 

income exclusion for additional information. 

  SUMMING UP THIS SEGMENT  

 As a volunteer assisting taxpayers abroad, you may be asked 

questions regarding self-employed tax. In this lesson you 

have learned how to determine if you are considered a selfemployed individual and how to compute the self-employment tax.
Lesson 2 I-2-12 International Segment

SUMMARY EXERCISES

Exercise 1

You must pay self-employment tax if you have net earnings from 

self-employment of $ or more a year.

Exercise 2

John has a business abroad in 2003, as a private contractor 

and his self-employed income qualifies for the foreign earned 

income exclusion. His foreign earned income is $64,000, business

expenses $19,000, and net earnings $45,000. Since his for eign

earned income is completely excluded, is he liable for self-employment tax? If yes, what amount of income is subject to self-employment tax? 

Exercise 3

The United States may reach agreements with foreign coun tries

to eliminate dual coverage and dual contributions (taxes) to social 

security systems for the same work. These agreements may be 

applicable to self-employed persons. 

True/False 

Exercise 4

Janice Thompson is a self-employed baby-sitter overseas. She is a 

U.S. citizen living with her husband. He is a U.S. Army officer and 

also a U.S. citizen. She operates her sole proprietor babysitting 

service out of their off base apartment. She has no wage income. 

Her Schedule C shows a net profit of $9,500 in 2003. She qualifies 

for the foreign earned income exclusion. She receives no exemption from any agreement to exclude her self-employment tax. 

Compute her self-employment tax for 2003 on the blank

Schedule SE.
Lesson 2

International Segment I-2-13

 Form 1040 Schedule SE

Proof as of

July 21, 2003

(subject to change)

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003
Lesson 2 I-2-14 International Segment

SELF-EMPLOYMENT TAX

Lesson 2 ANSWERS TO EXERCISES

Exercise 1

$400

Exercise 2

Yes 

John must take all of his earned income into account in figur ing

his self-employment tax, even though the income is exempt from 

income tax because of the foreign earned income exclusion. John’s 

$45,000 net earnings are subject to self-employment tax in 2003. 

Exercise 3 

True. Agreements may apply to self-employed persons. 

International Segment
Lesson 2

International Segment I-2-15

 Form 1040 Schedule SE

Proof as of

July 21, 2003

(subject to change)

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003

0

$9,500

$9,500

$8,773

$1,342

$671

Janice Thompson
Lesson 2 I-2-16 International Segment

STUDENT NOTES
Lesson 2

International Segment I-2-17

RENTAL INCOME AND

EXPENSES Lesson 2

International Segment

INTRODUCTION AND OBJECTIVES

This lesson will explain the rental income reporting requirements for 

U.S. citizens and resident aliens. Generally, you must include in gross

income all amounts received from rental properties, including rental 

receipts received from your former residence. Both United States 

citizens and resident aliens must report rental income, regardless 

whether the rental property is located in the United States or in a 

foreign country.

At the end of the segment, you will be able to:

1. Determine how to report rental income. 

2. Determine how to report rental expenses. 

3. Determine how to report rental income when property is used 

for personal purposes either part of the year or during the 

entire year. 

4. Determine how to compute deductible depreciation expense. 

5. Identify the application of at-risk and passive activity rules. 

NOTE: The information and explanation of this issue is beyond 

the usual scope of Volunteer training. An exception has been made 

to serve the military and other Volunteers living abroad due to limited access to both resources and the professional preparers.

WHICH FORMS TO USE

Rental income and expenses are reported on Schedule E ( Form 

1040), Supplemental Income Schedule, Part 1. Additional information on rental income can be found in Publication 527, “Residential 

Rental Property,” and Publication 946, “How to Depreciate 

Property.” 

RENTAL INCOME

Rental income may include other payments in addition to the normal and ordinary rents received. Include in gross rental income 

advance rent, security deposits, payments for canceling a lease, 

expenses paid by the tenant, and the fair market value of property 

or services received in exchange for rental pay ments. The security 

deposit is not included when the taxpayer plans on returning the 

deposit at the end of the lease. A tax payer using the cash basis of 

accounting, reports the income when actually received. Taxpayers 

using the accrual accounting method report the income in the year 

they are entitled to receive payments. 
Lesson 2 I-2-18 International Segment

RENTAL EXPENSES

The deductible rental expenses are reported on the Schedule E, 

Part I, (see Exhibit 1) lines 5 through 18. 

Exhibit 1 Form 1040 Schedule E

Proof as of

July 21, 2003

(subject to change)

C

Properties Totals

(Add columns A, B, and C.) Income: A B C

3 Rents received 3 3

4 Royalties received 4 4

Expenses:

5 Advertising 5

6 Auto and travel (see page E-4) 6

7 Cleaning and maintenance 7

8 Commissions 8

9 Insurance 9

10 Legal and other professional fees 10

11

Mortgage interest paid to banks,

etc. (see page E-4) 12

11

12

Other interest

12

13

Repairs

13

14

Supplies

14

15

Taxes

15

16

Utilities

16

17 17

18 Other (list) 

18

Management fees

(See page E-3.)

Deductible expenses include any ordinary and necessary expenses, 

such as expenses for repairs, maintenance, certain operating 

expenses and depreciation. 

Repairs vs. Improvements. The cost of a repair is a current 

year deduction, however, the cost of an improvement must be 

depreciated over the useful life of the improvement. The distinction between a repair and an improvement is that a repair keeps 

the property in good operating condition, whereas an improvement materially adds to the life or value of the property or adapts 

it to new uses. The following chart helps illustrate the difference 

between repairs and improvements. 

REPAIRS IMPROVEMENTS 

Painting Adding a Room 

Fixing Gutters Putting up a Fence 

Repairing Driveways Putting in plumbing or wiring 

Replacing Window Glass Replacing hot water tank 

Repairing the Roof Putting on a new roof 
Lesson 2

International Segment I-2-19

Since an improvement is a capital expenditure and must be depreciated, the total cost including material, labor, and instal lation

increases the basis of the property. Depreciation will be discussed 

later in this chapter. 

Other Expenses. Some of the other ordinary expenses that may 

be deducted from gross rental income include salary and wages, 

utilities, rental of equipment, insurance premiums, interest 

expense ( mortgage interest), advertising, taxes, and commis sions

paid for collecting rental income. If any part of the property tax is 

for local benefits, such as putting in streets and sidewalks, that portion of the property tax is added to the basis of the property rather 

than deducted as an ordinary expense. Insurance premi ums paid 

in advance must be prorated over the period covered by the policy 

by both the cash basis and accrual basis taxpayer. If the rental is a 

condominium or cooperative, the maintenance fee is deductible. See 

Publication 527, Residential Rental Property, for taxes and interest 

deductions on cooperatives. Generally, mortgage interest expense 

is fully deductible. However, if the taxpayer has interest expense 

other than mortgage interest, refer him or her to the Internal 

Revenue Service or a professional preparer. 

Ordinary and necessary travel and transportation expenses 

attributable to the production of rental income are deductible. 

If a personal automobile is used, the taxpayer may use the standard mileage rate for business mileage. The standard mileage 

rate is 36 cents per mile for the year 2003. When using the standard mileage rate, parking fees and tolls may also be deducted. 

The standard mileage rate method (MACRS) may be selected on 

a yearly basis. However, if changing to actual expense after using 

the standard mileage method, accelerated depreciation may not 

be used. In order to claim depreciation under the actual expense 

method for transportation expenses, the vehicle must be used more 

than 50 percent for business, including for the production of rental 

income. If the travel incurred on behalf of a rental property is into 

or outside of the United States, the trip may have a dual purpose. 

Substantiation of the pleasure vs. business purpose and allocation of the expenses may be required. When a tenant does not pay 

the rent, the cash-basis landlord cannot take a deduction for the 

unpaid rent, since a deduction can never be taken for a payment 

that has never been included in income. 

SPECIAL ALLOCATION

Special rules apply when rental property is used for personal purposes, or as a rental without the intent to make a profit. When 

renting part of the property, certain expenses must be divided 

between rental use and personal use. When figuring the division of 

expenses, the taxpayer may use any reasonable method. The most 

common methods used are based on the number of rooms in the 

dwelling or on the total area of the dwelling.
Lesson 2 I-2-20 International Segment

Example 1 

Mary Alma rents one room in her house. The total square footage 

of her house is 1,000 square feet. The rental room mea sures 10 feet 

by 10 feet (100 square feet). She may deduct 10% of any allowable 

expense that benefited the renter. She may deduct 100% of any 

expenses that relate only to the rental por tion of the house, such as 

painting the rented room. 

Exercise 1

Mary Alma, in the example above, has the following expenses 

attributable to the entire property: 

Taxes $ 1,000 

Utilities $ 600 

Mortgage Interest $ 800 

Depreciation $ 500 

Also wallpapering expense of $100 for the tenant’s room only. 

a. What are the allowable expense deductions on Schedule E? 

Answer: 

b. What are the allowable expense deductions on Schedule A? 

Answer: 

For property changed to rental use in the tax year other than the 

beginning of the year, the allocation of expenses should be made 

between the number of days in the year for personal use and the 

number of days for rental use. 

Example 2 

John Princeton is transferred overseas and begins renting out 

his residence on October 1, 2003. For 2003, he may deduct threetwelfths (25 percent) of his yearly expenses such as taxes, interest 

and utilities as rental expenses. 

Vacation Home and Other Dwelling Units. Certain limi tations

apply to rental expenses for vacation homes or other dwellings that 

are used by the taxpayer for personal use during the year. A dwelling unit for this purpose includes a house, apartment, condominium, mobile home, boat or similar prop erty. However, the limitation 

does not apply to hotel, motel, inn or similar dwelling unit. The 

limitation on deductions applies if a dwelling unit is used as a residence during the tax year for personal purposes for greater than: 

1. 14 days or 

2. 10 percent of the number of days during the tax year the property is rented at fair market value. 

See Publication 527 for a discussion of the limitations. 
Lesson 2

International Segment I-2-21

Use as home before or after renting. If you use a dwelling unit 

as your main home before or after renting it, or trying to rent it, 

you may not have to count the days you use it as your main home 

as days of personal use. 

12 months or more. If for 12 or more consecutive months, you 

rent or try to rent a dwelling unit at a fair rental price, some of 

the days on which you use the property as your main home are not 

counted as days of personal use. 

Do not count as days of personal use the days you used the property as your main home. 

a) During the year in which you began renting it or offering 

it for rent, but before you began renting it or offering it for 

rent, or 

b) During the year in which you stopped renting it or offer ing

it for rent, but after you stopped renting it or offering it for 

rent. 

Example 3 

On February 28, 2001, you moved out of the house you had lived 

in for 6 years because you accepted a job in another town. You rent 

your house at a fair rental price from March 15, 2001, to May 14, 

2003. On June 1, 2003, you move back to town and move back into 

your house. 

Your use of the house as your main home from January 1 to 

February 28, 2001, and from June 1 to December 31, 2003, is not 

counted as personal use. 

Since these days are not counted as days of personal use the limitations on deductions discussed above do not apply. 

Depreciation 

The cost of property with a useful life of one year or more and used 

in a trade or business or held for the production of income is recovered by allowing an annual deduction called deprecia tion. The most 

common methods for the depreciation are called ACRS (Accelerated 

Cost Recovery System) for property placed in service after 1980 

and before 1987 and MACRS (modified ACRS) for property placed 

in service after 1986. Both of these depreciation methods have an 

alternative method that may be chosen that generally increases 

the number of years the prop erty is depreciated over and therefore decreases the annual deduction. The method used for property placed in service before 1981 is referred to as straight line or 

declining balance. 

Depreciable property includes buildings, machinery, furniture, 

equipment and vehicles. As discussed earlier any cost for addi tions

or improvements to the rental property must also be depreciated. 

Depreciation is allowed or allowable. What this means is, if you did 

not claim depreciation that you were entitled to claim in an earlier 

year you must still reduce your basis in the property by the amount 
Lesson 2 I-2-22 International Segment

of depreciation that you did not deduct. The depreciation deduction is determined by considering several factors. These factors are 

discussed next in this chapter. When depreci ating real property the 

value of land is not depreciable. 

Basis. The total of the yearly deductions for depreciation can never 

total more than the cost or other basis of the property. Generally, 

the cost (purchase price) of the property including the cost of 

improvements is the basis for depreciation. However, if the taxpayer acquired the property, other than buying it, the basis may be 

figured differently than using the original cost. An example is an 

acquisition through inheritance or gift. For further informa tion on 

the basis of inherited or gifted property refer to Publi cation 551, 

Basis of Assets. When property is converted from personal use to 

rental use the basis is the lesser of the adjusted basis or fair market value (FMV) at the time of conversion. 

Example 4 

Jen and Tom purchased a house in 1985 for $85,000. In 2003, they 

were transferred overseas and decided to rent out their personal 

residence. The value in 2003 was $125,000. The basis for depreciation is $85,000. Assume that the value of land was excluded in 

determining the cost of the house. 

Adjusted Basis. The basis of property must be increased or 

decreased to reflect certain adjustments before the depreciation 

deduction is computed. For example, to the purchase price of a 

home add the cost of any improvements, minus any casualty losses 

or depreciation previously deducted and minus the land value to 

find the adjusted basis. Since land can never be depre ciated, an 

allocation between land and building must be done based generally 

on assessed value. Where property is acquired in a purchase along 

with a trade-in, the basis must be adjusted. 

Example 5 

Neil Bates traded in old appliances used for his rental property 

with an adjusted basis of $500 and got new appliances with a fair 

market value of $2,000. He paid $1,000.00 in cash, his basis for 

depreciation in the new appliances is $1,500 (the $500 adjusted

basis plus the $1,000 cash). 

Placed in Service. For depreciation purpose, property is considered placed in service when it is in a condition or state of readiness and availability for use. However, a depreciation deduction 

may not be claimed until the property is used in business or for the 

production of income. 

Property Classes and Recovery Periods. The Accelerated Cost 

Recovery System (ACRS) and Modified Accelerated Cost Recovery 

System (MACRS) use the class life of depreciable property to determine the recovery period. If property is used as a personal residence before 1987 and converted to rental property after 1986, use 
Lesson 2

International Segment I-2-23

the MACRS method to figure deprecia tion. Under MACRS, tangible 

property used in a rental activity generally falls into a 5-, 7-, or 

27.5-year recovery period. 

A home converted in 1998 to a rental property would be depreciated over a recovery period of 27.5 years. A stove also used in this 

same rental would be assigned a 7 year recovery period. Property, 

both real and personal, located outside the United States has a longer recovery period. Although the true physical life of the property 

may be less, under MACRS the recovery period is fixed. MACRS 

requires that a convention for half-year or mid-quarter be used. 

Under this special rule, in the year the property is placed in service 

the depreciation deduction is pro rated. Publication 946, How to 

Depreciate Property, contains tables of depreciation with the conventions already incorpo rated. Examples of the tables are shown 

below. 

MACRS charts 

Table A

MACRS 5-Year Property

Half-year

convention

Mid-quarter

convention

Year First

quarter

Second

quarter

Third

quarter

Fourth

quarter

1 20.00% 35.00% 25.00% 15.00% 5.00%

2 32.00 26.00 30.00 34.00 38.00

3 19.20 15.60 18.00 20.40 22.80

4 11.52 11.01 11.37 12.24 3.68

Table B

MACRS 7-Year Property

Half-year

convention

Mid-quarter

convention

Year First

quarter

Second

quarter

Third

quarter

Fourth

quarter

1 14.29% 25.00% 17.85% 10.71 3.57%

2 24.49 21.43 23.47 25.51 27.55

3 17.49 15.31 16.76 18.22 19.68

4 12.49 10.93 11.97 13.02 14.06
Lesson 2 I-2-24 International Segment

Table I, II

Table 1

Residential Rental Property (27.5-year)

Use the column for the month of taxable year placed in service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1 3.485% 3.182% 2.879% 2.576% 2.273% 1.970% 1.667% 1.364% 1.061% 0.758% 0.455% 0.152%

2 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636%

3 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636%

4 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636%

Table 2

Residential Rental Property (31.5-year)

Use the column for the month of taxable year placed in service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1 3.042% 2.778% 2.513% 2.249% 1.984% 1.720% 1.455% 1.190% 0.926% 0.661% 0.397% 0.132%

2 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175%

3 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175%

4 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175% 3.175%

For property located outside of the United States, the taxpayer 

must use an alternative method of depreciation under MACRS. 

Therefore, residential rental property located in a foreign coun try

would be depreciated over a 40-year recovery period. 

REPORTING DEPRECIATION

The depreciation deduction is shown on line 20 of Schedule E (see 

Exhibit 2). Use Form 4562, Depreciation and Amortization only if 

you placed an asset in service in the current year, you depreciate 

listed property or you claim a Section 179 expense. 
Lesson 2

International Segment I-2-25

Exhibit 2 Form 1040 Schedule E

19 Add lines 5 through 18 19 19

Depreciation expense or depletion

(see page E-4)

20

20 20

21 Total expenses. Add lines 19 and 20 21

Income or (loss) from rental real

estate or royalty properties.

Subtract line 21 from line 3 (rents)

or line 4 (royalties). If the result is

a (loss), see page E-5 to find out

if you must file Form 6198

22

22

Deductible rental real estate loss.

Caution. Your rental real estate

loss on line 22 may be limited. See

page E-5 to find out if you must

file Form 8582. Real estate

professionals must complete line

43 on page 2

23

23 ( ) ( ) ) (

24 Income. Add positive amounts shown on line 22. Do not include any losses 24

25 ( ) 25 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here

26 Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result

here. If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form

1040, line 17. Otherwise, include this amount in the total on line 41 on page 2 26

For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 11344L Schedule E (Form 1040) 2003

AT-RISK AND PASSIVE LOSS

Very often rental property shows a net loss because the rental 

expenses are greater than the rental income. In this situation there 

are two potential restrictions on how much of the loss can offset 

other sources of income. 

The first restriction is the at-risk rule. This rule provides that you 

can claim a loss for no more than you could actually lose from the 

activity. That is, you can claim a loss only up to the amount for 

which you are personally at-risk in the activity. Generally you are 

considered at-risk for the amount of cash and property contributed 

to the activity from which you are not protected against personal 

liability with the exception of casualty insurance. 

The Tax Reform Act of 1986 added other limitations to deduct ing

rental losses. Prior to the law, losses from passive activities could 

offset all other income (for example wages, interest, and dividends)

without any restrictions. Rental activities, by defini tion of the law, 

are always considered to be a passive activity. The passive activity 

law states that passive activity losses can only be deducted from 

passive activity income. A passive activ ity is a trade or business 

being conducted without that taxpayer materially participating. 

Material participation may be defined by the regular continuous 

and substantial involvement of the taxpayer in the operation of 

the trade or business, where for rental property active participation does not require regular, continu ous and substantial involvement. Active participation requires that the taxpayer participate 

in making management decisions or arranging for others to provide services in a significant and bona fide sense. Management 

decisions include approving new tenants, setting rental terms, 

approving capital or repair expenditures and similar decisions. 

It is important to under stand the difference between active and 
Lesson 2 I-2-26 International Segment

material participation as it pertains to rentals, because of a special 

$25,000 offset allowed for certain rental losses. Rental losses up to 

$25,000 ($12,500 for married taxpayers filing separate and living 

apart for the entire year) may be used to offset any and all nonpassive income if the taxpayer actively participates in the residential rental activity. The following list is an example of nonpassive 

income. 

1. Salaries, wages, commissions or tips. 

2. Self-Employment income from a trade or business in which the 

taxpayer materially participates (may be partnership, but not 

limited partnership income). 

3. Distributive shares of income through pass-through entities 

(such as S corporations) that is not income from a passive activity. 

4. Portfolio income ( gross income from interest, dividends, annuities, or some royalties). 

Example 6 

Lynn Ferris, a United States citizen, lives in Europe and has wages 

paid by the U.S. Government of $25,000 and interest income of 

$100. She rented out her home located in the United States in 

2003, and incurred $1,000 in rental loss. Although her sister collects the rent, Lynn makes all of the bottom line deci sions as to 

whom, and, for what amount, the property will be rented. While 

Lynn is outside of the United States, she pays her sister to manage 

the property. The rental loss of $1,000 may be offset against her 

gross income of $25,100 because she is considered to be an active 

participant in the rental activity. 

Phase-Out of Offset. The amount allowed to offset nonpassive income is reduced once the taxpayer’s adjusted gross income 

exceeds $100,000 ($50,000 for married filing separately). It is completely phased out when AGI exceeds $150,000 ($75,000 for married filing separately). Refer taxpayers with an AGI over $100,000 

to the Internal Revenue Service or a professional pre parer. 

REPORTING RENTAL LOSS

Form 8582, Passive Activity Loss Limitations is filed to sum marize

losses and income from all passive activities. Check the instructions for Form 1040 to determine if the taxpayer is required to file 

Form 8582 when he or she has rental losses. Generally, taxpayers 

who have only one passive loss generated from a rental activity and 

an adjusted income of less than $100,000 will not be required to 

file Form 8582. If any questions arise beyond the scope of this lesson regarding filing Form 8582, refer the taxpayer to the Internal 

Revenue Service or a professional preparer. 
Lesson 2

International Segment I-2-27

SELLING RENTAL PROPERTY

The sale of rental property is reported on Form 4797, Sales of 

Business Property. A gain is the amount realized minus the 

adjusted basis of the property. 

Example 7 

Pat Drake sold her rental property for $60,000. She had pur chased 

the house for $30,000 and had claimed $10,000 for depreciation. 

Her gain is $40,000 

The gain is figured as follows: 

1. Selling price $60,000 

2. Less selling expenses 0

3. Amount realized $60,000

4. Basis $30,000 

5. Less depreciation $10,000

6. Adjusted basis $20,000 $20,000

7. Gain (line 3 minus 6) $40,000

The gain may be either capital gain or ordinary gain depend ing on 

the depreciation claimed. If part of the property was also used for 

personal uses, the sale is reported as two separate sales. A loss is 

the adjusted basis of the property minus the amount realized. A 

loss for any personal use of property can not be deducted. 

  SUMMING UP THIS SEGMENT  

As a volunteer, you will assist taxpayers who have rental properties. In this lesson you learned what qualified as rental income 

and rental expenses. You studied how to figure and report the 

following:

 The proration needed when the property is used both for personal and rental purposes.

 Depreciation expense.

 Rental losses.

ANSWERS

Exercise 1

a. $390 (10% of total expenses of $2,900=$290 plus $100 for wallpaper)

b. $1,620 (90% of martgage interest and taxes)
Lesson 2 I-2-28 International Segment

STUDENT NOTES
Lesson 3 3-1

BASIC

 ADJUSTMENTS Lesson 3

INTRODUCTION AND OBJECTIVES

In this lesson you will learn about adjustments to income. 

There are six adjustments covered in this lesson. They are 

educators expenses, traditional IRA deductions, student loan 

interest deduction, tuition and fees deduction, penalty on 

early withdrawal of savings, and alimony payments. Lesson 

2 discusses an additional adjustment to income covered in the 

VITA/TCE training — one-half of self employment tax.

The remaining adjustments — moving expenses; self-employed

health insurance deduction; and self-employed SEP, SIMPLE, 

and qualified plans — are not covered in traditional VITA/TCE 

training. Taxpayers who need assistance with these adjustments 

should be referred to a paid professional tax preparer.

After completing this lesson you should be able to:

■ Calculate and accurately report adjustments to income.

■ Identify which IRA contributions are within the scope of the 

VITA/TCE program.

■ Identify contribution limits for IRAs.

 ADJUSTMENTS TO INCOME

Adjustments are subtractions from total income. Total income 

minus adjustments results in adjusted gross income (AGI),

an important number for tax purposes. Adjusted gross income is 

used to figure some limitations. In addition, it is used to figure 

income tax in some states.

Taxpayers cannot take any adjustments to income on Form 

1040EZ. On Form 1040EZ total income and adjusted gross

income are the same. Form 1040A filers can take adjustments 

for educator expenses, contributions to a traditional IRA, the 

student loan interest deduction, and tuition and fees payments. 

Form 1040 filers can take any of the adjustments for which they 

are eligible.

DEDUCTION FOR EDUCATOR EXPENSES

If the taxpayer is an eligible educator, he or she can deduct as 

an adjustment to income up to $250 in qualified expenses. The 

taxpayer can deduct these expenses even if he or she does not 

itemize deductions on Schedule A ( Form 1040). This adjustment 

to income is for expenses paid or incurred in 2003. If both the 

taxpayer and spouse are eligible educators and choose to file 

a joint tax return, they may deduct up to $500 ($250 each) of 

qualified expenses. Prior to 2002 these expenses were deductible 

only as miscellaneous itemized deductions.
3-2 Lesson 3

BASIC

Eligible educator

The taxpayer is an eligible educator if, for the tax year, he or she 

is a kindergarten through grade 12 teacher, instructor, counselor, 

principal, or aide, and he or she works at least 900 hours during 

a school year in a school that provides elementary or secondary 

education as determined under state law.

 Qualified expenses

Qualified expenses are the unreimbursed expenses

paid or incurred for books, supplies, computer equipment 

(including related software and services), other equipment 

and supplementary materials that the taxpayer uses in his or 

her classroom. For courses in health and physical education, 

expenses for supplies are qualified expenses only if they are 

related to athletics.

To be deductible as an adjustment to income, the qualified 

expenses must be more than the following amounts for the tax 

year:

■ The interest on qualified U.S. savings bonds that the taxpayer 

excluded from income because he or she paid qualified higher 

education expenses.

■ Any distributions from a qualified tuition program that the 

taxpayer excluded from income, or

■ Any tax-free withdrawals by the taxpayer from a Coverdell 

education savings account.

The educator expense can be claimed on Form 1040, line 23 or 

Form 1040A, line 16.

Example 1

Joe and Mary will file a joint return for 2003. Joe is a high school 

math teacher and incurred $500 in qualified unreimbursed

expenses. Mary is a grade school principal and incurred $200 in 

qualified unreimbursed expenses. Both Joe and Mary meet the 

definition of eligible educators. They will claim $450 ($250 for Joe 

and $200 for Mary) on Form 1040, line 23.

 INDIVIDUAL RETIREMENT ARRANGEMENTS

An Individual Retirement Arrangement (IRA) is a taxsheltered savings plan set up by the taxpayer, generally for 

retirement income. This lesson discusses only traditional

IRAs (IRAs other than Roth IRAs, SIMPLE IRAs, or Coverdell 

education savings accounts (ESAs). Contributions to the 

nontraditional IRAs are not deductible as adjustments to income.

Information on nontraditional IRAs can be found in Publication 

590, Individual Retirement Arrangements (IRAs).
Lesson 3 3-3

BASIC

Contributions to a traditional IRA can be either deductible or 

nondeductible. Earnings and gains on the contributions are not 

taxed until withdrawn from the traditional IRA account.

Example 2

Anna contributed a total of $2,500 over the last two years to her 

traditional IRA account. During 2003 she earned $140 of interest 

on her traditional IRA. All of the interest was added to her 

traditional IRA savings account.

Anna will not have to pay tax on the interest until she withdraws 

it from her traditional IRA account.

Contributions

Anyone under 70 1/2 years of age (at the end of the tax year) 

who has taxable compensation can contribute to a traditional

IRA. If both the taxpayer and spouse have compensation and 

both are under age 701/2, each can set up an IRA. However, they 

cannot participate in the same IRA — they must have separate 

accounts.

Compensation includes wages, salaries, commissions, tips, 

bonuses, professional fees, and earnings from self-employment. 

Alimony or separate maintenance payments that are included in 

total income are also compensation for traditional IRA purposes. 

Compensation does not include interest, rents, dividends, 

pension and annuity income, deferred compensation received, or 

income you can exclude.

General Contribution Limits

The most that can be contributed for any year to a traditional IRA 

is the lesser of:

■ $3,000 ($3,500 if age 50 or older), or

■ Compensation that is includible in gross income for the year.

If a taxpayer has more than one traditional IRA, the taxpayer 

must combine all of the traditional IRAs and treat them as one 

when figuring the amount that can be contributed for the year.

Example 3

Dan, a college student, working part time earned $1,500 in 2003. 

His IRA contributions for 2003 are limited to $1,500 (the lesser of 

$3,000 or compensation includible in income for the year).

Example 4

George has three traditional IRA accounts. During 2003 he 

contributed $1,000 to each. His total IRA contributions for 2003 

will be $3,000.
3-4 Lesson 3

BASIC

Deemed IRAs

Beginning in 2003, employers who provide qualified employer 

retirement plans can maintain a separate account or annuity

under the plan to receive voluntary employee contributions. This 

separate account is referred to as a deemed IRA. A deemed IRA 

can be a traditional IRA or a Roth IRA, and the same limits apply 

whether they are deemed or not. If a taxpayer has both a regular 

IRA and a deemed IRA, the taxpayer can divide contributions 

between them in any manner, but total contributions to both 

cannot exceed the $3,000/$3,500 limit.

Spousal IRA limit

If taxpayers file a joint return and one spouse’s compensation is 

less than that of the other spouse’s compensation, the most that 

can be contributed for that spouse is the lesser of:

1) $3,000 ($3,500 if age 50 or older), or

2) The total compensation includible in the gross income of both 

spouses for the year, reduced by:

a) IRA contributions for the spouse with the greater 

compensation,

b) Any contribution for the year to a Roth IRA for the spouse 

with the greater compensation.

The total combined contributions to both traditional IRAs cannot 

exceed the lesser of:

■ $6,000 ($7,000 if both individuals are age 50 or older), or

■ The total taxable compensation of both spouses.

Example 5

Kristen, a full time student with no taxable compensation, marries 

Jeremy during the year. Neither will be 50 by the end of the year. 

For the year, Jeremy has taxable compensation of $30,000. He 

will contribute $3,000 to a traditional IRA. If he and Kristen file a 

joint return, each can contribute $3,000. This is because Kristen, 

who has no compensation, can add Jeremy’s compensation, reduced 

by his IRA contribution ($30,000 - $3,000 = $27,000) to her own 

compensation (0) to figure her maximum contribution. In her 

case, $3,000 is her contribution limit, because $3,000 is less than 

$27,000 (her compensation for purposes of the figuring the spousal 

IRA).

Example 6

Tom and Darcy are married and both are 53. They both work and 

each has a traditional IRA. Tom earned $1,800 and Darcy earned 

$48,000 in 2003. Because of the spousal IRA limit rule, even 

though Tom earned less than $3,500, they can contribute up to 

$3,500 in each of their IRAs if they file a joint return. If they file 

separate returns, the amount that can be contributed to Tom’s IRA 

is limited to $1,800 (his taxable compensation).

ALERT

Deemed IRAs are new 

for tax year 2003.
Lesson 3 3-5

BASIC

 Excess Contributions

Generally, an excess contribution is the amount contributed to a 

traditional IRA that is more than the lesser of the:

1) Taxable compensation for the year, or

2) $3,000 ($3,500 if age 50 or older).

This limit applies whether the contributions are deductible or 

nondeductible. Contributions made in the year the taxpayer 

reaches age 70 1/2 and any later year are also excess contributions.

In general, if the excess contribution for a year and any earnings 

on it are not withdrawn by the due date of the tax return (including 

extensions), the taxpayer is subject to an additional 6% tax. The 

additional 6% tax must be paid each year on the excess amounts 

that remain in the traditional IRA at the end of the tax year. The 

tax cannot be more than 6% of the value of the IRA as of the end 

of the tax year. The excise tax is figured on Form 5329, Additional

Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored 

Accounts.

A taxpayer who has taxable compensation, but can no longer 

contribute to a traditional IRA because of age (70 1/2 years or 

older) may continue to contribute to a spouse’s traditional IRA 

until the year in which the spouse reaches 70 1/2.

Example 7

Eldridge is a 73-year-old attorney. He earned $12,000 during the 

year.

Eldridge had compensation for traditional IRA purposes but he 

cannot make an IRA contribution because he is 70 1/2 or older. If 

Eldridge files a joint return with his spouse who is 68 years old, he 

can still contribute up to $3,500 to his spouse’s IRA.
3-6 Lesson 3

BASIC

Exercise 1

A. Liz receives alimony which is included in her total income. All 

of her other income is from interest and dividends. Can Liz 

make a traditional IRA contribution? Explain. 

B. David is 73 and works part time in a hardware store. David’s 

wife, Mary, does not work outside of the home. Mary is 68. Can 

David make a traditional IRA contribution for Mary? Explain

C. Carla receives all her income from a rental property, interest

income, and dividends. Can Carla make a traditional IRA contribution? Explain. 

D. Joy is 62 years old. Most of her income comes from a pension. 

However, Joy did earn $1,250 doing consumer testing. How 

much can Joy contribute to a traditional IRA? Explain. 

Deductible IRA Contributions

Generally, you can deduct the lesser of the contributions to your 

traditional IRA for the year or the general limit (or the spousal IRA 

limit, if it applies).

The actual deductible amount for a traditional IRA depends on the 

following:

■ Whether or not the taxpayer or taxpayer’s spouse is covered by 

a retirement plan set up by an employer for any part of the year,

■ The taxpayer’s modified adjusted gross income, and

■ The taxpayer’s filing status.

 Modified Adjusted Gross Income

Generally, modified adjusted gross income is the adjusted gross

income without consideration of certain deductions. The modified 

adjusted gross income (MAGI) can be figured as follows:

AGI ( Form 1040 Line 34) plus 

■ IRA deduction

■ Student loan interest deduction

■ Tuition and fees deduction

■ Foreign earned income exclusion

■ Foreign housing exclusion or deduction

■ Exclusion of qualified savings bond interest shown on Form 

8815
Lesson 3 3-7

BASIC

■ Exclusion of employer-paid adoption expenses shown on Form 

8839. 

Not covered by an employer retirement plan.

A taxpayer whose filing status is single, head of household, or 

qualifying widow(er), and who is not covered by an employer 

retirement plan, can take a full traditional IRA deduction of either 

his or her taxable compensation or $3,000 (whichever amount is 

smaller). The $3,000 amount is increased to $3,500 if the taxpayer 

is age 50 or older.

Example 8

Cyril is single and 40 years of age. His modified adjusted gross

income is $50,000. He is not covered by a retirement plan at work. 

Cyril’s traditional IRA contribution of $3,000 is deductible.

Married taxpayers who file separate returns for a taxable year 

and who live apart at all times during the taxable year are treated 

as single and can take a full IRA deduction, if not covered by an 

employer plan. This is true even if the other spouse is covered by 

an employer retirement plan.

Married taxpayers who file jointly or separately may each be 

able to take the full IRA deduction of $3,000 ($3,500 if age 50 or 

older) or taxable compensation (whichever amount is smaller), if 

they had taxable compensation and both were not covered by an 

employer retirement plan. The total deduction for a joint return 

cannot exceed $6,000 ($7,000 if both individuals are age 50 or 

older). When determining the allowable deduction each 

spouse figures the deduction separately.

Covered by an employer retirement plan.

If the taxpayer is covered by a retirement plan at work, the 

traditional IRA deduction will be reduced or eliminated, as shown 

in Table 1, depending on filing status and modified AGI.

NOTE: If Box 13, Retirement Plan, on Form W-2 is checked, the 

taxpayer is covered by an employer retirement plan. If taxpayers 

do not agree with the Form W-2 they must contact their employer. 

Volunteers cannot make a determination on whether or not 

a taxpayer is covered by an employer retirement plan. Refer 

taxpayers with questions on their employer retirement plans 

to their employer or Publication 590, Individual Retirement 

Arrangements (IRAs).
3-8 Lesson 3

BASIC

Table 1.

Traditional IRA Deduction Phaseout Chart

(If taxpayer is covered by an employer retirement plan)

Allowable traditional 

IRA deduction is...

reduced if 

modifi ed AGI is:

zero when 

modifi ed 

AGI is:

Filing Status

at least but less 

than

Single or 

Head of household

Married fi ling jointly 

or Qualifying 

widow(er)

Married fi ling 

separately1

$40,000

$60,000

$0.01

$50,000

$70,000

$10,000

$50,000 or 

more

$70,000 or 

more

$10,000 or 

more

1

If the taxpayer did not live with his or her spouse at any time 

during the year, his or her filing status is considered Single for 

this purpose.

Example 9

Emily, 36 years old, is single. Her modified AGI was $49,500. She 

is covered by a retirement plan at work. Emily’s $3,000 traditional

IRA contribution will be reduced or modified on her tax return 

because her modified AGI is between $40,000 and $50,000.

If either the taxpayer or the taxpayer’s spouse is covered by 

an employer retirement plan, he or she may be entitled to only a 

partial deduction or no deduction at all, depending on filing status 

and modified adjusted gross income, as shown in Table 2.

ALERT

For 2003, the MAGI 

limits increased for 

taxpayers covered by 

an employer retirement 

plan.
Lesson 3 3-9

BASIC

Table 2.

Traditional IRA Deduction Phaseout Chart

(If taxpayer is not covered, but the spouse is)

Allowable traditional 

IRA deduction is...

reduced if modifi ed 

AGI is:

zero when 

modifi ed 

AGI is:

Filing Status

more

than

but less 

than

Married fi ling jointly 

or Qualifying 

widow(er)

Married fi ling 

separately1

$150,000

$0.01

$160,000

$10,000

$160,000 or 

more

$10,000 or 

more

1

The taxpayer is entitled to the full deduction if he or she did not 

live with their spouse at any time during the year.

Example 10

David and Ruth are filing a joint return. David earned $72,000 

and is covered by his employer’s retirement plan. Ruth, age 32, is a 

homemaker, and has no compensation. David, age 36, contributed 

$2,800 to his traditional IRA and $3,000 to a traditional IRA for 

Ruth.

Because David is covered by his employer’s retirement plan, the 

modified AGI limits apply (Table 1). Based on Table 1, David is not 

allowed a deduction for his traditional IRA contributions. Because 

David made traditional IRA contributions for Ruth, they can take a 

deduction on the tax return for her IRA contributions. Ruth is not 

covered by an employer’s retirement plan. Their compensation for 

IRA purposes is $72,000 and their modified AGI is not more than 

$150,000 (see Table 2). 

POTENTIAL

PITFALLS

When determining the 

allowable deduction, 

each spouse fi gures the 

deduction separately.
3-10 Lesson 3

BASIC

Example 11

Assume still that David earned $72,000 and is covered by his 

employer’s retirement plan. Assume too that Ruth is employed; she 

earned $66,000 and she is not covered by her employer’s retirement 

plan. David cannot deduct his traditional IRA contribution, but 

Ruth can deduct hers. The modified AGI limits that apply to David 

are shown in Table 1. Table 2 modified AGI limits apply to Ruth’s 

deduction. Her deduction would not be reduced unless the couple’s 

modified AGI was more than $150,000. It would not be eliminated 

unless their modified AGI was $160,000 or more.

Exercise 2

A. Angela and Joe are married and fi le a joint return. Joe, age 23, 

is covered by a retirement plan at work, but Angela, age 25, 

is not. Joe earned $25,000 and Angela earned $20,000; their 

modifi ed AGI is $45,000. Is any portion of Angela’s traditional

IRA contribution deductible, and why? 

B. Annette, age 26, is single. She earned $23,000, and her modified AGI is $24,500. She made a $500 contribution to a traditional IRA. Annette is covered by a retirement plan at work. Is 

any portion of her contribution deductible, and why? 

C. Richard and Lynn are married and lived together during the 

year. They fi le separate returns. Richard is covered by a retirement plan at work. Lynn is not covered by a retirement plan at 

work. Richard, age 40, earned $17,000 and contributed $1,400 

to a traditional IRA. Lynn, age 33, worked part-time and 

earned $4,500. She contributed $1,000 to a traditional IRA. 

Can Richard or Lynn deduct any of the IRA contributions, and 

why?

When to Deduct Traditional IRS Contributions

Individuals may deduct traditional IRA contributions on their 

2003 tax return if the contributions are made in 2003 or by April 

15, 2004. Taxpayers may not deduct on their 2003 tax return 

contributions made in 2003 which were deducted on the 2002 

tax return. The contributions do not have to be made before 

the return is filed. However, if the taxpayer deducts traditional

IRA contributions on the 2003 tax return but does not make the 

traditional IRA contributions by April 15, 2004, for the exact 

amount deducted, the taxpayer must file an amended tax return.
Lesson 3 3-11

BASIC

Usng the Worksheet and Reporting the Deduction

Use the IRA Deduction Worksheet in the Form 1040A or Form 1040 

instructions booklet to figure the traditional IRA deduction.

The traditional IRA deduction is reported on Form 1040A, line 

17 or Form 1040, line 24. On joint returns when both spouses are 

making deductible traditional IRA contributions, enter the total 

contribution.

Example 12

Nick and Susan file a joint return. Both work, and Nick, age 27, 

was covered by a retirement plan, but Susan, age 25, was not. Nick 

earned $12,300 and Susan earned $10,990. Their total income 

(Form 1040, line 22) is $23,400. Nick and Susan each contributed 

$500 to a traditional IRA.

The completed worksheet is shown in Exhibit 1. The information 

for Nick is shown in the column for Your IRA. The information for 

Susan is shown in the column for Spouse’s IRA.
3-12 Lesson 3

BASIC

Draft as of

08/27/2003

IRA Deduction Worksheet—Line 24 Keep for Your Records

Before you begin:  Complete Form 1040, lines 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  Be sure you have read the list beginning on page 28.

Your IRA Spouse’s IRA

1a. Were you covered by a retirement plan (see page 30)? ........................ 1a. Yes No

1b. If married filing jointly, was your spouse covered by a retirement plan? ............................. 1b. Yes No

Next. If you checked “No” on line 1a (and “No” on line 1b if married filing jointly), skip

lines 2 through 6; enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7a

(and 7b if applicable), and go to line 8. Otherwise, go to line 2.

2. Enter the amount shown below that applies to you.

• Single, head of household, or married filing separately and you lived

apart from your spouse for all of 2003, enter $50,000

• Qualifying widow(er), enter $70,000

• Married filing jointly, enter $70,000 in both columns. But if you 2a. 2b. checked “No” on either line 1a or 1b, enter $160,000 for the person

who was not covered by a plan

• Married filing separately and you lived with your spouse at any time

in 2003, enter $10,000

}

3. Enter the amount from Form 1040, line 22. .............. 3.

4. Enter the total of the amounts from Form 1040, lines 23, 27

through 32a, plus any amount you entered on the dotted line

next to line 33 .................................. 4.

5. Subtract line 4 from line 3. Enter the result in both columns .................... 5a. 5b.

6. Is the amount on line 5 less than the amount on line 2?

 No. STOP None of your IRA contributions are deductible. For details on

nondeductible IRA contributions, see Form 8606.

Yes. Subtract line 5 from line 2 in each column. If the result is $10,000 or more,

enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7 for

that column and go to line 8. Otherwise, go to line 7 ................ 6a. 6b.

7. Multiply lines 6a and 6b by 30% (.30) (or by 35% (.35) in the column for the IRA of an

individual who is age 50 or older at the end of 2003). If the result is not a multiple of

$10, increase it to the next multiple of $10 (for example, increase $490.30 to $500). If the

result is $200 or more, enter the result. But if it is less than $200, enter $200 ........ 7a. 7b.

8. Enter your wages, and your spouse’s if filing jointly, and other

earned income from Form 1040, minus any deductions on Form

1040, lines 28 and 30. Do not reduce wages by any loss from

self-employment ................................. 8.

If married filing jointly and line 8 is less than $6,000 ($6,500 if one

spouse is age 50 or older at the end of 2003; $7,000 if both spouses are

age 50 or older at the end of 2003), stop here and see Pub. 590 to

figure your IRA deduction.

9. Enter traditional IRA contributions made, or that will be made by April 15, 2004, for

2003 to your IRA on line 9a and to your spouse’s IRA on line 9b ................ 9a. 9b.

10. On line 10a, enter the smallest of line 7a, 8, or 9a. On line 10b, enter the smallest of line

7b, 8, or 9b. This is the most you can deduct. Add the amounts on lines 10a and 10b and

enter the total on Form 1040, line 24. Or, if you want, you may deduct a smaller amount

and treat the rest as a nondeductible contribution (see Form 8606) ................ 10a. 10b.

- 29 - Need more information or forms? See page 7.

Exhibit 1 IRA Deductions Worksheet

✘

✘

70,000 160,000

23,400

0

23,400 23,400

46,600 136,600

3,000 3,000

23,400

500 500

500 500

x
Lesson 3 3-13

BASIC

Nondeductible IRA Contributions

Although the deductible amount of traditional IRA contributions 

can be reduced or eliminated because of the modified adjusted

gross income limitation, a taxpayer can make nondeductible 

contributions to new or existing traditional IRAs. Earnings 

and gains on these contributions are not taxed until they are 

distributed to the taxpayer.

The total traditional IRA contribution, whether deductible or 

nondeductible, cannot be more than the taxpayer’s taxable 

compensation or $3,000 ($3,500 if age 50 or older), whichever 

amount is smaller.

Taxpayers must complete Form 8606, Nondeductible IRAs, for each 

year that nondeductible contributions are made. 

If taxpayers do not report nondeductible contributions, all of the 

contributions to a traditional IRA will be treated as deductible. 

This means all distributions will be taxed unless the taxpayer can 

show, with satisfactory evidence, that nondeductible contributions 

were made.

Example 13

Rachel, age 35, is single and wants to contribute the maximum 

amount possible to her traditional IRA. She is covered by her 

employer’s retirement plan and her total income, Form 1040A Line 

15, is $41,000. Her total basis in traditional IRAs from line 14 of 

her 2002 Form 8606 is $10,000. The completed IRA Deduction 

Worksheet and Form 8606 are shown in Exhibits 2 and 3.
3-14 Lesson 3

BASIC

Draft as of

08/27/2003

IRA Deduction Worksheet—Line 24 Keep for Your Records

Before you begin:  Complete Form 1040, lines 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  Be sure you have read the list beginning on page 28.

Your IRA Spouse’s IRA

1a. Were you covered by a retirement plan (see page 30)? ........................ 1a. Yes No

1b. If married filing jointly, was your spouse covered by a retirement plan? ............................. 1b. Yes No

Next. If you checked “No” on line 1a (and “No” on line 1b if married filing jointly), skip

lines 2 through 6; enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7a

(and 7b if applicable), and go to line 8. Otherwise, go to line 2.

2. Enter the amount shown below that applies to you.

• Single, head of household, or married filing separately and you lived

apart from your spouse for all of 2003, enter $50,000

• Qualifying widow(er), enter $70,000

• Married filing jointly, enter $70,000 in both columns. But if you 2a. 2b. checked “No” on either line 1a or 1b, enter $160,000 for the person

who was not covered by a plan

• Married filing separately and you lived with your spouse at any time

in 2003, enter $10,000

}

3. Enter the amount from Form 1040, line 22. .............. 3.

4. Enter the total of the amounts from Form 1040, lines 23, 27

through 32a, plus any amount you entered on the dotted line

next to line 33 .................................. 4.

5. Subtract line 4 from line 3. Enter the result in both columns .................... 5a. 5b.

6. Is the amount on line 5 less than the amount on line 2?

 No. STOP None of your IRA contributions are deductible. For details on

nondeductible IRA contributions, see Form 8606.

Yes. Subtract line 5 from line 2 in each column. If the result is $10,000 or more,

enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7 for

that column and go to line 8. Otherwise, go to line 7 ................ 6a. 6b.

7. Multiply lines 6a and 6b by 30% (.30) (or by 35% (.35) in the column for the IRA of an

individual who is age 50 or older at the end of 2003). If the result is not a multiple of

$10, increase it to the next multiple of $10 (for example, increase $490.30 to $500). If the

result is $200 or more, enter the result. But if it is less than $200, enter $200 ........ 7a. 7b.

8. Enter your wages, and your spouse’s if filing jointly, and other

earned income from Form 1040, minus any deductions on Form

1040, lines 28 and 30. Do not reduce wages by any loss from

self-employment ................................. 8.

If married filing jointly and line 8 is less than $6,000 ($6,500 if one

spouse is age 50 or older at the end of 2003; $7,000 if both spouses are

age 50 or older at the end of 2003), stop here and see Pub. 590 to

figure your IRA deduction.

9. Enter traditional IRA contributions made, or that will be made by April 15, 2004, for

2003 to your IRA on line 9a and to your spouse’s IRA on line 9b ................ 9a. 9b.

10. On line 10a, enter the smallest of line 7a, 8, or 9a. On line 10b, enter the smallest of line

7b, 8, or 9b. This is the most you can deduct. Add the amounts on lines 10a and 10b and

enter the total on Form 1040, line 24. Or, if you want, you may deduct a smaller amount

and treat the rest as a nondeductible contribution (see Form 8606) ................ 10a. 10b.

- 29 - Need more information or forms? See page 7.

Exhibit 2 Rachel’s IRA Deductions Worksheet

✘

50,000

41,000

0

41,000

9,000

2,700

41,000

3,000

2,700
Lesson 3 3-15

BASIC

Draft as of

7/31/2003

OMB No. 1545-1007

Form 8606 Nondeductible IRAs

 See separate instructions.

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040, Form 1040A, or Form 1040NR. Sequence No. 48

Name. If married, file a separate form for each spouse required to file Form 8606. See page 5 of the instructions. Your social security number

Home address (number and street, or P.O. box if mail is not delivered to your home) Apt. no. Fill in Your Address Only

if You Are Filing This

Form by Itself and Not

With Your Tax Return

City, town or post office, state, and ZIP code

1

1 Enter your nondeductible contributions to traditional IRAs for 2003, including those made for

2003 from January 1, 2004, through April 15, 2004 (see page 5 of the instructions)

2 Enter your total basis in traditional IRAs (see page 6 of the instructions) 2

3 Add lines 1 and 2

4

3

Enter those contributions included on line 1 that were made from January 1, 2004, through April

15, 2004

5

4

Subtract line 4 from line 3 5

6 Enter the value of all your traditional, SEP, and SIMPLE IRAs as of

December 31, 2003, plus any outstanding rollovers (see page 6 of

the instructions)

8

7

Enter the net amount you converted from traditional, SEP, and SIMPLE

IRAs to Roth IRAs in 2003. Do not include amounts converted that

you later recharacterized (see page 7 of the instructions). Also enter

this amount on line 16

9 9

10

Add lines 6, 7, and 8

10

 .

11

Divide line 5 by line 9. Enter the result as a decimal rounded to at

least 3 places. If the result is 1.000 or more, enter “1.000”

11 Multiply line 8 by line 10. This is the nontaxable portion of the amount

you converted to Roth IRAs. Also enter this amount on line 17

12

12

13

Multiply line 7 by line 10. This is the nontaxable portion of your

distributions that you did not convert to a Roth IRA

13

14

15

Subtract line 13 from line 3. This is your total basis in traditional IRAs for 2003 and earlier

years

Cat. No. 63966F Form 8606 (2003)



In 2003, did you take a

distribution from traditional,

SEP, or SIMPLE IRAs or

make a Roth IRA conversion?

No

Yes

Enter the amount from line 3 on

line 14. Do not complete the rest

of Part I.

Go to line 4.

Taxable amount. Subtract line 12 from line 7. Also include this amount on Form 1040, line 15b;

Form 1040A, line 11b; or Form 1040NR, line 16b





6

For Paperwork Reduction Act Notice, see page 8 of the instructions.

Part I Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs

Complete this part only if:

● You made nondeductible contributions to a traditional IRA for 2003,

● You took distributions from a traditional, SEP, or SIMPLE IRA in 2003 (other than a rollover, conversion,

recharacterization, or return of certain contributions) and you made nondeductible contributions to a traditional IRA

in 2003 or an earlier year, or

● You converted part, but not all, of your traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2003 (excluding any portion

you recharacterized) and you made nondeductible contributions to a traditional IRA in 2003 or an earlier year.

Enter your distributions from traditional, SEP, and SIMPLE IRAs in

2003. Do not include rollovers, conversions to a Roth IRA, certain

returned contributions, or recharacterizations of traditional IRA

contributions (see page 6 of the instructions)

7

Add lines 11 and 12. This is the nontaxable portion of all your distributions

14

8

15

Note: You may be subject to an additional 10% tax on the amount on line 15 if you were under

age 591⁄2 at the time of the distribution (see page 7 of the instructions).

2003

Exhibit 3 Rachel’s Form 8606

Rachel Green 000 00 6220

300

10,000

10,300

10,300
3-16 Lesson 3

BASIC

Exercise 3

Bill and Kathy are both employed and each earned $15,000 in 

2003. Both Bill and Kathy are age 32. Bill was covered by an 

employer retirement plan but Kathy was not. In July 2003, Bill 

contributed $1,200 to his 2003 traditional IRA. In February 

2004, he contributed $800 to his 2003 traditional IRA. Kathy 

contributed $400 to her 2003 traditional IRA. They file a joint 

return. Their total income on line 22 is $30,000. They have no 

other adjustments to income.

Complete their IRA deduction worksheet (Exhibit 4).

Additional Taxes and Penalties

Taxpayers are generally subject to additional taxes and penalties 

for:

■ Contributing more to a traditional IRA than is allowed,

■ Making traditional IRA withdrawals before age 59 1/2, and

■ Not withdrawing enough traditional IRA funds after age 70 1/2.

■ Investing in collectibles

■ Prohibited transactions, such as borrowing money from one’s 

own IRA or selling property to it.

There are penalties for overstating the amount of nondeductible 

contributions and for failure to file Form 8606, if required.

Credit for Qualified Retirement Savings Contribution

Refer to Lesson 5 to determine if a taxpayer is also eligible to 

receive the credit for qualified retirement savings contributions 

based on their contributions to an IRA.
Lesson 3 3-17

BASIC

Draft as of

08/27/2003

IRA Deduction Worksheet—Line 24 Keep for Your Records

Before you begin:  Complete Form 1040, lines 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  Be sure you have read the list beginning on page 28.

Your IRA Spouse’s IRA

1a. Were you covered by a retirement plan (see page 30)? ........................ 1a. Yes No

1b. If married filing jointly, was your spouse covered by a retirement plan? ............................. 1b. Yes No

Next. If you checked “No” on line 1a (and “No” on line 1b if married filing jointly), skip

lines 2 through 6; enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7a

(and 7b if applicable), and go to line 8. Otherwise, go to line 2.

2. Enter the amount shown below that applies to you.

• Single, head of household, or married filing separately and you lived

apart from your spouse for all of 2003, enter $50,000

• Qualifying widow(er), enter $70,000

• Married filing jointly, enter $70,000 in both columns. But if you 2a. 2b. checked “No” on either line 1a or 1b, enter $160,000 for the person

who was not covered by a plan

• Married filing separately and you lived with your spouse at any time

in 2003, enter $10,000

}

3. Enter the amount from Form 1040, line 22. .............. 3.

4. Enter the total of the amounts from Form 1040, lines 23, 27

through 32a, plus any amount you entered on the dotted line

next to line 33 .................................. 4.

5. Subtract line 4 from line 3. Enter the result in both columns .................... 5a. 5b.

6. Is the amount on line 5 less than the amount on line 2?

 No. STOP None of your IRA contributions are deductible. For details on

nondeductible IRA contributions, see Form 8606.

Yes. Subtract line 5 from line 2 in each column. If the result is $10,000 or more,

enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7 for

that column and go to line 8. Otherwise, go to line 7 ................ 6a. 6b.

7. Multiply lines 6a and 6b by 30% (.30) (or by 35% (.35) in the column for the IRA of an

individual who is age 50 or older at the end of 2003). If the result is not a multiple of

$10, increase it to the next multiple of $10 (for example, increase $490.30 to $500). If the

result is $200 or more, enter the result. But if it is less than $200, enter $200 ........ 7a. 7b.

8. Enter your wages, and your spouse’s if filing jointly, and other

earned income from Form 1040, minus any deductions on Form

1040, lines 28 and 30. Do not reduce wages by any loss from

self-employment ................................. 8.

If married filing jointly and line 8 is less than $6,000 ($6,500 if one

spouse is age 50 or older at the end of 2003; $7,000 if both spouses are

age 50 or older at the end of 2003), stop here and see Pub. 590 to

figure your IRA deduction.

9. Enter traditional IRA contributions made, or that will be made by April 15, 2004, for

2003 to your IRA on line 9a and to your spouse’s IRA on line 9b ................ 9a. 9b.

10. On line 10a, enter the smallest of line 7a, 8, or 9a. On line 10b, enter the smallest of line

7b, 8, or 9b. This is the most you can deduct. Add the amounts on lines 10a and 10b and

enter the total on Form 1040, line 24. Or, if you want, you may deduct a smaller amount

and treat the rest as a nondeductible contribution (see Form 8606) ................ 10a. 10b.

- 29 - Need more information or forms? See page 7.

Exhibit 4 Bill and Kathy’s IRA Deductions Worksheet
3-18 Lesson 3

BASIC

STUDENT LOAN INTEREST DEDUCTION

If a taxpayer paid interest on a student loan in 2003, he or she may 

be able to deduct up to $2,500 of the interest paid.

If the taxpayer paid $600 or more in interest to a single lender, 

the taxpayer should receive a statement from the lender showing 

the amount of interest paid. This information will assist you in 

completing the student loan interest deduction. 

 Qualified Student Loan Interest

Generally, student loan interest is the interest paid during the year 

on a loan for qualified higher education expenses that were:

1. For the taxpayer, the taxpayer’s spouse, or a person who was the 

taxpayer’s dependent when the loan was obtained.

2. Paid within a reasonable period of time before or after obtaining 

the loan, and

3. For an eligible student.

Interest can be the interest paid during the life of the loan 

(voluntary and required interest payments), loan origination 

fees, capitalized interest, interest on revolving lines of credit, and 

interest on refinanced student loans.

Interest does not include interest on any of the following:

1. A loan from a related person.

2. A loan from a qualified employer plan.

3. A loan for which the taxpayer is not legally liable. 

Who Can Claim the Deduction

Generally, a taxpayer can claim the deduction if all the following 

requirements are met:

1. Taxpayer cannot use married filing separately filing status.

2. Taxpayer cannot be claimed as a dependent on someone else’s 

return.

3. The interest is on a loan to pay tuition and other qualified 

higher education expenses for the taxpayer, the taxpayer’s 

spouse, or someone whom the taxpayer can claim as a 

dependent, when the loan was taken out.

4. The education expenses were paid or incurred within a 

reasonable period of time before or after the loan was taken out.

5. The person for whom the expenses were paid or incurred was an 

eligible student.
Lesson 3 3-19

BASIC

Qualified Higher Education Expenses

Generally, qualified higher education expenses include tuition and 

fees; room and board; books, supplies and equipment; and other 

necessary expenses.

These costs must be reduced by the following:

1. Employer provided educational assistance benefits.

2. Tax-free withdrawals from a Coverdell ESA.

3. Tax-free withdrawals from a qualified tuition program.

4. U.S. savings bond interest excluded from income because it is 

used to pay qualified higher education expenses.

5. Certain scholarships.

6. Veteran’s educational assistance benefits.

7. Any other nontaxable payments (other than gifts, bequests, or 

inheritances) received for educational expenses.

Eligible educational institution

An eligible educational institution is any college, university, 

vocational school or other postsecondary educational institution 

eligible to participate in a student aid program administered by 

the Department of Education. It includes virtually all accredited 

public, nonprofit, and privately owned profit-making postsecondary 

institutions.

For the student loan interest deduction only, an eligible educational 

institution also includes an institution conducting an internship 

or residency program leading to a degree or certificate from an 

institution of higher education, hospital, or health care facility that 

offers postgraduate training.

If a taxpayer does not know if the educational institution is an 

eligible institution, the taxpayer should contact the school.

Eligible student

An eligible student is a student who is enrolled at least half-time 

in a program leading to a degree, certificate, or other recognized 

educational credential.

The standard for what is half the normal full-time work load is 

determined by each eligible educational institution.

Deduction Limits

The student loan interest deduction is generally the smaller of 

$2,500 or the interest payments paid in 2003.

This amount may be gradually reduced (phased out) or eliminated 

based on the taxpayer’s filing status and modified adjusted gross

income (MAGI). Table 3 depicts when the limits apply.
3-20 Lesson 3

BASIC

Table 3

Limit on Student Loan Interest Deduction

If your filing status is AND your modified AGI is THEN...

Singe, head of household, or 

qualifying widow(er)

$50,000 or less You can deduct all your 

interest, up to $2,500

More than $50,000, but less 

than $65,000

Your deduction is limited

$65,000 or more You cannot claim this 

deduction.

Married filing jointly $100,000 or less You can deduct all your 

interest up to $2,500

More than $100,000, but less 

than $130,000

Your deduction is limited

$130,000 or more You cannot claim this 

deduction.

Figuring the Deduction

Use the Student Loan Interest Deduction worksheet found in the 

Form 1040 or Form 1040A instructions to figure the deduction.

Claiming the Deduction

The student loan interest deduction is entered on Form 1040, line 

25, or Form 1040A, line 18.

Example 14

During 2003, Rick paid $2,650 in qualified interest on his student 

loan. His total income, Form 1040, line 22, is $35,000. He has 

no other adjustments to his income. His completed student loan 

interest deduction worksheet, Exhibit 5, shows Rick is entitled to 

$2,500. Although his MAGI falls within the income limits, he is 

only entitled to a maximum $2,500 deduction.
Lesson 3 3-21

BASIC

0

Student Loan Interest Deduction Worksheet—Line 25 8/2Keep for Your Records

Before you begin:  Complete Form 1040, lines 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32).  See the instructions for line 25 that begin on this page.  Be sure you have read the Exception above to see if you can use this worksheet

instead of Pub. 970 to figure your deduction.

1. Enter the total interest you paid in 2003 on qualified student loans (defined above). Do not enter more

than $2,500 ................................................................... 1.

2. Enter the amount from Form 1040, line 22 .............................. 2.

3. Enter the total of the amounts from Form 1040, lines 23, 24, 27 through 32a, plus

any amount you entered on the dotted line next to line 33 ................... 3.

4. Subtract line 3 from line 2 .......................................... 4.

5. Enter the amount shown below for your filing status.

• Single, head of household, or qualifying widow(er)—$50,000 ......... 5. • Married filing jointly—$100,000 }

6. Is the amount on line 4 more than the amount on line 5?

No. Skip lines 6 and 7, enter -0- on line 8, and go to line 9.

Yes. Subtract line 5 from line 4 .................................. 6.

7. Divide line 6 by $15,000 ($30,000 if married filing jointly). Enter the result as a decimal (rounded to

at least three places). If the result is 1.000 or more, enter 1.000 ............................. 7. .

8. Multiply line 1 by line 7 ......................................................... 8.

9. Student loan interest deduction. Subtract line 8 from line 1. Enter the result here and on Form 1040,

line 25. Do not include this amount in figuring any other deduction on your return (such as on

Schedule A, C, E, etc.) ........................................................... 9.

Exhibit 5 Rick’s 2003 Student Loan Interest Deduction Worksheet

2,500

35,000

35,000

0

50,000

0

2,500
3-22 Lesson 3

BASIC

TUITION AND FEES DEDUCTION

Taxpayers can deduct an amount equal to the qualified tuition 

and related expenses paid during the tax year as an adjustment to 

income. The adjustment is reported on Form 1040, line 26, or Form 

1040A, line 19.

To claim the deduction the taxpayer must have incurred 

qualified expenses for an eligible student to attend an eligible

educational institution during the tax year. In addition, the 

taxpayer must include on the tax return the name and taxpayer 

identification number of the qualified student.

Qualified Expenses

Qualified tuition and related expenses include tuition and fees 

required for enrollment or attendance at an eligible educational 

institution and generally include fees for:

■ Course-related books, supplies and equipment, and

The fees must be paid to the institution as a condition of 

enrollment or attendance.

Qualified tuition and related expenses do not include the cost of:

■ Insurance,

■ Medical expenses (including student health fees),

■ Room and board,

■ Student activities.

■ Transportation or similar personal, living or family expenses, 

even if the fees must be paid to the institution as a condition of 

enrollment or attendance.

■ Athletic fees.

■ Other expenses unrelated to an individual’s academic course of 

instruction.

 Eligible Student

The deduction can be claimed for the taxpayer, the taxpayer’s 

spouse (if filing a joint return) and any dependent (for whom the 

taxpayer claims a dependency exemption).

Married taxpayers that file as married filing separately 

cannot take the deduction.

An individual who is the dependent of another taxpayer cannot 

claim the deduction.

Eligible Educational Institution

An eligible educational institution is generally any accredited 

public, nonprofit, or private postsecondary institution eligible 

to participate in the student aid programs administered by the 
Lesson 3 3-23

BASIC

Department of Education. It includes virtually all accredited, 

public, nonprofit, and privately owned profit-making post 

secondary institutions.

If the taxpayer does not know if the educational institution is an 

eligible institution, he or she should contact the school.

Deduction Amount

The deduction amount is determined by the taxpayer’s filing 

status and adjusted gross income. Table 4 depicts when the income 

limitations apply.

The total amount of qualified tuition and related expenses are 

reduced by:

■ Distributions from qualified state tuition programs

■ Distributions from Coverdell ESAs

■ Interest from savings bonds used for higher education expenses

Table 4 Limit on Tuiton and Fees Deduction

IF your fi ling 

status is...

AND your modifi ed 

AGI is...

THEN...

Single, Head of 

Household, or 

Qualifying widow(er)

Equal to or less than 

$65,000

You can deduct all of 

your qualifi ed tuition 

and fees up to $3,000.

More than $65,000 You cannot claim the 

credit

Married fi ling jointly Equal to or less than 

$130,000

You can deduct all of 

your qualifi ed tuition 

and fees up to $3,000

More than $130,000 You cannot claim the 

credit.

Married fi ling 

separately

Any amount You cannot claim the 

credit.

Modified adjusted gross income for purposes of the deduction for 

qualified tuition and related fees is adjusted gross income before 

the deduction for qualified tuition and related fees and after adding 

back the following:

■ Foreign earned income exclusion,

■ Foreign housing exclusion or deduction,

■ Exclusion of income for bona fide residents of Guam, Puerto 

Rico, American Samoa, or the Northern Mariana Islands.
3-24 Lesson 3

BASIC

Figuring the Deduction

Use the Tuition and Fees Deduction worksheet found in the Form 

1040 or Form 1040A instructions to figure the modified adjusted

gross income and the resulting deduction amount.

Example 15

Luis and Priscilla file a joint return for 2003. Their 1040 line 22 

total income is $49,620. In 2003, Priscilla paid $1,300 for classes 

taken at the local university. She had allowable IRA deductions of 

$1,500. Their allowable tuition and fees deduction is $1,300, shown 

in Exhibit 6.

Tuition and Fees Deduction Worksheet—Line 26 Keep for Your Records

Before you begin:  Complete Form 1040, lines 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32).  See the instructions for line 26 above.

 Be sure you have read the Exception above to see if you can use this worksheet

instead of Pub. 970 to figure your deduction.

1. Enter amount from Form 1040, line 22 ............................................ 1.

2. Enter the total of the amounts from Form 1040, lines 23 through 25, 27 through 32a, plus any

amount you entered on the dotted line next to line 33 ................................. 2.

3. Subtract line 2 from line 1. If the result is more than $65,000 ($130,000 if married filing

3. jointly), STOP You cannot take the deduction for tuition and fees .........................

4. Tuition and fees deduction. Enter the total qualified tuition and fees (defined above) you paid in

2003. Do not enter more than $3,000. Also, enter this amount on Form 1040, line 26. Do not

include this amount in figuring any other deduction on your return (such as on Schedule A, C, E,

etc.) ...................................................................... 4.

Exhibit 6 Luis and Priscilla’s Tuition and Fees Deduction Worksheet

No Double Benefits

A taxpayer cannot:

■ Deduct qualified tuition and related expenses if the same 

expense is deductible on a different line of the return.

■ Claim the Hope credit or the lifetime learning credit for an 

individual in the same year as a deduction for qualified tuition 

and related expenses are claimed.

■ Claim a credit based on expenses paid with a tax-free 

scholarship, grant, or an employer-provided educational 

assistance.

ONE-HALF OF SELF-EMPLOYMENT TAX

Report on Form 1040, line 28, the adjustment for one-half of selfemployment tax from Schedule SE. This subject was covered 

in Lesson 2, for volunteers who will be helping self-employed

taxpayers.

49,620

1,500

48,120

1,300
Lesson 3 3-25

BASIC

PENALTY ON EARLY WITHDRAWAL OF SAVINGS

Depositors may withdraw funds from ordinary savings accounts 

any time they wish. However, if they withdraw funds from a time 

deposit (such as a certificate of deposit) before the maturity date, a 

penalty is charged. Form 1099-INT reports the interest earned as 

well as any early withdrawal penalties.

As you learned in Lesson 2, taxpayers must report the total amount 

of interest earned. They cannot subtract the early withdrawal 

penalty from the interest earned and report the difference. The 

early withdrawal penalty can be claimed as an adjustment only 

on Form 1040, line 31. The entire penalty is deducted, even if it is 

greater than the interest income.

Example 16

Arlene has one Form W-2 and one Form 1099-INT and no other 

income. Her Form 1099-INT shows both interest income and an 

early withdrawal penalty. Arlene does not pay alimony, and she did 

not make a contribution to a traditional IRA. She will not itemize 

deductions, and she cannot claim any tax credits. Normally, she 

would be able to file Form 1040A.

However, Arlene must file Form 1040 to claim the adjustment for 

the penalty on early withdrawal of savings.

 ALIMONY PAID

As you learned in Lesson 2, alimony and separate maintenance 

payments are taxable to the person receiving these payments. The 

person paying the alimony or separate maintenance can claim 

it as an adjustment to income. This adjustment can be claimed 

only on Form 1040. The amount paid during the year and the 

recipient’s social security number are entered on line 32a and 32b, 

respectively. Claim the adjustment only for amounts paid during 

the tax year.

Child support is not the same as alimony or separate maintenance 

payments. Child support is not taxable to the recipient and cannot 

be claimed as an adjustment by the payer.

 JURY DUTY PAY GIVEN TO EMPLOYER

As you learned in Lesson 2, Income, jury duty pay received by 

taxpayers is included in other income on line 21 of Form 1040. 

Some employees receive their regular wages from their employers 

when they are serving on a jury instead of working at their jobs. 

Often the jury duty pay the employees receive is turned over to 

their employers. The amount given to the employer may be claimed 

as an adjustment to income. On the dotted line next to line 33, 

write “jury pay” and the amount. Include jury duty pay with the 

adjustments claimed on lines 23 through 32a.
3-26 Lesson 3

BASIC

OTHER ADJUSTMENTS

The other adjustments that can be claimed on Form 1040 are 

beyond the scope of the VITA/TCE Program. Taxpayers who have 

adjustments that aren’t discussed in this lesson should be advised 

to seek paid professional tax assistance.

TOTAL ADJUSTMENTS AND ADJUSTED GROSS INCOME

Add all adjustments and enter the total on Form 1040A, line 20, 

or Form 1040, line 33. Subtract the total adjustments from total 

income on Form 1040A, line 15, or Form 1040, line 22. Enter 

the result on Form 1040A, line 21, or Form 1040, line 34. This 

is adjusted gross income and is often referred to as “AGI.”

Adjusted gross income is used to compute some limitations, such as 

the medical and dental deduction on Schedule A and the credit for 

child and dependent care expenses.

 TAXWISE HINTS

TaxWise will quickly complete any worksheets needed to determine 

adjustments to income.

There is one worksheet for educator expenses, student loan interest 

deduction, and tuition and fees deduction. You can link to this form 

from Form 1040, lines 23, 25, or 26.

Link to the Deductible and Non-deductible IRA Worksheet from 

Form 1040, line 24. Once the IRA contribution is input for the 

taxpayer (and spouse if married), TaxWise will complete the Form 

8606, if necessary, and input the entry on Form 1040, line 24.

One half the self employment tax will be entered automatically 

when completing Schedule C or C-EZ.

The penalty on withdrawal from savings should be entered by 

linking to the Interest Received Worksheet. This worksheet is a 

link from Schedule B.

TaxWise breaks out the remaining adjustments. Simply input the 

appropriate amount. 
Lesson 3 3-27

BASIC

  SUMMING UP THIS LESSON  

• An adjustment is an amount subtracted from total income.

The result is adjusted gross income.

• Adjustments covered in the VITA program are: 

 Educator expenses

 Contributions to a traditional IRA

 Student loan interest deduction

 Tuition and fees paid

 One-half of self-employment tax paid (volunteers trained to 

prepare Schedule C-EZ and SE can assist taxpayers claiming 

this adjustment)

 Penalty on early withdrawal of savings

 Alimony paid

 Jury duty pay given to employer

• The adjustments for traditional IRA contributions, student

loan interest deduction, tuition and fees deduction, and educator expenses deduction can be claimed either on Form 

1040A or Form 1040. The other adjustments can be claimed 

on Form 1040 only.

• Persons 70 1/2 years of age or older by the end of the tax year 

cannot make traditional IRA contributions for that tax year.

• Traditional IRA contributions generally cannot be more than 

the taxpayer’s taxable compensation or $3,000 ($3,500 if age 

50 or older), whichever amount is smaller.

• Individuals who are not covered by retirement plans at work 

may make deductible IRA contributions regardless of their 

modified adjusted gross income. Taxpayers who are covered 

by retirement plans at work may deduct all, part, or none of 

their traditional IRA contributions depending on their modified adjusted gross income and filing status.

• Taxpayers may be subject to additional tax for contributing 

more to a traditional IRA than is allowed, making traditional

IRA withdrawals before age 59 1/2, and not withdrawing 

enough traditional IRA funds after 70 1/2.
3-28 Lesson 3

BASIC

Lesson 3 ADJUSTMENTS ANSWERS TO EXERCISES

Exercise 1

(A) Yes; alimony is considered compensation for traditional IRA 

purposes.

(B) Yes; But only if they file a joint return.

(C) No; Carla has no compensation for traditional IRA purposes.

(D) $1,250; The lessor of taxable compensation or $13,500.

Exercise 2

(A) Yes; all of her contribution up to $3,000 is deductible because 

their combined modified adjusted gross income is not more 

than $150,000.

(B) Yes; all of it is deductible because her modified adjusted gross

income is less than $40,000.

(C) Richard may not deduct any of his contribution because his 

modified adjusted gross income is at least $10,000. Lynn will 

be able to deduct a portion of her IRA contribution because 

she is not covered by an employer-sponsored retirement plan 

and her income is less than $10,000.
Lesson 3 3-29

BASIC

 ADJUSTMENTS ANSWERS TO EXERCISES Lesson 3

Exercise 3

Draft as of

08/27/2003

IRA Deduction Worksheet—Line 24 Keep for Your Records

Before you begin:  Complete Form 1040, lines 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  Be sure you have read the list beginning on page 28.

Your IRA Spouse’s IRA

1a. Were you covered by a retirement plan (see page 30)? ........................ 1a. Yes No

1b. If married filing jointly, was your spouse covered by a retirement plan? ............................. 1b. Yes No

Next. If you checked “No” on line 1a (and “No” on line 1b if married filing jointly), skip

lines 2 through 6; enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7a

(and 7b if applicable), and go to line 8. Otherwise, go to line 2.

2. Enter the amount shown below that applies to you.

• Single, head of household, or married filing separately and you lived

apart from your spouse for all of 2003, enter $50,000

• Qualifying widow(er), enter $70,000

• Married filing jointly, enter $70,000 in both columns. But if you 2a. 2b. checked “No” on either line 1a or 1b, enter $160,000 for the person

who was not covered by a plan

• Married filing separately and you lived with your spouse at any time

in 2003, enter $10,000

}

3. Enter the amount from Form 1040, line 22. .............. 3.

4. Enter the total of the amounts from Form 1040, lines 23, 27

through 32a, plus any amount you entered on the dotted line

next to line 33 .................................. 4.

5. Subtract line 4 from line 3. Enter the result in both columns .................... 5a. 5b.

6. Is the amount on line 5 less than the amount on line 2?

 No. STOP None of your IRA contributions are deductible. For details on

nondeductible IRA contributions, see Form 8606.

Yes. Subtract line 5 from line 2 in each column. If the result is $10,000 or more,

enter $3,000 ($3,500 if age 50 or older at the end of 2003) on line 7 for

that column and go to line 8. Otherwise, go to line 7 ................ 6a. 6b.

7. Multiply lines 6a and 6b by 30% (.30) (or by 35% (.35) in the column for the IRA of an

individual who is age 50 or older at the end of 2003). If the result is not a multiple of

$10, increase it to the next multiple of $10 (for example, increase $490.30 to $500). If the

result is $200 or more, enter the result. But if it is less than $200, enter $200 ........ 7a. 7b.

8. Enter your wages, and your spouse’s if filing jointly, and other

earned income from Form 1040, minus any deductions on Form

1040, lines 28 and 30. Do not reduce wages by any loss from

self-employment ................................. 8.

If married filing jointly and line 8 is less than $6,000 ($6,500 if one

spouse is age 50 or older at the end of 2003; $7,000 if both spouses are

age 50 or older at the end of 2003), stop here and see Pub. 590 to

figure your IRA deduction.

9. Enter traditional IRA contributions made, or that will be made by April 15, 2004, for

2003 to your IRA on line 9a and to your spouse’s IRA on line 9b ................ 9a. 9b.

10. On line 10a, enter the smallest of line 7a, 8, or 9a. On line 10b, enter the smallest of line

7b, 8, or 9b. This is the most you can deduct. Add the amounts on lines 10a and 10b and

enter the total on Form 1040, line 24. Or, if you want, you may deduct a smaller amount

and treat the rest as a nondeductible contribution (see Form 8606) ................ 10a. 10b.

- 29 - Need more information or forms? See page 7.

✘

✘

70,000 160,000

30,000

30,000

0

30,000

40,000 130,000

3,000 3,000

30,000

2,000 400

2,000 400

Bill and Kathy’s IRA Deductions Worksheet
3-30 Lesson 3

BASIC

STUDENT NOTES
Lesson 3

Military Segment M-3-1

MOVING EXPENSES Lesson 3

Military Segment

INTRODUCTION AND OBJECTIVES

This segment covers the moving expenses of military personnel. 

When a member of the Armed Forces is transferred to a new 

permanent duty station he or she may deduct certain moving 

expenses.

In preparing returns for the military, you will need to:

■ Identify qualifying moves by assisting in determining if the 

move qualifies as a permanent change of station (PCS).

■ Determine when allowances and reimbursements must be 

included in income.

■ Identify deductible moving expenses.

■ Compute the moving expense deduction using Form 3903, 

Moving Expenses, for moves within and outside the United 

States.

PERMANENT CHANGE OF STATION

For military moves, only expenses incurred as a result of a permanent change of station are deductible. A permanent change of 

station includes:

■ A move from home to the area of the first post of duty.

■ A move from one permanent post of duty to another.

■ A move from the last post of duty to home or to a nearer point 

in the United States. The member must move within one year 

of ending active duty or within the period allowed under the 

Joint Travel Regulations.

Spouse and dependents. If a member of the Armed Forces deserts, is imprisoned, or dies, a permanent change of station for the 

spouse or dependents includes a move to the place of enlistment, 

the home of record, or any nearer point in the United States.
Lesson 3 M-3-2 Military Segment

If the Armed Forces moves a member and his or her spouse or 

dependents to or from separate locations, the moves are treated as 

a single move to the member’s post of duty. The qualified expenses 

of both moves are combined and deducted on the same tax return.

Exercise 1

Which of the following is a permanent change of station?

A. A move by an Air Force pilot to an airbase for a 6-month detail.

B. A move by an Army sergeant to his home 2 years after he 

ended active duty.

C. A move by a new enlistee from her home to her first post of 

duty.

 Answer 

REQUIREMENTS

The moving expense deduction includes only expenses that are 

reasonable for the circumstances of the move. For example, the 

costs of any side trips for sightseeing are not deductible. The cost of 

lavish and extravagant lodging also is not deductible. 

Although civilians must meet a distance test and a time test to 

deduct moving expenses, members of the military can disregard 

such tests for moves required by a permanent change of station.

PAYMENTS IN KIND, ALLOWANCES, AND REIMBURSEMENTS

The service member must include in gross income any payments 

he or she receives from the government for a do-it-yourself (DITY) 

permanent change of station (PCS) move. A DITY move payment 

is based on government estimates of the cost to move household 

goods, not on actual expenses and receipts. The service member will 

receive a separate Form W-2 for the DITY payment. The amount 

in box 1 of the Form W-2 must be included on line 7 of Form 1040. 

He or she must also complete Form 3903 to compute total qualified 

moving expenses that can be deducted on line 27, Form 1040. These 

line 7 and line 27 entries on Form 1040 will report the income and 

applicable related expenses for the move on the Form 1040.

The service member does not include any of the following in his or 

her gross income.

• Moving or storage services furnished to the member.

• Non-taxable allowances such as:

• Dislocation allowance

• Temporary Lodging Allowance

• Mileage Allowance in Lieu of Transportation

• Per Diem Allowance
Lesson 3

Military Segment M-3-3

Generally, if total reimbursements or allowances received by 

the service member are more than his or her qualified moving 

expenses, the excess will be included with his or her wages in box 1 

of Form W-2. However, if reimbursements or allowances (other than 

nontaxable allowances like the ones listed above) exceed the cost 

of moving and they are not included in the Form W-2, the service 

member must still include the excess on line 7 of Form 1040.

Use Form 3903 to deduct qualified expenses that exceed reimbursements and allowances (including nontaxable allowances like 

the ones listed above).

Exercise 2

A. A member of the Armed Forces must include in gross income 

all reimbursements, allowances, and the value of moving and 

storage services that the military organization furnishes. True 

or false?

 Answer 

B. If a member of the Armed Forces receives reimbursements 

or allowances (that are not excludable from gross income) in 

excess of the actual moving expenses, he or she must include 

in income only the amount that exceeds actual expenses. True 

or false?

 Answer 

DEDUCTIBLE MOVING EXPENSES

Any qualifying moving expenses that exceed allowances or 

reimbursements from the government are deductible. 

Members of the military will need to determine whether they have 

excess expenses and, if so, whether the expenses are deductible on 

their federal tax return. 

Qualifying moving expenses are:

■ The cost of moving household goods and personal effects, 

including hauling a trailer and packing, storage, and insurance. 

It does not include the expense of moving furniture or other 

goods that the taxpayer bought on the way from the old home to 

the new home.

■ The cost of reasonable travel and lodging expenses from 

the old home to the new home, including actual automobile 

expenses (or 12 cents per mile), airfare, and lodging for the 

taxpayer and members of his or her household. Members cannot 

deduct the cost of meals while traveling from the old home to 

the new home.

Foreign moves. A foreign move is one from the United States or 

its possessions to a foreign country or from one foreign country 

to another. It is not a move from a foreign country to the United 

States or its possessions.
Lesson 3 M-3-4 Military Segment

Exercise 3

Which of the following are deductible moving expenses for Major 

Boone? (Assume the member received no reimbursements from 

the government.)

A. Payment to Fulton Construction Company for home improvements made to Major Boone’s former home.

B. Security deposit to Towner Apartments on the Boones new 

apartment.

C. Commission to Mercer Real Estate for the sale of the Boones’ 

former home.

D. Payment to Shelby Transport Company to ship a piano that 

the Boones bought on the way to their new home.

E. Cost of transporting Major Boone’s second car to the new job 

location.

F. Payment for meals while on the way to the new permanent 

duty station.

 Answer 

REPORTING MOVING EXPENSES

Moving expenses are deductible as an adjustment to income on 

Form 1040, line 27. Only deductible expenses that are more than 

reimbursements and allowances can be claimed. 

If the service member was not reimbursed, he or she can deduct 

allowable moving expenses either in the year incurred and paid or 

in the year they were paid. 

If the member was reimbursed for expenses, he or she can deduct 

allowable expenses either in the year incurred or in the year paid

If the member uses the cash method of accounting, which is used by 

most individuals, he or she can choose to deduct moving expenses 

in the year of reimbursement if: 

(l) The expenses were paid in a year before the year of 

reimbursement, or

(2) The expenses were paid in the year immediately after 

the year of reimbursement but by the due date, including 

extensions, for filing his or her return for the reimbursement 

year.

Moving expenses are reported on Form 3903, Moving Expenses. For 

more information, see Publication 521, Moving Expenses. 

The following example illustrates applications of the rules 

discussed in this lesson.
Lesson 3

Military Segment M-3-5

Example

Capt. Shirley M. Holmes (SSN 000-00-9876) transferred in 2003 

from one base to another. The government reimbursed her $350 

for her travel and lodging expenses on the way to her new job location. The travel and lodging reimbursements were not reported 

as income on Form W-2. The $5,000 expense for transporting her 

household goods was furnished in kind by the military. No other 

reimbursements or allowances were made.

Capt. Holmes incurred the following expenses:

Travel and lodging en route – $500

The moving expense is computed on Form 3903 as follows:

Exhibit 1 Form 3903
Lesson 3 M-3-6 Military Segment

Note: The $5,000 expense for transporting her household goods 

was not included because the Armed Forces paid for this service. 

The travel and lodging expenses for moving from the old home to 

the new home are shown on line 2 of Form 3903.

Reimbursements are shown on line 4.

To figure the moving expense deduction on Form 3903, subtract the 

total reimbursements on line 4 from the amount on line 3. Check 

the “Yes” box and enter the result on line 5 and on Form 1040, line 

27.

Exercise 4

Greg T. (SSN 000-00-4567) and Diane E. Coe are filing a joint 

return. Greg T. Coe, an airman in the Air Force, was transferred from Maxwell Air Force Base to Scott Air Force Base. The 

government reimbursed Greg $400 for travel expenses incurred 

on the way to his new job location. He also received a $1,000 

dislocation allowance. The travel and lodging reimbursements 

and the dislocation allowance were not reported as wages on 

Form W-2. Using the following information furnished by the Coes, 

complete Form 3903.

Dislocation expenses: $ 1,000

Travel and lodging en route: $ 575

Meals en route: $ 200

Security deposit for new apartment: $ 350

Exhibit 2 Form 3903
Lesson 3

Military Segment M-3-7

MOVING EXPENSES ANSWERS TO EXERCISES

Lesson 3

Military Segment

1. c.

2. a. False

b. True

3. e.

4. See completed Form 3903. The Coes are entitled to a $175 moving expense deduction. Only the travel and lodging en route can 

be claimed on Form 3903, line 2. The security deposit and the 

meals are not deductible expenses. In addition, the dislocation 

allowance is netted against dislocation expenses. Only if the 

dislocation expenses exceeded the dislocation allowance would 

the Coes have reported the difference as an additional moving 

expense on Form 3903.

  SUMMING UP THIS SEGMENT  

In this segment you learned what moves qualify for tax benefits, 

what expenses are deductible, and how to use Form 3903 to 

compute the moving expense deduction. These expenses are 

deductible as an adjustment to income on Form 1040, line 27.
Lesson 3 M-3-8 Military Segment

Exhibit 2 Form 3903
Lesson 4 4-1

BASIC

STANDARD AND ITEMIZED

DEDUCTIONS, AND TAX

COMPUTATION Lesson 4

INTRODUCTION AND OBJECTIVES

In this lesson you will learn about the standard

deduction, itemized deductions and tax computations. You will learn which expenses can be included 

in itemized deductions. You will also learn when 

the taxpayer will use the tax tables and the Capital

Gains Worksheet to compute their total tax.

After completing this lesson you should be able to:

■ Identify the correct standard deduction.

■ Calculate and accurately report itemized deductions on Schedule A.

■ Identify the miscellaneous deductions reported 

on Schedule A, line 27.

■ Review the Capital Gain Tax Worksheet.

■ Explain the process to calculate and report tax 

liability.

STANDARD DEDUCTION

The standard deduction depends on: 

■ the taxpayer’s filing status,

■ whether the taxpayer (or the taxpayer’s spouse) 

is 65 or older and/or blind, and

■ whether the taxpayer can be claimed as a dependent on another taxpayer’s return.

Based on the taxpayer’s situation, you will figure 

the standard deduction by using one of the following:

■ Standard deduction amount for the appropriate 

filing status from the appropriate tax form,

■ Standard Deduction Chart for People Age 65 or 

Older or Blind, or

■ Standard Deduction Worksheet for Dependents.

ALERT

In 2003, the basic 

standard deduction 

for married taxpayers 

fi ling jointly and 

qualifying widow(er)s 

has increased to $9,500 

(double that of single 

fi lers).

The standard deduction 

for married fi ling 

separately has increased 

to $4,750 (one half of 

that for married fi ling 

jointly).
4-2 Lesson 4

BASIC

Example 1

Bob is 55 years old and is married to Janice, age 50. If they are 

filing a joint return and neither is blind, they can enter $9,500 

on either Form 1040 or Form 1040A for their standard deduction 

amount.

Example 2

John is 73 years old, blind, and files a single tax return. To find his 

standard deduction, use the Standard Deduction Chart for People 

Age 65 or Older or Blind. His standard deduction is $7,050.

PERSONAL EXEMPTION IN CONNECTION WITH STANDARD DEDUCTION ON

 FORM 1040EZ

If the taxpayer (or his or her spouse, if married filing a joint return) 

can be claimed as a dependent on another taxpayer’s return, check 

the Yes box on line 5 of the Form 1040EZ. To fill in the amount on 

line 5 for this taxpayer, you must then turn the form over and complete the worksheet (Exhibit 1 shows a blank worksheet from Form 

1040EZ, page 2).

If the taxpayer (or his or her spouse, if filing a joint return) cannot be claimed as a dependent on another taxpayer’s return, check 

the No box on line 5. Enter on line 5 the amount shown below that 

applies to the taxpayer (and spouse, if married filing jointly).

A. Single, enter $7,800. This is the total of the taxpayer’s standard

deduction ($4,750) and personal exemption ($3,050).

July 2

(subject to 

Use this worksheet to figure the amount to enter on line 5 if someone can claim you (or your

c

spouse if married filing jointly) as a dependent, even if that person chooses not to do so. To find

out if someone can claim you as a dependent, use TeleTax topic 354 (see page 8).

Worksheet

for

dependents

who

checked

“Yes” on

line 5

A .

A . Amount, if any, from line 1 on front

B . Minimum standard deduction B . 750.00

C. Enter the larger of line A or line B here C.

D.

D. Maximum standard deduction. If single, enter $4,750; if married

filing jointly, enter $9,500

E . Enter the smaller of line C or line D here. This is your standard

deduction E .

F. Exemption amount.

G . Add lines E and F. Enter the total here and on line 5 on the front

If you checked “No” on line 5 because no one can claim you (or your spouse if married filing

jointly) as a dependent, enter on line 5 the amount shown below that applies to you.

● Single, enter $7,800. This is the total of your standard deduction ($4,750) and your exemption

($3,050).

● Married filing jointly, enter $15,600. This is the total of your standard deduction ($9,500), your

exemption ($3,050), and your spouse’s exemption ($3,050).

F.

G .

● If single, enter -0-.

● If married filing jointly and—

—only one of you can be claimed as a dependent, enter $3,050.

—both you and your spouse can be claimed as dependents, enter -0-.

+ 250.00 Enter total 

(keep a copy for

your records)

Exhibit 1 Form 1040EZ, Page 2
Lesson 4 4-3

BASIC

B. Married, enter $15,600. This is the total of the taxpayer’s 

and spouse’s standard deduction ($9,500), exemption for the 

taxpayer ($3,050), and exemption for the taxpayer’s spouse 

($3,050).

Exercise 1

A. James is 37 years old. He has two children who live with him 

and he files as head of household. What is James’ standard

deduction?

B. Malcom is 37 years old. He was divorced in 2003. He is blind 

and has no dependent children. What is Malcom’s standard

deduction?

C. Carl is 67 years old and married to Sue, who is 59 years old. 

Neither is blind. If they file a joint return, what is their standard deduction?

D. If they are filing separate returns, what is Carl’s standard

deduction?

E. If they are filing separate returns, what is Sue’s standard

deduction?

F. Shirley is 15 years old and is claimed as a dependent on her 

parents’ tax return. She earned $1,500 during the summer and 

deposited it all into her savings account, where she earned $40 

in interest. What is her standard deduction?

 ITEMIZED DEDUCTIONS

Taxpayers can either claim the standard deduction or itemize their 

deductions. Both the standard deduction and itemized deductions 

reduce adjusted gross income. Most taxpayers choose the larger 

of their itemized deductions or the standard deduction. However, 

there are some exceptions:

■ A married taxpayer filing a separate return cannot claim the 

standard deduction if the taxpayer’s spouse itemizes deductions, 

and

■ Nonresident aliens cannot claim the standard deduction.

When itemizing, you should complete the taxpayer’s return through 

line 36 of Form 1040. Then figure itemized deductions on Schedule 

A.

POTENTIAL

PITFALLS

Entering an incorrect 

standard deduction 

amount is a frequently 

made error on tax 

returns. Take care 

to report the correct 

standard deduction 

amount.
4-4 Lesson 4

BASIC

Medical and Dental Expenses

Claim medical and dental expenses paid in 2003 on lines 1 through 

4 of Schedule A. Include expenses incurred for:

■ the taxpayer and spouse,

■ dependents claimed on the return, and

■ others who could have been claimed as dependents except that 

they had gross income of $3,050 or more, or they filed a joint 

return.

If a child of divorced or separated parents is claimed as a dependent on either parent’s return, each parent may deduct the medical 

expenses that he or she pays for the child.

Deductible expenses include:

■ Prescription medicines and drugs (including insulin)

■ Medical, dental, and nursing care, including amounts paid for 

unreimbursed qualified long-term care services

■ Medical and hospital insurance premiums, including amounts 

paid for eligible long-term care (subject to certain limitations 

based on the insured person’s age — see Exhibit 2, next page.)

■ Prescription eyeglasses, hearing aids, crutches, wheelchairs, 

braces, and guide dogs

■ Transportation for medical care at 12 cents a mile, or actual 

out-of-pocket expenses, plus parking fees and tolls

■ Certain lodging expenses

■ Certain home improvements made for medical care purposes or 

to make the home suitable for a disabled person

■ Medicare A premiums for persons not enrolled in Social 

Security

■ Medicare B

■ Certain weight-loss programs to treat disease diagnosed by a 

physician, including obesity

■ Unreimbursed costs of smoking-cessation programs, including the cost of prescription drugs designed to alleviate nicotine 

withdrawal

■ Expenses for admission and transportation to a medical conference relating to the chronic disease of a dependent (if the costs 

are primarily for and essential to the medical care of the dependent).

Total medical and dental expenses must exceed 7.5 percent of a 

taxpayer’s adjusted gross income ( Form 1040, line 35) for Schedule 

A deduction.

POTENTIAL

PITFALLS

Explain to taxpayers that 

they can only deduct 

expenses in the year 

they are paid. They 

cannot deduct expenses 

that are owed but not 

paid.

ALERT

The standard mileage 

rate for operating a 

vehicle for medical transportation is 12 cents a 

mile.
Lesson 4 4-5

BASIC

Nondeductible expenses include:

■ Medical expenses paid from a medical savings account (MSA). 

[Refer taxpayers with MSAs to Publication 969, Medical

Savings Accounts (MSAs), Publication 502, Medical and Dental 

Expenses, and a paid professional tax preparer.]

■ Payroll tax paid for Medicare A

■ Life insurance policy premiums

■ Babysitting, child care, and nursing care for a healthy baby

■ Illegal drugs

■ Nonprescription drugs or medicines

■ The cost of purchasing diet food items

■ Nonprescription nicotine gum and patches designed to stop 

smoking

■ Funeral, burial, or cremation costs

■ Unnecessary cosmetic surgery (surgery that does not correct a 

congenital abnormality or an abnormality caused by injury or 

disease)

■ Income protection policies, including nursing home policy premiums, if the policy ensures a maximum out-of-pocket expense per 

day

■ Meals and lodging while attending a medical conference relating to the chronic disease of a dependent.

Eligible Long-Term Care Premiums

Exhibit 2

IF the person was, at

the end of 2003, age . . . 

THEN the most you 

may deduct is . . . 

40 or under $250

41-50 $470

51-60 $940

61-70 $2,510

71 or older $3,130

These figures should always be checked against the figures in the 

instructions for the Form 1040, Schedule A.
4-6 Lesson 4

BASIC

Exercise 2

Sam and Paula Ferris file a joint return. Sam’s social security 

number is 000-00-8612. Their adjusted gross income is $40,000. 

They paid the following medical bills:

 Unreimbursed doctor’s bills $ 500

 Unreimbursed orthodontist bill for braces 1,200

 Hospital insurance premiums 300

 Life insurance premiums 500

 Unreimbursed prescription medicines 100

 Vitamins 70

 Hospital bill (before deducting $1,000)

 reimbursed by insurance company) 2,000

 Smoking cessation program 150

Complete the Medical and Dental Expenses section of Schedule A 

for the Ferris family.

SCHEDULES A&B OMB No. 1545-0074 Schedule A—Itemized Deductions

(Form 1040) (Schedule B is on back)

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.  See Instructions for Schedules A and B (Form 1040).

Attachment

Sequence No. 07

Name(s) shown on Form 1040 Your social security number

Medical Caution. Do not include expenses reimbursed or paid by others.

and

Dental

Expenses

1 Medical and dental expenses (see page A-2) 1

2 2

3 Multiply line 2 by 7.5% (.075) 3

4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- 4

Enter amount from Form 1040, line 35

(99)

2003

Exhibit 3 Schedule A

Taxes

To be deductible, a tax must be imposed on and paid by the 

taxpayer. Taxpayers cannot deduct:

■ a tax that they do not owe, but pay for someone else,

■ a tax that they owe, but someone else pays, or

■ a tax that was not paid in 2003.

Report deductible taxes on lines 5 through 9 of Schedule A.

State, Local, and Foreign Income Taxes — Taxpayers can 

deduct income taxes paid to a state or local government or to a 

foreign government or tax any of its subdivisions. These taxes 

include tax withheld, estimated tax payments, and taxes paid in 

2003 for an earlier year.

Real Estate Taxes — State, local, or foreign taxes on real property, such as the taxpayer’s house or land, are deductible. Real 

estate taxes are deductible when paid. If the taxes are paid with a 

mortgage payment and held in escrow, do not deduct the taxes until 

they are paid by the bank or mortgage lender.
Lesson 4 4-7

BASIC

Assessments to pave a street or install lighting or a sewer generally are not deductible.

Personal Property Tax — Taxes that state and local governments charge on the value of personal property are deductible. A 

portion of the cost of personal vehicle registration may fall in this 

category.

Nondeductible Taxes — Many federal, state, and local government taxes are not deductible. The following taxes are not deductible:

■ General sales tax

■ Federal taxes-income tax, social security (FICA), Medicare, railroad retirement tax, gift tax, and excise taxes or customs duties

■ Hunting licenses and dog licenses

■ Water and sewer taxes

■ Taxes on alcoholic beverages, cigarettes, and tobacco

■ State, local, and federal taxes on gasoline, diesel, and other 

motor fuels used in a nonbusiness vehicle

■ Utility taxes — telephone, gas, electricity, etc.

Interest

Interest is the amount that is paid in order to borrow money. Only 

taxpayers who are legally liable for the debt can deduct the interest 

in the year it is paid or accrued. Interest expenses are reported on 

lines 10 through 14 of Schedule A.

Home Mortgage Interest — The amount of mortgage interest 

that a taxpayer can deduct depends on the:

■ date of the loan,

■ amount of the loan, and

■ use of the proceeds of the loan.

If the mortgage debt was incurred on or before October 13, 

1987, and was secured by a main or second home, the interest on 

that debt is fully deductible, regardless of the amount of the loan or 

the use of the loan proceeds.

If the mortgage debt was incurred after October 13, 1987,

and was secured by a main or second home, the interest is fully 

deductible if:

■ the loans plus any grandfathered debt do not exceed $1 million 

($500,000 if married filing separate returns), and

■ the proceeds were used to buy, build, or improve the home or 

homes.

SPECIAL

POPULATIONS

Members of the clergy 

and military personnel 

can deduct real estate 

taxes even if they 

receive a housing 

allowance that is 

excluded from income. 

Also, they can deduct 

allowable mortgage 

interest even if the 

interest was paid from 

a nontaxable housing 

allowance.
4-8 Lesson 4

BASIC

In addition to loans used to buy, build, or improve a main or second 

home, taxpayers can deduct interest on other loans secured by a 

main or second home, regardless of the use of the proceeds, if:

■ the total of these loans does not exceed $100,000 ($50,000 if 

married filing separate returns), and

■ the total amount of the secured debt is not more than the 

home’s fair market value minus any outstanding acquisition 

debt and any grandfathered debt on the home.

Points. Certain charges paid by a borrower and/or a seller to a 

lender to secure a loan are called points. They are also called loan 

origination fees (including VA and FHA loan origination fees), maximum loan charges, premium charges, loan discount, or discount 

points.

Points paid only for the use of money are considered prepaid interest. This interest, even if it qualifies as home mortgage interest, 

must be spread over the life of the mortgage and is considered paid 

and deductible over that period unless it meets the following exception.

Exception. A taxpayer may fully deduct points in the year he or 

she pays them only if all of the following conditions apply.

■ The taxpayer itemizes deductions.

■ The taxpayer’s loan is secured by his or her main home. (The 

main home is the one the taxpayer lives in most of the time.)

■ Paying points is an established business practice in the area 

where the loan was made.

■ The points paid were not more than the points generally 

charged in that area.

■ The taxpayer uses the cash method of accounting. (The cash 

method means that the taxpayer reports income in the year 

received and deducts expenses in the year paid.)

■ The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as 

appraisal fees, inspection fees, title fees, attorney fees, and property taxes.

■ The taxpayer uses his or her loan to buy or build his or her 

main home.

■ The points were computed as a percentage of the principal 

amount of the mortgage.

■ The amount is clearly shown on the settlement statement (such 

as Form HUD-1) as points charged for the mortgage.

■ The points may be shown as paid from either the taxpayer’s or 

the seller’s funds.
Lesson 4 4-9

BASIC

■ The funds the taxpayer provided at or before closing, plus 

any points the seller paid, were at least as much as the points

charged. The funds the taxpayer provided do not have to have 

been applied to the points. They can include a down payment, 

an escrow deposit, earnest money, and other funds the taxpayer 

paid at or before closing for any purpose. The taxpayer cannot 

have borrowed these funds from his or her lender or mortgage

broker.

Charges by the lender for specific services, such as appraisal fees, 

preparation costs, VA funding fees, or notary fees, may be called 

points. However, these charges are not considered interest and are 

not deductible.

Points paid by the seller are deductible as interest by the buyer.

Points paid to refinance a mortgage are generally not deductible 

in full in the year the taxpayer paid them (unless they are paid 

in connection with the improvement of a main home and the first 

seven statements, discussed earlier under Exception, are true).

Points paid in excess of those generally charged in the area and 

points paid to refinance a mortgage can be deducted over the life of 

the mortgage. Deduct points reported to the taxpayer on Form 1098 

on line 10 of Schedule A ( Form 1040). Deduct points not reported to 

the taxpayer on Form 1098 on line 12 of Schedule A ( Form 1040).

Investment Interest. Interest that is paid on money borrowed 

to buy or carry property held for investment is called investment

interest. Taxpayers with investment interest expense that exceeds 

investment income (interest and ordinary dividend income) should 

see a paid professional tax preparer.

Interest that cannot be deducted. Interest that cannot be 

deducted includes:

■ Interest on car loans where the car is used for personal use and 

other personal loans,

■ Credit investigation fees,

■ Loan fees; aid for services necessary to get a loan,

■ Interest on a debt the taxpayer is not legally liable to pay, and

■ Finance charges on credit card purchases of personal items.

POTENTIAL

PITFALLS

Personal interest 

cannot be claimed as 

an itemized deduction. 

Personal interest 

includes interest 

on car loans, credit 

card balances, and 

installment plan loans 

that are incurred for 

personal use or for 

personal expenses.
4-10 Lesson 4

BASIC

Exercise 3

John and Shannon file a joint return. During the year, they paid 

the bank $2,180 of interest on their home mortgage that was 

reported to them on Form 1098 (all qualified), $400 in credit 

card interest, $300 on installment loan, and $2,000 on a car loan. 

Complete the Interest You Paid section of Schedule A for John and 

Shannon.

Proof as of

ly 21, 2003

to change)

Interest 10 Home mortgage interest and points reported to you on Form 1098

You Paid

10

Home mortgage interest not reported to you on Form 1098. If paid

to the person from whom you bought the home, see page A-3

and show that person’s name, identifying no., and address 

11

(See

page A-3.)

11

12

Points not reported to you on Form 1098. See page A-3

for special rules

12

13 Investment interest. Attach Form 4952 if required. (See

page A-3.) 13

14 Add lines 10 through 13 14

Note.

Personal

interest is

not

deductible.

Exhibit 4 Schedule A

Contributions

Taxpayers can deduct contributions to organizations that are:

■ Organized and operated exclusively for religious, charitable, 

educational, scientific, or literary purposes,

■ Organizations that work to prevent cruelty to children or animals, and

■ Organizations that foster national or international amateur 

sports competition if they do not provide athletic facilities or 

equipment.

To be deductible, contributions must be made to an organization, 

not an individual. Qualifying organizations include:

■ Churches, synagogues, temples, mosques, Salvation Army, 

Red Cross, CARE, United Way, Boy Scouts, Girl Scouts, World 

Wildlife Fund, etc.,

■ Fraternal orders (if used for the purposes listed above),

■ Nonprofit schools and hospitals,

■ Nonprofit medical research organizations,

■ Veterans’ groups and certain cultural groups, and

■ Federal, state, and local governments (if the gifts are exclusively 

for public purposes).

Nonqualifying organizations include:

■ Business organizations, such as the Chamber of Commerce,

■ Civic leagues and associations,
Lesson 4 4-11

BASIC

■ Political organizations and candidates,

■ Social clubs,

■ Foreign organizations,

■ Homeowners’ associations, and

■ Communist organizations.

Deductible items include:

■ Money gifts,

■ Dues, fees, and assessments paid to qualified organizations 

above the value of the benefits received (not country clubs or 

other social organizations),

■ Fair market value of used clothing, furniture,

■ Cost and upkeep of uniforms that have no general use but must 

be worn while performing donated services,

■ Unreimbursed transportation expenses that relate directly 

to the services the taxpayer gave the qualified organization, 

including bus fare, parking fees, tolls, and either the actual cost 

of gas and oil or a standard mileage charge of 14 cents per mile, 

and

■ The part of a contribution above the fair market value for items 

such as merchandise and tickets to charity balls or sporting 

events.

Nondeductible items include:

■ Cost of raffle, bingo, or lottery tickets,

■ Tuition,

■ Value of a person’s time or service,

■ Blood donated to a blood bank or the Red Cross,

■ Car depreciation, insurance, general repairs, or maintenance,

■ Direct contributions to an individual,

■ Sickness or burial expenses for members of a fraternal society, 

and

■ The part of a contribution that personally benefits the taxpayer 

(such as the fair market value of the meal eaten at a charity 

dinner).

Report cash and check contributions on Schedule A, line 15. 

Contributions other than cash or check are entered on line 16. 

Taxpayers with noncash contributions exceeding $500 should see a 

paid professional tax preparer. 

The taxpayer must keep records to prove the amount of the cash 

and noncash contributions he or she makes during the year. 

POTENTIAL

PITFALLS

If the taxpayer makes 

a contribution to a 

qualifying organization 

that is more than 

$75 and is partly for 

goods or services, the 

qualifying organization 

must give the taxpayer 

a written statement. 

For more information, 

see Publication 526, 

Charitable Contributions.
4-12 Lesson 4

BASIC

A taxpayer can claim a deduction for any single contribution of 

$250 or more only if he or she has a written acknowledgment of 

the contribution from the qualifying organization. You do not have 

to see the written acknowledgement, but you should ask the taxpayer if they have one.

Exercise 4

Rose contributed $600 to St. Martin’s Church (church gave letter verifying amount). $32 to the Girl Scouts, and $40 to a family 

whose house burned. She purchased $50 worth of lottery tickets 

and spent $100 playing bingo at her church. She donated used 

furniture with a fair market value of $200 to Goodwill.

Complete the Gifts to Charity section of Schedule A for Rose.

July

(subject to

g

Gifts to 

Charity 15

15 Gifts by cash or check. If you made any gift of $250 or

more, see page A-4

16

Other than by cash or check. If any gift of $250 or more,

see page A-4. You must attach Form 8283 if over $500

16

17 Carryover from prior year 17

18 Add lines 15 through 17 18

If you made a

gift and got a

benefit for it,

see page A-4.

Exhibit 5 Schedule A

Casualty and Theft Losses

A casualty occurs when property is damaged as a result of a sudden, unexpected, or unusual event such as fire, storm, shipwreck, 

flood, earthquake, or automobile accident. Theft is the unlawful taking and removing of money or property with the intent to 

deprive the owner of it. Theft does not include the mere disappearance of money or property.

A casualty or theft may result in a gain if the insurance proceeds 

or other reimbursements exceed the adjusted basis of destroyed or 

stolen property.

Usually, however, a casualty or theft results in a loss. Part of a 

casualty or theft loss may be deductible if the taxpayer can prove 

that the casualty or theft occurred to property that the taxpayer 

owned. The taxpayer must also prove the dollar amount of the loss.

Miscellaneous Itemized Deductions

Certain employee expenses, expenses of producing income, and 

other qualifying expenses are reported as miscellaneous itemized 

deductions on Schedule A. Miscellaneous itemized deductions that 

exceed 2% of adjusted gross income are deductible. There are some 

miscellaneous itemized deductions that are deductible, regardless 

of a taxpayer’s adjusted gross income.
Lesson 4 4-13

BASIC

Examples of deductions that are subject to the 2% limit and that 

are reported on lines 20 through 26 of Schedule A are:

■ Union dues and fees,

■ Professional society dues,

■ Uniforms not adaptable to general use,

■ Small tools and supplies,

■ Professional books, magazines, journals,

■ Employment-related educational expenses,

■ Expenses of looking for a new job,

■ Investment counsel fees,

■ Investment expenses,

■ Tax counsel and assistance,

■ Fees paid to an IRA custodian, and

■ Safe deposit box rental for investment documents.

■ Unrecovered after-tax pension contributions (see Lesson 13).

Examples of deductions that are not subject to the 2% limit and 

that are reported on line 27 of Schedule A are: 

■ Gambling losses to the extent of gambling winnings, and

■ Work-related expenses for an individual with a disability, such 

as attendant-care services at the individual’s place of work, that 

are necessary for the person to work.

Nondeductible expenses include:

■ Burial or funeral expenses,

■ Wedding expenses,

■ Fees and licenses, such as car and marriage licenses and dog 

tags,

■ Fines and penalties, such as parking tickets,

■ Home repairs, insurance, and rent,

■ Illegal bribes and kickbacks,

■ Insurance premiums (except medical insurance premiums),

■ Losses from the sale of a taxpayer’s home, furniture, or personal 

car,

■ Lost or misplaced cash or property,

■ Personal legal expenses, and

■ Commuting expenses to and from work.
4-14 Lesson 4

BASIC

Exercise 5

Robert is a janitor. His adjusted gross income is $20,000. He wants 

to deduct the following items on his tax return:

 2003 income tax preparation fee $ 100

 Safe deposit box rental (used to keep bonds) 75

 Life insurance premiums 300

 Investment expenses 70

 Loss on sale of personal home 800

 Investment journals and newsletters 250

 Investment advisory fees 200

 Attorney fees for preparation of will 100

Complete Robert’s Schedule A, line 20 through 26.

Unreimbursed employee expenses—job travel, union

dues, job education, etc. You must attach Form 2106

or 2106-EZ if required. (See page A-5.) 

Job Expenses 20

and Most

Other

Miscellaneous

Deductions

22 Other expenses—investment, safe deposit box, etc. List

type and amount 

(See

page A-5 for

expenses to

deduct here.)

23 Add lines 20 through 22

24 Enter amount from Form 1040, line 35

25 Multiply line 24 by 2% (.02)

26 Subtract line 25 from line 23. If line 25 is more than line 23, enter -0- 26

Other 27 Oth f li t A 6 Li t t d t 

24

20

22

23

25

21 Tax preparation fees 21

Exhibit 6 Schedule A

TOTAL ITEMIZED DEDUCTIONS

Schedule A, line 28, is Total Itemized Deductions. It is the sum of 

lines 4, 9, 14, 18, 19, 26, and 27.

Compare the amount on line 28 to the standard deduction, and 

enter the larger of the two on Form 1040, line 38.
Lesson 4 4-15

BASIC

Exercise 6

Seth A. and Karen Yale’s adjusted gross income is $28,000. 

Seth’s social security number is 000-00-1039. They gave you a 

list of their itemized deductions. They received no insurance 

reimbursement for medical expenses. They purchased their home 

in 1989, and a commercial mortgage company holds the mortgage. 

They have not refinanced the mortgage or increased the principal 

balance since they bought their home. They are both under age 65 

and not blind. Neither can be claimed as a dependent by another 

taxpayer.

Unreimbursed medical expenses:

 Medical insurance premiums $480

 Hospital 600

 Doctors and dentists 820

 Vitamins 75

 Prescription drugs 300

 Insulin 120

Taxes:

 State income tax $1,200

 Federal income tax 2,400

 Real estate tax 780

Interest:

 Interest on mortgage (reported on Form 1098) $4,500

 Car loan 900

 Credit cards 102

Contributions:

 Church (gave Yales’ letter verifying this amount) $850

 Bingo costs 60

 American Cancer Society 130

 Canned goods donated to a food drive 15

 Fair market value of donated used clothing 60

Miscellaneous:

 Union dues $90

 IRA custodial fee 10

 Traffic fine 70

 Investment expenses 20

Complete Seth and Karen’s Schedule A.
4-16 Lesson 4

BASIC

Proof as of

July 21, 2003

(subject to change)

SCHEDULES A&B OMB No. 1545-0074 Schedule A—Itemized Deductions

(Form 1040) (Schedule B is on back)

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.  See Instructions for Schedules A and B (Form 1040).

Attachment

Sequence No. 07

Name(s) shown on Form 1040 Your social security number

Medical Caution. Do not include expenses reimbursed or paid by others.

and

Dental

Expenses

1 Medical and dental expenses (see page A-2) 1

2 2

3 Multiply line 2 by 7.5% (.075) 3

4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- 4

Taxes You 5 State and local income taxes 5

Paid 6 Real estate taxes (see page A-2) 6

8 Other taxes. List type and amount 

(See

page A-2.)

8

9 Add lines 5 through 8 9

Interest 10 Home mortgage interest and points reported to you on Form 1098

You Paid

10

Home mortgage interest not reported to you on Form 1098. If paid

to the person from whom you bought the home, see page A-3

and show that person’s name, identifying no., and address 

11

(See

page A-3.)

11

12

Points not reported to you on Form 1098. See page A-3

for special rules

12

13 Investment interest. Attach Form 4952 if required. (See

page A-3.) 13

14 Add lines 10 through 13 14

Gifts to 

Charity 15

15 Gifts by cash or check. If you made any gift of $250 or

more, see page A-4

16

Other than by cash or check. If any gift of $250 or more,

see page A-4. You must attach Form 8283 if over $500

16

17 Carryover from prior year 17

18 Add lines 15 through 17 18

19 Casualty or theft loss(es). Attach Form 4684. (See page A-5.)

Casualty and 

Theft Losses 19

Unreimbursed employee expenses—job travel, union

dues, job education, etc. You must attach Form 2106

or 2106-EZ if required. (See page A-5.) 

Job Expenses 20

and Most

Other

Miscellaneous

Deductions

22 Other expenses—investment, safe deposit box, etc. List

type and amount 

(See

page A-5 for

expenses to

deduct here.)

23 Add lines 20 through 22

24 Enter amount from Form 1040, line 35

25 Multiply line 24 by 2% (.02)

26 Subtract line 25 from line 23. If line 25 is more than line 23, enter -0- 26

Other 27 Other—from list on page A-6. List type and amount  

Miscellaneous

Deductions 27

Total 28

Itemized

Deductions 28

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule A (Form 1040) 2003

24

20

22

23

If you made a

gift and got a

benefit for it,

see page A-4.

25

Enter amount from Form 1040, line 35

No. Your deduction is not limited. Add the amounts in the far right column

for lines 4 through 27. Also, enter this amount on Form 1040, line 37.

Yes. Your deduction may be limited. See page A-6 for the amount to enter.

Cat. No. 11330X



Note.

Personal

interest is

not

deductible.



7 Personal property taxes 7

21 Tax preparation fees 21

Is Form 1040, line 35, over $139,500 (over $69,750 if married filing separately)?

(99)

2003

Exhibit 7 Schedule A
Lesson 4 4-17

BASIC

TAXABLE INCOME COMPUTATION

Once you have determined the standard deduction, compare it to 

the total itemized deductions. In most cases, you will enter the 

larger of the two amounts on Form 1040, line 37. Subtract line 

37 from line 35 and enter the result on line 38. Then subtract the 

exemption deduction (line 39) to compute the taxable income.

If the taxpayer has capital gain distributions that are reported 

directly on Form 1040 or Form 1040A, the taxpayer should use the 

Capital Gain Tax Worksheet to determine if the tax is less.

The taxpayer should:

■ Check the box next to line 13a, Form 1040 and

■ Use the Capital Gain Tax Worksheet (Exhibit 8) from either the 

Form 1040A or 1040 instruction booklet to compute tax.

Example 3

Marjorie is a single taxpayer with taxable income of $46,250. She 

files Form 1040 and does not have to file a Schedule D. In 2003, she 

received capital gain distributions of $798 from XYZ Investments. 

Marjorie pays less tax by using Capital Gain Tax Worksheet 

(Exhibit 8).
4-18 Lesson 4

BASIC

Draft as of

08/27/2003

Qualified Dividends and Capital Gain Tax Worksheet—Line 41 Keep for Your Records

Before you begin:  Be sure you do not have to file Schedule D (see the instructions for Form 1040, line 13a, that

begin on page 23).  Be sure you checked the box on line 13a of Form 1040.

1. Enter the amount from Form 1040, line 40 .............................. 1.

2. Enter the amount from Form 1040, line 9b ............. 2.

3. Enter the amount from Form 1040, line 13a ............ 3.

4. Add lines 2 and 3 .............................. 4.

5. If you are claiming investment interest expense on Form

4952, enter the amount from line 4g; otherwise enter -0- . . . 5.

6. Subtract line 5 from line 4. If zero or less, enter -0- ....................... 6.

7. Subtract line 6 from line 1. If zero or less, enter -0- ....................... 7.

8. Enter the smaller of:

• The amount on line 1 or

• $56,800 if married filing jointly or qualifying widow(er), } ........... 8.

$28,400 if single or married filing separately, or

$38,050 if head of household.

9. Is the amount on line 7 equal to or more than the amount on line 8?

 Yes. Skip lines 9 through 15; go to line 16 and check the ‘‘No’’ box.

No. Enter the amount from line 7 ................................ 9.

10. Subtract line 9 from line 8 ......................................... 10.

11. Add Form 1040, line 13b, and line 2 above ............ 11.

12. Enter the smaller of line 10 or line 11 ................................ 12.

13. Multiply line 12 by 5% (.05) ....................................................... 13.

14. Subtract line 12 from line 10. If zero, go to line 16 ........................ 14.

15. Multiply line 14 by 10% (.10) ...................................................... 15.

16. Are the amounts on lines 6 and 10 the same?

 Yes. Skip lines 16 through 25; go to line 26.

No. Enter the smaller of line 1 or line 6 ........................... 16.

17. Enter the amount from line 10 (if line 10 is blank, enter -0-) ................. 17.

18. Subtract line 17 from line 16 ....................................... 18.

19. Add Form 1040, line 13b, and line 2 above ............ 19.

20. Enter the amount from line 12 (if line 12 is blank, enter -0-) 20.

21. Subtract line 20 from line 19 ...................... 21.

22. Enter the smaller of line 18 or line 21 ................................ 22.

23. Multiply line 22 by 15% (.15) ...................................................... 23.

24. Subtract line 22 from line 18. If zero, go to line 26 ........................ 24.

25. Multiply line 24 by 20% (.20) ...................................................... 25.

26. Figure the tax on the amount on line 7. Use the Tax Table or Tax Rate Schedules, whichever applies..... 26.

27. Add lines 13, 15, 23, 25, and 26 ..................................................... 27.

28. Figure the tax on the amount on line 1. Use the Tax Table or Tax Rate Schedules, whichever applies..... 28.

29. Tax on all taxable income. Enter the smaller of line 27 or line 28 here and on Form 1040, line 41 ..... 29.

- 35 - Need more information or forms? See page 7.

Exhibit 8 Marjorie’s Qualified Dividends Capital Gain Tax Worksheet

46,250

0

798

798

0

798

45,452

28,400

798

0

798

0

0

0

0

798

0

160

8,179

8,339

8,379

8,339
Lesson 4 4-19

BASIC

FINDING THE TAX

Taxpayers with taxable income of less than $100,000 use the Tax 

Table to find their tax. However, children under 14 years of age 

who have more than $1,500 of investment income (interest, dividends, etc.) might not be able to use the Tax Table. Their income 

might have to be taxed at the parents’ tax rate. These taxpayers 

should be referred to a paid professional tax preparer.

The Tax Table is in the back of this book. The tax is based on the 

person’s filing status and taxable income. To find the tax, use the 

taxable income from the tax forms (1040EZ, line 6; 1040A, line 

27; and 1040, line 40), and:

■ locate the income bracket for the taxable income,

■ read across that line until you reach the column for the appropriate filing status, and

■ find the amount where the taxable income and filing status 

meet. This is the tax liability.

If the taxable income is the same as the ending amount in an 

income bracket, go to the next bracket to find the tax.

Qualifying widows(ers) use the married filing jointly column.

Enter the tax on Form 1040EZ, line 10, Form 1040A, line 28, or 

Form 1040, line 41.

Double check the amount entered. Common errors include:

■ Using the wrong standard deduction,

■ Incorrectly figuring the exemption amount,

■ Using an amount other than taxable income to find the tax,

■ Picking up the wrong number from the Tax Table, and

■ Transposing the numbers when entering the tax amount.

 TAXWISE HINT

If a taxpayer wants to determine whether the standard or itemized deduction is best for him or her, input Schedule A information. 

TaxWise will automatically select the deduction that is more beneficial. 
4-20 Lesson 4

BASIC

  SUMMING UP THIS LESSON  

Both the standard deduction (or total itemized deductions, if 

greater) and exemption amounts are subtracted from adjusted

gross income to arrive at taxable income.

The standard deduction depends upon: 

 filing status, 

 age, eyesight, and 

 whether the taxpayer can be claimed as a dependent on 

 another taxpayer’s return.

Determine the standard deduction by using the:

 Standard Deduction amount for the appropriate filing status 

 from the appropriate tax form,

 Standard Deduction Chart for People Age 65 or Older or 

 Blind, or

 Standard Deduction Worksheet for Dependents

Itemized deductions are specifically allowed by law. Claim itemized deductions on Schedule A ( Form 1040).

Itemized deductions include:

 Medical and dental expenses

 Taxes paid

 Home mortgage and certain investment interest paid

 Charitable contributions

 Casualty and theft losses

 Miscellaneous itemized deductions.

Medical and dental expenses that exceed 7.5 percent of adjusted

gross income are deductible.

To be deductible as a charitable contribution, a donation of $250 

or more must be acknowledged in writing by the charitable organization that received the donation.

Most miscellaneous itemized deductions that exceed 2% of 

adjusted gross income are deductible. However, there are certain miscellaneous itemized deductions that are fully deductible, 

regardless of gross income.

If deducted investment interest expense exceeds investment 

income, refer the taxpayer to a paid professional tax preparer.

If you are uncertain whether an expense qualifies as a deduction, do not guess. Refer the taxpayer to a paid professional tax 

preparer.
Lesson 4 4-21

BASIC

  SUMMING UP THIS LESSON  

(continued)

Most taxpayers compare their total itemized deductions to their 

standard deduction and enter the larger amount on Form 1040, 

line 37.

Do not use the Tax Table for taxpayers with taxable income of 

$100,000 or more

Common errors include:

 Using the wrong standard deduction,

 Incorrectly figuring the exemption amount, 

 Using an amount other than taxable income to find the tax,

 Picking up the wrong number from the Tax Table, and

 Transposing the numbers when entering the tax amount.

Lesson 4
4-22 Lesson 4

BASIC

Lesson 4

STUDENT NOTES
Lesson 4 4-23

BASIC

STANDARD AND ITEMIZED

DEDUCTIONS AND TAX

COMPUTATION ANSWERS TO EXERCISES

Exercise 1

(A) $7,000

(B) $5,900

(C) $10,450

(D) $5,700

(E) $4,750

(F) $1,750

SCHEDULES A&B OMB No. 1545-0074 Schedule A—Itemized Deductions

(Form 1040) (Schedule B is on back)

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.  See Instructions for Schedules A and B (Form 1040).

Attachment

Sequence No. 07

Name(s) shown on Form 1040 Your social security number

Medical Caution. Do not include expenses reimbursed or paid by others.

and

Dental

Expenses

1 Medical and dental expenses (see page A-2) 1

2 2

3 Multiply line 2 by 7.5% (.075) 3

4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- 4

5

Enter amount from Form 1040, line 35

(99)

2003

Sam and Paula Fordham 000 00 8612

40,000

3,250

3,000

250

Exercise 2 Sam and Paula’s Schedule A

Proof as of

uly 21, 2003

t to change)

9 Add lines 5 through 8 9

Interest 10 Home mortgage interest and points reported to you on Form 1098

You Paid

10

Home mortgage interest not reported to you on Form 1098. If paid

to the person from whom you bought the home, see page A-3

and show that person’s name, identifying no., and address 

11

(See

page A-3.)

11

12

Points not reported to you on Form 1098. See page A-3

for special rules

12

13 Investment interest. Attach Form 4952 if required. (See

page A-3.) 13

14 Add lines 10 through 13 14

Note.

Personal

interest is

not

deductible.

2,180

2,180

Exercise 3 John and Shanon’s Schedule A

Lesson 4
4-24 Lesson 4

BASIC

STANDARD AND ITEMIZED

DEDUCTIONS AND TAX

COMPUTATION ANSWERS TO EXERCISES

Exercise 4

Line 15 $632

Line 16 $200

Line 18 $832

Theft Losses 9 C y ( ) (S p g ) 19

Unreimbursed employee expenses—job travel, union

dues, job education, etc. You must attach Form 2106

or 2106-EZ if required. (See page A-5.) 

Job Expenses 20

and Most

Other

Miscellaneous

Deductions

22 Other expenses—investment, safe deposit box, etc. List

type and amount 

(See

page A-5 for

expenses to

deduct here.)

23 Add lines 20 through 22

24 Enter amount from Form 1040, line 35

25 Multiply line 24 by 2% (.02)

26 Subtract line 25 from line 23. If line 25 is more than line 23, enter -0- 26

Other 27 Oth f li t A 6 Li t t d t 

24

20

22

23

25

21 Tax preparation fees 21 100

595

695

400

295

20,000

Exercise 5 Robert’s Schedule A
Lesson 4 4-25

BASIC

STANDARD AND ITEMIZED

DEDUCTIONS AND TAX

COMPUTATION ANSWERS TO EXERCISES

Proof as of

July 21, 2003

(subject to change)

SCHEDULES A&B OMB No. 1545-0074 Schedule A—Itemized Deductions

(Form 1040) (Schedule B is on back)

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.  See Instructions for Schedules A and B (Form 1040). Attachment

Sequence No. 07

Name(s) shown on Form 1040 Your social security number

Medical Caution. Do not include expenses reimbursed or paid by others.

and

Dental

Expenses

1 Medical and dental expenses (see page A-2) 1

2 2

3 Multiply line 2 by 7.5% (.075) 3

4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- 4

Taxes You 5 State and local income taxes 5

Paid 6 Real estate taxes (see page A-2) 6

8 Other taxes. List type and amount 

(See

page A-2.)

8

9 Add lines 5 through 8 9

Interest 10 Home mortgage interest and points reported to you on Form 1098

You Paid

10

Home mortgage interest not reported to you on Form 1098. If paid

to the person from whom you bought the home, see page A-3

and show that person’s name, identifying no., and address 

11

(See

page A-3.)

11

12

Points not reported to you on Form 1098. See page A-3

for special rules

12

13 Investment interest. Attach Form 4952 if required. (See

page A-3.) 13

14 Add lines 10 through 13 14

Gifts to 

Charity 15

15 Gifts by cash or check. If you made any gift of $250 or

more, see page A-4

16

Other than by cash or check. If any gift of $250 or more,

see page A-4. You must attach Form 8283 if over $500

16

17 Carryover from prior year 17

18 Add lines 15 through 17 18

19 Casualty or theft loss(es). Attach Form 4684. (See page A-5.)

Casualty and 

Theft Losses 19

Unreimbursed employee expenses—job travel, union

dues, job education, etc. You must attach Form 2106

or 2106-EZ if required. (See page A-5.) 

Job Expenses 20

and Most

Other

Miscellaneous

Deductions

22 Other expenses—investment, safe deposit box, etc. List

type and amount 

(See

page A-5 for

expenses to

deduct here.)

23 Add lines 20 through 22

24 Enter amount from Form 1040, line 35

25 Multiply line 24 by 2% (.02)

26 Subtract line 25 from line 23. If line 25 is more than line 23, enter -0- 26

Other 27 Other—from list on page A-6. List type and amount  

Miscellaneous

Deductions 27

Total 28

Itemized

Deductions 28

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule A (Form 1040) 2003

24

20

22

23

If you made a

gift and got a

benefit for it,

see page A-4.

25

Enter amount from Form 1040, line 35

No. Your deduction is not limited. Add the amounts in the far right column

for lines 4 through 27. Also, enter this amount on Form 1040, line 37.

Yes. Your deduction may be limited. See page A-6 for the amount to enter.

Cat. No. 11330X



Note.

Personal

interest is

not

deductible.



7 Personal property taxes 7

21 Tax preparation fees 21

Is Form 1040, line 35, over $139,500 (over $69,750 if married filing separately)?

(99)

2003

Seth and Karen Yale 000 00 1039

28,000

2,320

2,100

220

4,500

4,500

30

560

0

20,000

1,200

780

1,980

980

75

1,055

90

120

Exercise 6 Schedule A
4-26 Lesson 4

BASIC

STUDENT NOTES
Lesson 4

Military Segment M-4-1

TRAVEL EXPENSES Lesson 4

Military Segment

INTRODUCTION AND OBJECTIVES

This segment identifies and explains how to apply the rules 

concerning travel and transportation expenses for members of the 

Armed Forces.

When we have concluded this segment you will be able to identify 

travel and transportation expenses (including meals) deductible by 

Armed Forces personnel. 

GENERAL INFORMATION

Fully reimbursed employee business expenses, such as travel and 

transportation expenses, generally are not reported on your tax 

return if an adequate accounting is made to the employer and any 

excess reimbursement is required to be returned to the employer. 

Armed Forces employees must substantiate their expenses to the 

federal government and return any excess reimbursement. The 

records must be adequate and complete. Adequate records include 

documents such as receipts and checks, account books, diaries, trip 

sheets, or similar items. To be considered adequate, the records 

should show the business purpose, time, place, and amount of the 

expense. If automobile expenses are involved, the records must 

include the total miles driven and total business miles driven.

 FORM 1040

Deductible employee business expenses are reported generally on 

Form 2106, Employee Business Expenses, and can only be taken as 

an itemized deduction on Schedule A, Form 1040. Only expenses 

that exceed 2% of adjusted gross income (AGI) can be deducted.

Excess reimbursements for employee business expenses that are 

not returned to the employer must be included in income on line 7 

of Form 1040. These reimbursements do not include any “qualified 

military benefit,” such as per diem.

FORM W-2

If the employee is reimbursed under a plan that requires the 

employee to adequately account for all business connected expenses 

and return any funds that are more than the substantiated 

expenses, the reimbursement should not be included as income in 

Box 1 of Form W-2. Therefore, the employee cannot deduct these 

expenses.
Lesson 4 M-4-2 Military Segment

Temporary duty (TDY) and temporary additional duty (TAD) 

allowances for travel and transportation are not reported as income 

on Form W-2. If there are excess expenses on some trips and the 

employee wants to claim them as employee business expenses, the 

employee must report all TAD and TDY trip expenses incurred 

during the year on Form 2106 and include all TAD and TDY 

allowances received as reimbursements.

FORM 2106

To claim unreimbursed job related expenses, such as travel or 

transportation expenses, Armed Forces personnel must complete 

Form 2106 and attach it to their Form 1040. Form 2106 will not 

have to be used if the Armed Forces member is claiming only 

unreimbursed employee business expenses for professional dues, 

subscriptions to professional journals, educational expenses, and 

uniform expenses. These expenses are reported on line 20 on 

Schedule A as miscellaneous itemized deductions subject to the 2% 

AGI limit.

Example 1

Capt. Glendale traveled from his duty station in California to 

Washington, DC, for a conference. He was away for 5 days. The 

Army advanced Capt. Glendale $700 for the trip. Capt. Glendale’s 

actual expenses were $625. When he filed his travel voucher with 

the Army, he returned the excess of $75. The captain does not have 

to complete Form 2106.

Remember, if the Armed Forces member does not claim 

reimbursement for expenses that he or she is entitled to, no 

deduction for those expenses is allowed.

MEALS

The cost of meals can be an employee business expense. This 

includes meals while on business travel away from home and 

for business-related entertainment. The deduction for meals is 

generally limited to 50% of the actual expenses. 

The deduction is taken on Form 2106 where the 50% limit is 

applied before the amount is carried to line 20 on Schedule A where 

it is subject to the 2% AGI limit. 

If the employee is fully reimbursed for the meals under an 

accountable plan that excludes reimbursement from gross income, 

there is no amount to deduct and, therefore, no amount subject 

to the 50% limit. For information on using the standard meal 

allowance instead of actual expenses, see Publication 463, Travel, 

Entertainment, Gift, and Car Expenses.
Lesson 4

Military Segment M-4-3

TRAVEL EXPENSES

To be deductible, travel expenses must be ordinary and necessary 

expenses of traveling away from home temporarily for your job 

and must be greater than the total of any advances, allowances, 

and reimbursements you receive for such expenses. “Ordinary” 

expenses are customary or usual in the employee’s field, trade, 

business, or profession. “Necessary” expenses are appropriate or 

helpful in the employee’s job or business. Such expenses include 

airfares, the costs of operating and maintaining a car, and meals

and lodging. For a more complete list, see Publication 463.

Deductible travel expenses are reported on Form 2106 (or Form 

2106-EZ, if you qualify) and are deductible as a miscellaneous

itemized deduction on Schedule A of Form 1040.

Away From Home

For costs other than local transportation to be deductible, the traveler must be away from home. The term “away from home” has a 

special meaning for tax purposes. 

“Home,” for this purpose, generally is the taxpayer’s main place 

of business or post of duty. This includes the entire city or general area where his or her business or work is located, regardless 

of where the taxpayer or his or her family lives. For the military, 

“home” is the permanent duty station. A naval officer assigned to 

permanent duty aboard a ship that has regular eating and living 

facilities has a tax home aboard ship for travel expense purposes.

“Away from home” means away for a period substantially longer 

than an ordinary day’s work, during which taxpayers need time off 

for sleep or rest to meet the demands of work.

(For examples, see Traveling away from home in Publication 463.) 

Members of the Armed Forces are away from home if they are away 

from their permanent duty stations long enough to require significant rest or sleep in order to be able to conduct and complete their 

duties.

Note: Away from home assignments that last, or are realistically 

expected to last more than one year are not temporary in nature. 

Therefore, taxpayers cannot deduct travel expenses incurred while 

on an assignment of more than one year. See Publication 463, for 

more details.

No Deduction for Personal Expenses

For travel expenses to be deductible, there must be a work-related 

purpose for the travel. The taxpayer may not deduct expenses for 

personal travel, such as vacations, sightseeing, entertaining, or 

family visits.
Lesson 4 M-4-4 Military Segment

Allowable Expenses

Common travel expenses for a member of the Armed Forces 

include:

■ Expenses incurred while on TDY or TAD if away from home 

(ship, base, or station).

■ Expenses of a reservist attending drills away from home overnight.

■ Meals and lodging of a reservist temporarily called to active 

duty.

■ Travel expenses, including meals and lodging, incurred in connection with deductible educational activities.

■ Travel expenses incurred when carrying on official business 

while on “No Cost” (to the government) orders.

Mess bills afloat are not deductible by an officer assigned to permanent duty aboard a ship. Bills may be deductible as travel expenses 

by individuals and members of mobile units in a travel or TAD status while away from their permanent ships or stations.

Travel expense deductions are available to air squadron personnel 

when away from the squadron’s home base on TAD and to Army 

personnel when on field duty or maneuvers in a TDY status. Air 

squadron personnel and members of staffs permanently embarked 

on ships on extended deployments may not deduct expenses of living aboard ships as travel expenses.

Officers assigned permanent duty afloat may deduct the cost of 

meals and lodging incurred while on travel or TAD ashore if the 

ship is not berthed at the temporary duty station, or if the ship is 

berthed at the temporary duty station but quarters aboard are not 

available. No deduction is permitted for meals or lodging furnished 

or available in kind at the place of TAD, even if they are not used. 

RESERVISTS

Unreimbursed travel expenses, including meals and lodging, are 

deductible for military reservists who, under competent orders and 

with or without compensation, must remain away from their main 

place of business to perform authorized drills and training duty.

Temporary active duty. Reservists temporarily called to active 

duty may deduct meals and lodging while on active duty if they 

kept their regular job while on active duty, returned to it after 

release, and were stationed away from the general area of that job 

or business. These expenses are deductible only if the reservists 

pay for meals and lodging at their official military post and only to 

the extent the expenses exceed BAH and BAS.
Lesson 4

Military Segment M-4-5

Exercise 1

A. Sgt. Martin’s permanent duty station is in Korea. His wife and 

children could not accompany him and have remained at their 

home in the United States. Can he deduct the cost of his meals

and lodging?

 Answer 

B. Can Sgt. Martin, in the circumstances above, deduct the cost of 

meals and lodging for his wife and children?

 Answer 

C. Can Sgt. Martin take a deduction for the cost of returning 

home to visit his family?

 Answer 

EDUCATIONAL EXPENSES

In Lesson 8, Education Credits, you will learn about deductions 

for educational expenses. Taxpayers cannot deduct as a business 

expense the cost of travel that in itself constitutes a form of education. If educational expenses qualify for a deduction under the rules 

given in Lesson 8, travel for that education is travel for a business 

purpose, and the unreimbursed transportation and meals and lodging expenses may be deducted according to the relevant rules discussed in this lesson.

Example 2

Airman Drake is sent from his permanent duty station to a technical school 500 miles away to learn the latest uses of computers for 

diagnosing engine performance and maintenance requirements. If 

his expenses for travel exceed the allowances and reimbursements 

he receives, he can take the excess as a miscellaneous itemized 

deduction, subject to the 2% AGI limit.

Lesson 8 will explain which other educational expenses can be 

deducted.
Lesson 4 M-4-6 Military Segment

Exercise 2

Which of the following can be taken as deductions?

A. Travel expenses in excess of allowances and reimbursements 

when the taxpayer is on TAD trips.

B. Mess bills of an officer permanently assigned to a ship.

C. Meals that are not lavish or extravagant, but cost more than 

allowances or reimbursements while the taxpayer attends 

assigned schooling away from his or her permanent station.

D. Laundry expenses the taxpayer incurs while traveling on TAD 

and for which no allowance or reimbursement is received.

 Answer 

LOCAL TRANSPORTATION EXPENSES

Local transportation expenses are generally the expenses of 

getting from one work place to another while not traveling away 

from home. Such expenses include the costs of operating and 

maintaining a car, but not meals and lodging. If taxpayers are 

required during their time on duty to go from one place to another 

(for example, as a courier or to attend meetings) without being 

away from home, their unreimbursed transportation expenses are 

deductible. When they must use their own vehicle, they can deduct 

transportation expenses. You may be able to use the standard 

mileage rate to figure the deductible costs of operating your car 

for business purposes. Beginning January 1, 2003, the standard 

mileage rate is 36 cents a mile for all business miles driven on 

or after that date. This rate is adjusted periodically for inflation. 

Commuting expenses are usually not deductible. However, you 

may be able to deduct certain daily transportation expenses, as 

explained next, under Temporary Work Location.

TEMPORARY WORK LOCATION

A taxpayer can deduct local transportation expenses.

Local transportation expenses include the ordinary and necessary 

costs of all of the following.

■ Getting from one workplace to another in the course of the 

taxpayer’s business or profession when he or she is traveling 

within the city or general area that is his or her tax home.

■ Visiting clients or customers.

■ Going to a business meeting away from the taxpayer’s regular 

workplace.

■ Getting from the taxpayer’s home to a temporary workplace 

when he or she has one or more regular places of work. These 

temporary workplaces can be either within the area of his or 

her tax home or outside that area.
Lesson 4

Military Segment M-4-7

Local business transportation does not include expenses the 

taxpayer has while traveling away from home overnight. Those 

expenses are deductible as travel expenses.

If the taxpayer’s employment at a work location is realistically 

expected to last (and does in fact last) for one year or less, the 

employment is temporary unless there are facts and circumstances 

that would indicate otherwise. If the taxpayer’s employment at a 

work location is realistically expected to last for more than one year 

or if there is no realistic expectation that the employment will last 

for one year or less, the employment is not temporary, regardless 

of whether it actually lasts for more than one year. If employment 

at a work location initially is realistically expected to last for one 

year or less, but at some later date the employment is expected to 

last for more than one year, that employment will be treated as 

temporary (unless there are facts and circumstances that would 

indicate otherwise) until the taxpayer’s expectation changes. It will 

not be treated as temporary after the date the taxpayer determines 

it will last for more than one year.

  SUMMING UP THIS SEGMENT  

In this lesson, you have learned that:

 Travel and transportation expenses can be taken as miscellaneous itemized deductions on Schedule A, subject to the 2% 

AGI limit.

 Travel expenses for meals, lodging, and incidentals must 

be incurred while temporarily away from home on business 

to be deductible. Assignments that last, or are realistically 

expected to last more than one year are not considered temporary. 

 Commuting and other personal expenses are not deductible.

 Travel costs associated with deductible educational expenses 

are treated like other business travel costs.

 Form 2106 and Schedule A ( Form 1040) are used to figure 

and claim the itemized deduction for employee business

expenses that exceed reimbursement.
Lesson 4 M-4-8 Military Segment

TRAVEL EXPENSES ANSWERS TO EXERCISES

Lesson 4

Military Segment

1. a. No.

b. No.

c. No

2. a., c., and d.
Lesson 4

Military Segment M-4-9

MISCELLANEOUS ITEMIZED

DEDUCTIONS Lesson 4

Military Segment

INTRODUCTION AND OBJECTIVE

As you learned earlier in this lesson, certain miscellaneous

itemized deductions, which includes unreimbursed employee 

business expenses and investment expenses, are deductible only if 

the total itemized deductions are more than 2% of the taxpayer’s 

adjusted gross income (AGI). All deductible miscellaneous itemized 

deductions discussed in this Military segment are subject to the 

2% AGI limit. In this segment we will cover additional itemized 

deductions of special interest to members of the military. To claim 

these expenses, a taxpayer must itemize using Schedule A ( Form 

1040), Itemized Deductions.

We will be able to identify miscellaneous itemized deductions, other 

than travel, of particular interest to the military.

UNIFORMS

Taxpayers can deduct the cost of buying and maintaining 

uniforms if the uniforms are specifically required as a condition of 

employment and they are not adaptable to general use as regular 

clothing.

Generally, members of the Armed Forces are required to wear 

uniforms when they are on duty but may be allowed to wear them 

when they are off duty. Because their uniforms can be worn in 

place of regular civilian clothing, members of the military cannot 

claim a deduction for uniform cost and upkeep. However, if 

military regulations prohibit off-duty wear of certain uniforms, the 

member can deduct the cost and upkeep of these uniforms. But he 

or she must reduce any deductible uniform costs incurred by any 

nontaxable uniform allowances or reimbursements received to pay 

for these expenses.

Active Duty Uniforms

Members of the Armed Forces on active duty can deduct amounts 

spent to buy and maintain required military battle dress uniforms 

and utility uniforms if local military regulations prohibit their offduty wear. The member must reduce the expense by any nontaxable uniform allowance or reimbursement received.
Lesson 4 M-4-10 Military Segment

Reservists’ Uniforms

A reservist in the Armed Forces can deduct the cost and upkeep of 

uniforms if military regulations prohibit their wearing the uniform 

except when performing duties as a reservist. The reservist must, 

however, reduce the uniform expense by any nontaxable uniform 

allowance or reimbursement received.

Articles Not Replacing Regular Clothing

A member of the Armed Forces can deduct the cost of required 

items that do not replace regular clothing. Such items include 

insignia of rank, corps devices, epaulets, aiguillettes, and swords.

Exercise 1

Indicate if the following are deductible or nondeductible by a 

member of the Armed Forces.

A. The cost of an Army dress blue uniform (without shoulder 

boards or gold stripe on pants), including cape. Off-duty wear 

is not prohibited.

 Answer 

B. The cost of a full Army green uniform (without braid) that can 

be worn anytime.

 Answer 

C. The cost of gold braid for decoration of a cap and uniform.

 Answer 

D. The cost of battle dress uniforms and utility uniforms that can 

be worn only while on duty or while traveling to and from duty.

 Answer 

PROFESSIONAL DUES

Taxpayers, including members of the Armed Forces, can deduct 

dues paid to professional societies that are directly related to their 

trade or business. For example, Lt. Margaret Allen, an electrical 

engineer at Maxwell Air Force Base, can deduct professional dues 

paid to the American Society of Electrical Engineers. 

However, members of the Armed Forces cannot deduct amounts 

paid to an officers’ club or a noncommissioned officers’ club.

EDUCATIONAL EXPENSES

Travel and transportation expenses for educational purposes are 

discussed in Lesson 8. In this segment, you will learn what educational expenses can be claimed as miscellaneous deductions on 

Schedule A. Certain rules must be met, however, for the expenses 

to qualify as a deduction.
Lesson 4

Military Segment M-4-11

Qualifications

A member of the Armed Forces can deduct expenses for education, 

even though the education may lead to a degree, if the education:

■ Is required by the taxpayer’s employer or by law or regulations 

for the taxpayer to keep salary, status, or job (if these requirements serve a business purpose of his or her employer); or

■ Maintains or improves the skills required in the taxpayer’s 

present work.

A taxpayer cannot deduct educational expenses, even though the 

above requirements are met, if the education:

■ Is to meet the minimum educational requirements needed to 

qualify the taxpayer in his or her trade or business, or

■ Is part of a program of study that will qualify the taxpayer for 

a new trade or business, even if he or she has no plans to enter 

that trade or business.

Some examples will help illustrate the various rules.

Example 1

Warrant Officer Newberry, an Army pilot, incurred educational 

expenses to obtain an accounting degree. He cannot deduct these 

expenses because they qualify him for a new trade or business.

Example 2

Lieutenant Commander Morris, who has a degree in financial 

management, is in charge of base finance at her post of duty. She 

incurred educational expenses when taking an advanced finance 

course. She can deduct educational expenses that were more than 

the educational allowance she received because she had already 

met the minimum qualifications of her job. By taking the course, 

she improved skills in her current position. The course did not 

qualify her for a new trade or business.

Deductible Expenses

Educational expenses and certain travel and transportation 

expenses related to education may be claimed on Form 2106, 

Employee Business Expenses. Expenses in excess of reimbursement are deductible only as a miscellaneous itemized deduction on 

Schedule A, subject to the 2% AGI limit discussed earlier. For more 

information, see Publication 508, Tax Benefits for Work-Related 

Education, and Travel Expenses, in this segment.

Deductible educational expenses include amounts spent for tuition, 

books, supplies, laboratory fees, correspondence courses, costs of 

research, and typing as part of an educational program, and travel. 

Educational expenses of a personal nature are not deductible. For 

example, a taxpayer cannot deduct the cost of dinner on campus 

while he or she attends evening classes. Also, deductible educational expenses do not include items of a capital nature, such as 

computers or desks.

POTENTIAL

PITFALLS

Remind students that 

qualifi ed educational 

expenses can be 

deducted as an 

adjustment to income, 

educational credit, or as 

a miscellaneous itemized 

deduction. 

The volunteer should 

calculate the various 

ways and claim these 

expenses where they are 

most benefi cial.
Lesson 4 M-4-12 Military Segment

Treatment of Allowances and Reimbursements

A member of the Armed Forces must reduce deductible educational 

expenses by any allowance or reimbursement he or she receives. 

Any educational services provided in kind are not deductible. For 

example, base-provided transportation to or from class cannot be 

claimed.

Exercise 2

Sgt. Stephen Butler is a mess sergeant. On his own, he takes 

courses at the local university in early childhood education. Does 

he have deductible educational expenses? Why?

Answer

Exercise 3

Specialist Bates is a qualified X-ray technician. Would he have 

deductible educational expenses if he took a course required by 

the Army in new radiology techniques? Assume his expenses 

exceed reimbursement or allowance received.

Answer

Exercise 4

Which of the following can be claimed as miscellaneous itemized 

deductions by a member of the Armed Forces?

a. Payment to an officers’ club.

b. Expenses incurred by a flight operations officer to obtain an 

accounting degree.

c. Cost of epaulets.

d. Cost and upkeep of a reservist’s uniform when local military 

regulations prohibit off-duty wear. (No uniform allowance 

received.)

e. Expenses incurred by a Navy disbursing clerk to learn television repair.

 Answer 

  SUMMING UP THIS SEGMENT  

In this segment, you learned about some of the more common 

itemized deductions of special interest to military members. The 

total of these miscellaneous deductions must be more than 2% of 

adjusted gross income to be deductible.
Lesson 4

Military Segment M-4-13

MISCELLANEOUS ITEMIZED

DEDUCTIONS ANSWERS TO EXERCISES

Lesson 4

Military Segment

1. a. Nondeductible

 b. Nondeductible

 c. Deductible

 d. Deductible

2. No. The courses were not required, do not improve Sgt. Baker’s 

skills as a mess sergeant, and could lead to qualifying him for a 

new trade or business.

3. Yes. The course is required by Specialist Bates’ employer, 

improves his skills in his present job, is not needed to meet the 

minimum educational requirements for his job, and will not lead 

to qualifying him for a new trade or business.

4. c. and d.
Lesson 4 M-4-14 Military Segment

STUDENT NOTES
Lesson 4

International Segment I-4-1

BUSINESS TRAVEL EXPENSES

INTRODUCTION AND OBJECTIVES

This lesson will explain how to compute business travel expenses 

for a U.S. citizen or resident aliens living aboard.

At the end of this segment, you will be able to:

1. Determine when employee business expenses are deductible. 

2. Determine what expenses are deductible. 

3. Determine how to report the expenses. 

4. Complete Form 2106 “Employee Business Expenses”. 

5. Determine how to complete the expenses when the taxpayer is 

eligible and elects to take the foreign earned income exclusion. 

TRAVEL EXPENSES

Travel expenses incurred must be ordinary and necessary when 

carrying out the duties of your employer while away from your 

home, for your job. Ordinary expenses are those that are customary for the type of travel being done. Necessary expenses are 

those that are appropriate and helpful to achieving the pur pose

of the travel. Treatment of the various expenses, allow ances, and 

reimbursements depends on whether allowances and reimbursements were received and whether the expenses were more than 

allowances and reimbursements, or whether the allowances and 

reimbursements were more than the expenses. It also depends 

on whether or not your employer included these allowances and 

reimbursements as income on Form W-2. These situations will be 

discussed in this lesson. 

Away from Home Overnight. For costs other than transportation the taxpayer must be “away from his tax home overnight”. “Tax Home” is defined as the taxpayer’s main place of 

business. “Overnight” is defined as a period substantially longer 

than an ordinary day’s work during which the taxpayer would 

need time off for sleep or rest.

Example 1

You live with your family in Manchester, England, but work in 

London where you have lodging and meal expenses during the 

week. You travel back and forth from London to Manchester on 

weekends. You may not deduct any of your expenses for travel, 

meals, and lodging in London because that is your main place of 

business and the travel on weekends is not for business rea sons. 

Lesson 4

International Segment
Lesson 4 I-4-2 International Segment

DEDUCTIBLE EXPENSES

Travel expenses that are ordinary and necessary while travel ing

away from your home for business purposes include such things as: 

1. Air, rail and bus transportation, 

2. Operating and maintaining your car, 

3. Taxi fares or other costs of transportation between the 

airport or station and your hotel, from one customer to

another, or from one place of business to another.

4. Transportation from the place where you eat and sleep to your 

temporary work assignment, 

5. Baggage and charges and transportation costs for sample and 

display material, 

6. Meals and lodging when you are away from home on

business.

7. Cleaning and laundry expenses, 

8. Telephone and telegraph expenses, 

9. Public stenographer’s fees, 

10. Operating and maintaining house trailers, 

11. Tips that are incidental to any of these expenses, and 

12. Other ordinary and necessary expenses related to travel. 

Car Expenses. If you use your car for business purposes you are 

entitled to the actual expenses which would include such things 

as gas, oil, repairs, insurance and depreciation on your car or, you 

can use the standard mileage rate. The standard mileage rate is 

.36 cents per mile for 2003. If you use the car for both business and 

personal mileage you should maintain a log book. You will have to 

allocate the expenses between busi ness and personal use. If you 

lease a car to use for qualified business expenses you may have 

to include an amount called the inclusion amount in your income, 

depending on the FMV of the vehicle (for more information on 

deducting actual car expenses see Publication 463). 

Meal Expense. Expenses for meals claimed on a taxpayer’s return 

are only 50% deductible. When an employee is reim bursed for substantiated meal expenses, the reimbursement will generally be 

nontaxable and the expenses will not be claimed. 
Lesson 4

International Segment I-4-3

HOW TO REPORT

The following discusses how the taxpayer should report his/her 

allowable expenses for travel, meals & lodging. Self-employed individuals must report their expenses on the appropriate form used 

to report their business income and expenses by using Schedule 

C, Form 1040. Employees, including outside sales per sons, must 

complete Form 2106, Employee Business Expenses, and attach it to 

their Form 1040 to claim these expenses. 

Expenses paid by an employee under a “reimbursement or other 

expense allowance arrangement” with an employer gen erally do 

not need to be claimed and the employer will not include the reimbursement as taxable income on the employee’s Form W-2. To qualify as nontaxable reimbursements, the arrangement must require 

that the employee substantiate the expenses to the employer and 

return any excess reimburse ments. Per Diem or other fixed allowance reimbursements that are similar to allowances specified by 

the Federal government will also be nontaxable to the extent that 

the amounts do not exceed government rates. 

Form 2106 needs to be completed if: 

1. The taxpayer received a reimbursement or an allowance and the 

employer included the amount on Form W-2, or a Form 1099 as 

taxable income, 

2. The taxpayer seeks to deduct expenses in excess of the amounts 

paid under a reimbursement allowance arrangement, 

3. The taxpayer received no reimbursement for his or her 

employee business expenses, or, 

4. The taxpayer received reimbursement or an allowance and did 

not account to his or her employer for the expenses. 

If the expenses equal the reimbursements and the taxpayer 

accounted to his or her employer, the taxpayer does not have to 

complete Form 2106 unless item (1) above applies. 

Example 2 

George Grant has incurred qualified employee business expenses. 

His company’s policy is that all employees must turn in a travel 

voucher showing all expenses incurred and the com pany reimburses the employee an amount equal to the expenses. George 

does not have to file a Form 2106 because he reports directly to his 

employer and is reimbursed in full.

Example 3 

Judy Coe incurred employee business expenses of $1,500. Her W-2 

shows that her employer reimbursed Judy $2,000. Judy will have 

to file Form 2106 and claim $1,500.00 as an employee business 

expense on Form 2106 subject to the 50% meals limi tation and 2% 

limitation on Schedule A. The entire $2,000 reimbursement must 

be reported as income on line 7, Form 1040. 
Lesson 4 I-4-4 International Segment

Claiming Employee Business Expenses on Form 1040.

The taxpayer can only claim employee business expenses on Form 

1040 as a miscellaneous itemized deduction subject to the overall 

2% limitation. Exceptions are provided for certain gov ernment officials, qualified performing artists, and individuals with a disability. 

For more information on these exceptions see the instructions for 

Form 2106. 

Example 4 

Frank Falls has a total of $2,000 of unreimbursed employee business expenses after reducing meals by 50% and no other miscellaneous itemized deductions. His total adjusted gross income is 

$52,000. Frank is entitled to a total of $960 as a miscellaneous

itemized deduction. (2,000 – [52,000 x .02] = $960) 

COMPLETING FORM 2106

Form 2106 is divided into 2 parts. Part I deals with all the expenses 

and Part II deals specifically with car expenses. Part II should be 

completed, if applicable, before entering an amount in Line 1, 

Part I. 

Look at Part II section A. This section deals with general information about the vehicle and is self-explanatory. The taxpayer 

should have this information from his or her records to assist you 

in preparing the form. 

ft as of

2003

Form 2106 (2003) Page 2

Vehicle Expenses

Section A—General Information (You must complete this section if you

are claiming vehicle expenses.) (a) Vehicle 1 (b) Vehicle 2

11 Enter the date the vehicle was placed in service 11 / /

12 Total miles the vehicle was driven during 2003 12 miles miles

13 Business miles included on line 12 13 miles miles

14 Percent of business use. Divide line 13 by line 12 14 % %

15 Average daily roundtrip commuting distance 15 miles miles

16 Commuting miles included on line 12 16 miles miles

17 Other miles. Add lines 13 and 16 and subtract the total from line 12 17 miles miles

18 Do you (or your spouse) have another vehicle available for personal use? Yes No

19 Was your vehicle available for personal use during off-duty hours? Yes No

Yes No

21 If “Yes,” is the evidence written? Yes No

20 Do you have evidence to support your deduction?

Part II

/ /

Exhibit 1 Form 2106, Part 2
Lesson 4

International Segment I-4-5

Part II, section B. of Form 2106 will be used if the taxpayer owns 

the vehicle and chooses, or has previously chosen, to use the standard mileage rate for the same vehicle.

Draft a 6/10/2003

Section B—Standard Mileage Rate (See the instructions for Part II to find out whether to complete this section or

Section C.)

22 Multiply line 13 by 36¢ (.36) 22

Section C—Actual Expenses (a) Vehicle 1 (b) Vehicle 2

Gasoline, oil, repairs, vehicle

insurance, etc.

23

23

24a Vehicle rentals 24a

b Inclusion amount (see instructions) 24b

c Subtract line 24b from line 24a 24c

Value of employer-provided

vehicle (applies only if 100% of

annual lease value was included

on Form W-2—see instructions)

25

25

26 Add lines 23, 24c, and 25 26

Multiply line 26 by the

percentage on line 14

27

27

28

Depreciation. Enter amount

from line 38 below

28

29 Add lines 27 and 28. Enter total

here and on line 1 29

Exhibit 2 Form 2106, Part II

As mentioned previously the taxpayer is entitled to .36¢ per mile 

for business mileage. The business standard mileage rate may not 

be used to compute the deductible expenses of vehicles used for 

hire, such as taxicabs, two or more automobiles used simultaneously (such as fleet operations), or any vehicle that is leased, rather 

than owned, by the taxpayer. The business stan dard mileage rate 

may not be used if the automobile has previ ously been depreciated 

using a method other than straight-line for its estimated useful life. 

The standard rate may not be used if additional first-year depreciation has been claimed, or if the taxpayer used ACRS or MACRS 

depreciation. 

For those taxpayers who are using the actual expense method, 

vehicles placed in service after September 10, 2001 are eligible for 

the additional 30% depreciation and an increased first year deduction. Property placed in service outside of the U.S. must be depreciated using the straight-line method. 

There is a special first-year depreciation allowance of 50% for 

qualified property acquired after May 5, 2003 (except for property 

acquired under a binding written contract in effect before May 6, 

2003). Instead of claiming the 50% allowance, taxpayers may elect 

to claim the 30% allowance or elect not to claim any special allowance. The depreciation limit for vehicles subject to the 50% allowance is increased by $7,650.
Lesson 4 I-4-6 International Segment

The front side of Form 2106 is divided into 3 steps, Let’s look at 

each step and how it will apply to the taxpayer. 

Exhibit 3 Form 2106

Step 1 of Form 2106 is used to summarize the employee business

expenses of the taxpayer. Column A is used for all expenses except 

meals and entertainment. Column B is used only for meals and 

entertainment expenses. Step 1 must always be filled out. (Note: 

If the employer did not reimburse the employee for any of the 

expenses, skip Step 2 and go directly to Step 3 to figure the amount 

deductible. 

Step 2 is filled out only if the taxpayer is reimbursed by the 

employer and the reimbursement is not shown as income to the 

taxpayer on a Form W-2 or Form 1099, and the employee seeks a 

deduction for additional expenses not paid by the employer. On line 

7, only include amounts from Box 13 of Form W-2 iden tified as code 

“L”. 

Many overseas employees will receive Forms W-2 reflecting only 

a portion of their total compensation while others will receive no 

Form W-2 at all. 

Draft as of

6/10/2003

OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including

lodging, airplane, car rental, etc. Do not include meals and

entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Part I

(99)

2003
Lesson 4

International Segment I-4-7

Reimbursements received under a reimbursement arrangement 

described above need not be shown as income on Form 1040 and 

will be reflected on Form 2106, line 7 only if additional expenses 

are claimed. Reimbursements for the unsubstantiated travel 

expenses must be included as income on Form 1040 and will not be 

included in Step 2 of Form 2106.

Step 3 is used when the employer did not reimburse the employee 

in full. This section will show how much the taxpayer is allowed 

as a miscellaneous itemized deduction on the tax-payer’s Schedule 

A Form 1040. This amount will be reduced by 2% of the taxpayer’s 

adjusted gross income unless the taxpayer is a qualified performing 

artist. 

6

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Exhibit 4 Form 2106, Step 2

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 65% (.65) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

Exhibit 5 Form 2106, Part II
Lesson 4 I-4-8 International Segment

Example 5 

John Scott is a U.S. citizen and an employee for an English company. He normally works out of their London office. However, John 

was temporarily assigned to the Paris office for the last 7 months 

of 2003. He had his car sent there so he can carry out his duties. 

He purchased the car on 6-1-2002, and did incur employee business expenses for that year. He elected in 2002 to use the standard 

mileage rate on his 2002 tax return. While in France he did some 

sight-seeing and had recorded per sonal mileage. John incurred the 

following expenses during 2003: 

Lodging—$10,640

Meals—$7,350

Transportation to & from Paris office from London office—$300 

Total mileage on car for 2003—23,720 

Average daily roundtrip commute—10 miles 

Commuting mileage for 2003—1,530 

Business mileage—16,290 

Parking fees & tolls—$586 

John is reimbursed $8,300 for lodging and $4,000 for meals. The 

$4,000 for the meals is shown as income on John’s W-2 Form. The 

$8,300 is not shown as taxable income on John’s Form W-2 because 

the lodging expenses were properly accounted for. See Exhibit 6 for 

how the Form 2106 would be filled out.
Lesson 4

International Segment I-4-9

Exhibit 6 Form 2106

Draft as of

6/10/2003

OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including

lodging, airplane, car rental, etc. Do not include meals and

entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 65% (.65) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

For Paperwork Reduction Act Notice, see instructions. Cat. No. 11700N Form 2106 (2003)

Part I

(99)

2003

John Scott Sales Manager

5,864.00

586.00

10,940.00

7,350.00

17,390.00 7,350.00

8,300.00

9,090.00 7,350.00

9,090.00 3,675.00

12,765.00
Lesson 4 I-4-10 International Segment

Form 2106, Page 2

Draft as of

6/10/2003

Form 2106 (2003) Page 2

Vehicle Expenses

Section A—General Information (You must complete this section if you

are claiming vehicle expenses.) (a) Vehicle 1 (b) Vehicle 2

11 Enter the date the vehicle was placed in service 11 / /

12 Total miles the vehicle was driven during 2003 12 miles miles

13 Business miles included on line 12 13 miles miles

14 Percent of business use. Divide line 13 by line 12 14 % %

15 Average daily roundtrip commuting distance 15 miles miles

16 Commuting miles included on line 12 16 miles miles

17 Other miles. Add lines 13 and 16 and subtract the total from line 12 17 miles miles

18 Do you (or your spouse) have another vehicle available for personal use? Yes No

19 Was your vehicle available for personal use during off-duty hours? Yes No

Yes No

21 If “Yes,” is the evidence written? Yes No

20 Do you have evidence to support your deduction?

Section B—Standard Mileage Rate (See the instructions for Part II to find out whether to complete this section or

Section C.)

22 Multiply line 13 by 36¢ (.36) 22

Section C—Actual Expenses (a) Vehicle 1 (b) Vehicle 2

Gasoline, oil, repairs, vehicle

insurance, etc.

23

23

24a Vehicle rentals 24a

b Inclusion amount (see instructions) 24b

c Subtract line 24b from line 24a 24c

Value of employer-provided

vehicle (applies only if 100% of

annual lease value was included

on Form W-2—see instructions)

25

25

26 Add lines 23, 24c, and 25 26

Multiply line 26 by the

percentage on line 14

27

27

28

Depreciation. Enter amount

from line 38 below

28

29 Add lines 27 and 28. Enter total

here and on line 1 29

Section D—Depreciation of Vehicles (Use this section only if you owned the vehicle and are completing Section C

for the vehicle.)

(a) Vehicle 1 (b) Vehicle 2

Enter cost or other basis (see

instructions)

30

30

Enter section 179 deduction

and special allowance (see

instructions)

31

31

Multiply line 30 by line 14 (see

instructions if you claimed the

section 179 deduction or special

allowance)

32

32

Enter depreciation method and

percentage (see instructions)

33

33

Multiply line 32 by the percentage

on line 33 (see instructions)

34

34

35 Add lines 31 and 34 35

Enter the limit from the table in

the line 36 instructions

36

36

Multiply line 36 by the

percentage on line 14

37

37

Enter the smaller of line 35 or

line 37. Also enter this amount

on line 28 above

38

38

Part II

/ /

Form 2106 (2003)

06 01 2002

23,720

16,290

64

10

1,530

5,900









5,864.00
Lesson 4

International Segment I-4-11

As you can see from the exhibit, the total expenses in Column A 

are reduced by the $8,300 reimbursement not included as taxable

income on John’s W-2. He will be entitled to an item ized miscellaneous deduction of $12,765. If John’s adjusted gross income was 

$60,000, John would have to reduce the $12,765 by $1,200 ($60,000 

x .02) giving him a total of $11,565 as a net miscellaneous deduction if John had no other miscella neous deductions.

Exercise 1 

Susan Troop, social security number 000-00-6789, works in 

Manila and is temporarily assigned to her company’s Tokyo, 

Japan office. Her round trip air fare is $375. She also incurred 

lodging expenses of $2,760 and meal expenses of $1,420. She used 

mass transportation while in Tokyo and spent $357. Her employer, 

who is in the retail sales trade, did not reimburse her for any of 

the expenses. Complete the Form 2106 for Susan Troop.
Lesson 4 I-4-12 International Segment

Form 2106

Draft as of

6/10/2003

OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including

lodging, airplane, car rental, etc. Do not include meals and

entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 65% (.65) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

For Paperwork Reduction Act Notice, see instructions. Cat. No. 11700N Form 2106 (2003)

Part I

(99)

2003
Lesson 4

International Segment I-4-13

FOREIGN EARNED INCOME EXCLUSION

If the taxpayer is eligible and elects the foreign earned income 

exclusion he or she must adjust the amount of the business deductions related to the income excluded. The disallowed por tion of 

the expenses is calculated by dividing the excluded for eign earned 

income by total foreign earned income. 

Example 6 

Harold Will is a U.S. citizen, employed as a salesperson in a foreign 

country and is eligible and elects to exclude $78,000 of his $98,500 

a year salary. His AGI is $30,000. He had a total of $2,000 of unreimbursed employee business expenses of which $500 was for meals; 

these expenses are deductible only as miscellaneous itemized 

deductions on Schedule A ( Form 1040). First, it is necessary to complete Form 2106. On that form Harold reduces the meal expenses 

by 50% of the $500 amount spent, yielding a total of $1,750 ($250 & 

$1,500). 

Harold must reduce the $1,750 by 79% (78,000/98,500) because he 

excluded 79% of his earned income. Thus $1,383 of his expenses are 

not deductible. Harold carries the $367 ($1,750 – $1,383) deductible 

amount to Schedule A. 

Harold also has $500 of other miscellaneous deductions subject to 

the 2% of AGI limit. He adds the $367 from Form 2106 plus the 

$500 for a total of $867 miscellaneous expenses. 2% of Harold’s AGI 

is $600 (.02 x 30,000). Harold’s deductible miscellaneous itemized 

deductions are $267 ($867 – $600). 

If Harold did not have the other miscellaneous expenses of $500 he 

would not have been able to claim any miscellaneous deductions. 

His remaining expenses ($367) would have been less than 2% of his 

AGI ($600).
Lesson 4 I-4-14 International Segment

SUMMARY EXERCISES

1. Which of the following taxpayers would be entitled to employee 

business expenses and if so indicate the type of expense? 

 Vehicle expenses

Lodging

Meals

Travel

a. Joseph Fulton works in London and drives from and to his 

house every day. 

Answer 

b. Mary Banks works in Paris and had to go to Lyon for the day 

to conduct business. She returns home to Paris that evening. 

She used her car. 

Answer 

c. Alice Canton is a nurse working in Rome, Italy. Her employer 

gives her a temporary assignment for 2 months in Oslo, Norway. 

Answer 

2. What form do you use to calculate a taxpayer’s employee business expenses? 

Answer 

3. When are employee business expense reimbursements not 

included in gross income? 

Answer 

4. When are the employee business expenses itemized miscellaneous deductions? 

Answer 

5. How are reimbursements that are more than expenses incurred 

treated?

Answer 
Lesson 4

International Segment I-4-15

  SUMMING UP THIS SEGMENT  

Reimbursements from an accountable plan for substantiated 

employee business expenses are not included as income on the 

employee’s return if the employee is required to return, and does 

return, any excess reimbursements.

 If the reimbursements are included as income, deductible 

expenses are allowed as miscellaneous itemized deductions 

subject ot the 2% limitation.

 Travel expenses for meals, lodging and incidentals must be 

incurred while “away from home overnight” to be deductible.

 Form 2106 is used to calculate the amount of itemized deductions that are in excess of reimbursements.

 If reimbursements exceed expenses, the excess is income to 

the employee and must be reported on Form 1040. (If reimbursements exceed the expenses it is probably a nonaccountable plan, and therefore the entire reimbursement is taxable).

 If it is the company’s policy for the employees to account for 

business expenses to the employer by supplying the employer 

with documented evidence and the employer reimburses the 

employee for the amount in full, Form 2106 is not required.

If the taxpayer is eligible for and elects the foreign earned 

income exclusion, certain adjustments must be made to the gross 

amount deductible as employee business expenses.
Lesson 4 I-4-16 International Segment

Answer to Exercise 1 Form 2106

Draft as of

6/10/2003

OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including

lodging, airplane, car rental, etc. Do not include meals and

entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 65% (.65) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

For Paperwork Reduction Act Notice, see instructions. Cat. No. 11700N Form 2106 (2003)

Part I

(99)

2003

Susan Troop Retail Sales

3,492.00

1,420.00

3,492.00

3,492.00 1,420.00

3,492.00 710.00

4,202.00

1,420.00
Lesson 4

International Segment I-4-17

1. a.) No (They are commuting expenses)

 b.) Yes. Vehicle expenses

 c.) Yes. Travel, lodging, meals.

2. Form 2106

3. When the employee is required to substantiate his buinsess 

expenses under a reimbursement arrangement and return any 

excess allowance to his employer. Also, Per Diem reimbursements that are similar to allowances specified by the Federal 

government will be nontaxable to the extent that the amounts 

do not exceed government rates.

4. When the expenses are more than the amount reimbursed. 

Itemized deductions are also created in the case of an employee 

reimbursed under a nonaccountable plan.

5. They are treated as income and shown on line 7 of Form 1040. If 

reimbursement in excess of expenses exists, the plan is probably 

a nonaccountable one, and therefore the entire reimbursement 

is taxable—not just the excess.

BUSINESS TRAVEL EXPENSES

ANSWERS TO SUMMARY EXERCISES Lesson 4

International Segment
Lesson 4 I-4-18 International Segment

STUDENT NOTES
Lesson 5 5-1

WAGE EARNER

MISCELLANEOUS TAX CREDITS Lesson 5

INTRODUCTION AND OBJECTIVES

In this lesson you will learn about three “miscellaneous credits”. The mortgage interest credit, the foreign tax credit and the credit for qualified retirement 

savings are covered in this lesson. 

After completing this lesson you should be able to:

■ Calculate the credit for qualified retirement savings contributions by using Form 8880.

■ Accurately report the foreign tax credit if Form 

1116 is not required.

■ Be aware of the mortgage interest credit.

CREDITS

A credit is a dollar-for-dollar reduction of the taxpayer’s tax liability. A refundable credit can be greater 

than the tax. Taxpayers not only can have their tax 

reduced to zero; they can also receive a “refund” of 

excess credit. A nonrefundable credit can also be 

greater than the tax, but the nonrefundable credit 

can only reduce the tax to zero. Therefore, taxpayers 

will not receive a refund for any excess nonrefundable

credit. All of the credits discussed in this lesson are 

non-refundable.
5-2 Lesson 5

WAGE EARNER

CREDIT FOR QUALIFIED RETIREMENT SAVINGS CONTRIBUTIONS

If the taxpayer contributed to a retirement plan or an IRA, he or 

she may be eligible for the credit for qualified retirement savings 

contributions credit. The amount of the saver’s credit is determined 

by the taxpayer’s filing status, adjusted gross income, and his or 

her qualified contributions.

The credit is reported on line 48 of Form 1040, or line 32 of Form 

1040A.

To be eligible for the saver’s credit, the taxpayer:

■ Must be age 18 or older by the end of the tax year,

■ Cannot be claimed on another person’s tax return, and

■ Cannot be a full-time student.

A full-time student is anyone who attends school full-time for 

some part of each of five calendar months of the year. The five 

months need not be consecutive. An individual is a full-time student if he or she is enrolled for the number of hours or courses the 

school considers as full-time attendance.

FIGURING THE CREDIT

The credit for qualified retirement savings contributions is figured 

by multiplying the credit rate by the lessor of the:

■ Maximum allowable contribution ($2,000) or

■ Eligible contributions.

The credit rate is determined by using the following table.

IF your fi ling 

status is...

AND your adjusted

gross income is...

THEN your credit

rate is...

Married fi ling jointly

Less than $30,001 50%

Between $30,001 and 

$32,500

20%

Between $32,501 and 

$50,000

10%

Over $50,000 0

Head of Household

Less than $22,501 50%

Between $22,501 and 

$24,375

20%

Between $24,376 and 

$37,500

10%

Over $37,500 0
Lesson 5 5-3

WAGE EARNER

Single, Married fi ling 

separately, or qualifying widow(er)

Less than $15,001 50%

Between $15,001 and 

$16,250

20%

Between $16,251 and 

$25,000

10%

Over $25,000 0

Adjusted gross income is determined without regards to:

■ The foreign income exclusion

■ The foreign housing exclusion or deduction

■ Income from sources within Guam, American Samoa, and the 

Northern Mariana Islands

■ Income from Puerto Rico

Eligible contributions are determined by reducing the taxpayer’s 

qualified retirement savings contributions by the following 

distributions that were received during the testing period.

■ Any distribution, that is included in the taxpayer’s gross

income, from a qualified retirement plan, or from an eligible 

deferred compensation plan.

■ Any distribution from a Roth IRA that is not a qualified rollover 

contribution.

If the distributions received by the taxpayer are for loans or for 

excess IRA contributions returned before the due date of the 

return, they are not used to reduce the taxpayer’s qualified retirement savings contributions.

Qualified retirement savings contributions are contributions 

made to a traditional or Roth IRA and salary reduction contributions to a 401(k) plan (including a SIMPLE 401(k)), a tax-sheltered 

annuity (403(b)) plan, an eligible deferred compensation plan of a 

state or local government (457(b)) plan), a SIMPLE IRA plan, or a 

salary reduction SEP.

Qualified retirement savings contributions also include voluntary 

after-tax employee contributions to a tax-qualified retirement plan 

or a tax-sheltered annuity (403(b)) plan. For purposes of the credit, 

an employee contribution will be voluntary as long as it is not 

required as a condition of employment.

The testing period includes:

■ The tax year,

■ The two preceding tax years, and

■ The period between the end of the tax year and the due date of 

the return (including extensions).
5-4 Lesson 5

WAGE EARNER

Example 1

Terry contributes $3,000 to a 401(k) plan during 2003. In 2002, 

Terry withdrew $500 from his IRA. In 2003, he withdrew $900 from 

his IRA. Neither of these withdrawals were rolled over. In 2003, 

Terry’s adjusted gross income was $23,000 and his filing status 

was head of household. Based on these facts, Terry would figure his 

saver’s credit as follows:

(Qualified retirement contributions – withdrawals) x credit rate 

(per table)

($3,000 – $1,400) × .20

$1,600 × .20 = $320 saver’s credit

The credit is figured on Form 8880, Credit for Qualified 

Retirement Savings Contributions.

Married filing jointly. If the taxpayer is married filing a joint 

return, he or she and his or her spouse may both use the credit. 

Both the taxpayer and spouse are eligible for a credit of the maximum annual contribution amount of $2,000.

If the taxpayers file a joint return, the qualified contribution is 

reduced by the taxable distributions received by the taxpayer or 

the taxpayer’s spouse if the taxpayers filed jointly for both:

■ the year a distribution was made, and

■ the year the credit is claimed.

Exercise 1

Jason is 22 and earned $30,000 in 2003. He is single and contriuted $3,000 to his 401(k) plan at work. Is Jason eligible for the 

credit for qualified retirement savings contributions?

Exercise 2

Martha Barnard (000-00-0088) is 32 and files as Head of 

Household. Her only income is wages of $26,819. This year, she 

was able to contribute $1,000 to her employer’s 401(k) plan. She 

did not put any money in an IRA. Use Exhibit 1 to complete 

Sally’s Form 8880 through line 10.
Lesson 5 5-5

WAGE EARNER

Exhibit 1

Draft as of

8/20/2003

OMB No. 1545-1805

8880 Credit for Qualified Retirement Savings Contributions Form

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 129  Attach to Form 1040 or Form 1040A.

Name(s) shown on return Your social security number

● The amount on Form 1040, line 35, or Form 1040A, line 22, is more than $25,000 ($37,500 if head of household,

$50,000 if married filing jointly).

You cannot claim this credit if either of the following applies.

4

1

Traditional and Roth IRA contributions for 2003. Do not include rollover

contributions

1

3

2

5

6

7

8

9

10

11

12

13

14

Elective deferrals to a 401(k) or other qualified employer plan, voluntary

employee contributions, and 501(c)(18) plan contributions for 2003

(see instructions) 

2

3 Add lines 1 and 2

Certain distributions received after 2000 and before the due date

(including extensions) of your 2003 tax return (see instructions). If

married filing jointly, include both spouses’ amounts in both columns.

See instructions for an exception 

4

5 Subtract line 4 from line 3. If zero or less, enter -0-

6 In each column, enter the smaller of line 5 or $2,000 

8 Enter the amount from Form 1040, line 35*, or Form 1040A, line 22

9 Enter the applicable decimal amount shown below:

Note: If line 9 is zero, stop; you cannot claim the credit.

10 Multiply line 7 by line 9 

11 Enter the amount from Form 1040, line 43, or Form 1040A, line 28

Enter the total of your credits from Form 1040, lines 44 through 47, or

Form 1040A, lines 29 through 31

12

13 Subtract line 12 from line 11. If zero, stop; you cannot take the credit 

Credit for qualified retirement savings contributions. Enter the smaller of line 10 or line 13

here and on Form 1040, line 48, or Form 1040A, line 32 

14

(a) You (b) Your spouse

● The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1986, (b) is

claimed as a dependent on someone else’s 2003 tax return, or (c) was a student in 2003 (see instructions).

7 Add the amounts on line 6. If zero, stop; you cannot claim the credit 

*S P b 590 f th t t t if fili F 2555 2555 EZ 4563 l di i f P t Ri

If line 8 is— 

Enter on line 9—

Single, Married filing 

separately, or 

Qualifying widow(er)

Over— But not 

over—

Married

filing jointly

Head of 

household

---

$15,000

$16,250

$22,500

$24,375

$25,000

$30,000

$32,500

$37,500

$50,000

$15,000

$16,250

$22,500

$24,375

$25,000

$30,000

$32,500

$37,500

$50,000

---

.5

.5

.5

.5

.5

.5

.2

.1

.1

.0

.5

.5

.5

.2

.1

.1

.1

.1

.0

.0

.5

.2

.1

.1

.1

.0

.0

.0

.0

.0

X .

And your filing status is—

2003
5-6 Lesson 5

WAGE EARNER

MORTGAGE INTEREST CREDIT

Taxpayers who hold qualified mortgage credit certificates under a 

qualified state or local government program may claim a credit for 

mortgage interest paid. The certificate must be for the taxpayer’s 

main home. If the interest is paid to certain related parties (such as 

relatives), the credit cannot be claimed.

The credit is figured on Form 8396, Mortgage Interest Credit.

Include the amount of the credit on Form 1040, line 52. Also, check 

box a on line 52 for Form 8396.

Any mortgage interest credit that the taxpayer cannot use in 2003 

can be carried forward for up to three tax years. Figure the carryforward credit in Part II of Form 8396.

Reduce the mortgage interest deduction claimed on Schedule A, 

Form 1040, by the amount shown on line 3 of Form 8396.

Caution: If the taxpayer was issued (and used) a qualified mortgage credit certificate after 1990 for a home, the taxpayer may have 

to recapture (repay) all or part of the benefit if the taxpayer sells 

that home within 9 years. The recapture is figured on Form 8828, 

Recapture of Federal Mortgage Subsidy.
Lesson 5 5-7

WAGE EARNER

 FOREIGN TAX CREDIT

If the taxpayer paid income, war profits, or excess profits taxes to 

any:

■ Foreign country,

■ U.S. possession, or

■ Any political subdivision, or agency or instrumentality of the 

country or possession, he or she may be able to take a Foreign 

Tax Credit (FTC) for taxes paid.

To determine if the tax paid is eligible for the foreign tax credit, the 

taxpayer may need to consult a paid professional preparer.

Generally, to claim the FTC, a taxpayer is required to file Form 

1116, Foreign Tax Credit (Individual, Estate, Trust, or Nonresident 

Alien Individual); however, the taxpayer does not have to file 

Form 1116 to take the credit if he or she meets all of the following 

requirements.

■ All of the taxpayer’s gross foreign source income is from interest and dividends that are reported on Form 1099-INT, or Form 

1099-DIV (or substitute statement)

■ If the taxpayer has dividend income from shares of stock, he or 

she held those shares for at least 16 days.

■ The taxpayer is not filing Form 4563, Exclusion of Income for 

Bona Fide Residents of American Samoa, or excluding income 

from sources within Puerto Rico.

■ The total of the taxpayer’s foreign taxes is less than or equal to 

$300 ($600 if married filing jointly).

■ All of the taxpayer’s foreign taxes were:

■ Legally owed and not eligible for a refund, and

■ Paid to countries that are recognized by the United States 

and do not support terrorism.

For additional information, see the Instructions for Form 1116.

If the taxpayer meets all of the requirements listed above, enter 

the foreign tax credit on line 45 of Form 1040. Form 1116 is not 

required.

Example 2

Tabitha received a 1099-DIV that shows $219 of foreign taxes (box 

6) in 2003. According to Tabitha she paid no other foreign taxes. 

She can claim the $219 on line 44 of Form 1040.

Exercise 3

Clyde comes to your site seeking help with his foreign tax credit. 

He is single and his 1099-DIVs show a total of $423 of foreign tax. 

Does Clyde need Form 1116 to claim his credit?
5-8 Lesson 5

WAGE EARNER

MISCELLANEOUS TAX CREDITS

Lesson 5 ANSWERS TO EXERCISES

Exercise 1

No; Jason is not eligible for the credit because his income exceeds 

the threshold limit.

Exercise 2

See the completed Form 8880 on the next page.

Exercise 3

Yes, Clyde needs to complete a Form 1116 since his foreign taxes 

exceed $300. Clyde will need to seek the assistance of a paid professional preparer.
Lesson 5 5-9

WAGE EARNER

Draft as of

8/20/2003

OMB No. 1545-1805

8880 Credit for Qualified Retirement Savings Contributions Form

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 129  Attach to Form 1040 or Form 1040A.

Name(s) shown on return Your social security number

For Paperwork Reduction Act Notice, see back of form. Cat. No. 33394D Form 8880 (2003)

● The amount on Form 1040, line 35, or Form 1040A, line 22, is more than $25,000 ($37,500 if head of household,

$50,000 if married filing jointly).

You cannot claim this credit if either of the following applies.

4

1

Traditional and Roth IRA contributions for 2003. Do not include rollover

contributions

1

3

2

5

6

7

8

9

10

11

12

13

14

Elective deferrals to a 401(k) or other qualified employer plan, voluntary

employee contributions, and 501(c)(18) plan contributions for 2003

(see instructions) 

2

3 Add lines 1 and 2

Certain distributions received after 2000 and before the due date

(including extensions) of your 2003 tax return (see instructions). If

married filing jointly, include both spouses’ amounts in both columns.

See instructions for an exception 

4

5 Subtract line 4 from line 3. If zero or less, enter -0-

6 In each column, enter the smaller of line 5 or $2,000 

8 Enter the amount from Form 1040, line 35*, or Form 1040A, line 22

9 Enter the applicable decimal amount shown below:

Note: If line 9 is zero, stop; you cannot claim the credit.

10 Multiply line 7 by line 9 

11 Enter the amount from Form 1040, line 43, or Form 1040A, line 28

Enter the total of your credits from Form 1040, lines 44 through 47, or

Form 1040A, lines 29 through 31

12

13 Subtract line 12 from line 11. If zero, stop; you cannot take the credit 

Credit for qualified retirement savings contributions. Enter the smaller of line 10 or line 13

here and on Form 1040, line 48, or Form 1040A, line 32 

14

(a) You (b) Your spouse

● The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1986, (b) is

claimed as a dependent on someone else’s 2003 tax return, or (c) was a student in 2003 (see instructions).

7 Add the amounts on line 6. If zero, stop; you cannot claim the credit 

*See Pub. 590 for the amount to enter if you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico.

If line 8 is— 

Enter on line 9—

Single, Married filing 

separately, or 

Qualifying widow(er)

Over— But not 

over—

Married

filing jointly

Head of 

household

---

$15,000

$16,250

$22,500

$24,375

$25,000

$30,000

$32,500

$37,500

$50,000

$15,000

$16,250

$22,500

$24,375

$25,000

$30,000

$32,500

$37,500

$50,000

---

.5

.5

.5

.5

.5

.5

.2

.1

.1

.0

.5

.5

.5

.2

.1

.1

.1

.1

.0

.0

.5

.2

.1

.1

.1

.0

.0

.0

.0

.0

X .

And your filing status is—

2003

MARTHA BARNARD 000 00 0088

1,000

1,000

1,000

1,000

1,000

26,819

10

100
5-10 Lesson 5

WAGE EARNER

STUDENT NOTES
Lesson 5

International Segment I-5-1

INTRODUCTION AND OBJECTIVES

This lesson will discuss how to compute the foreign tax credit in 

situations where a U.S. citizen could pay taxes twice on the same 

income—once to the government of the foreign country where the 

income was sourced and once to the U.S. Government. This segment will address the foreign tax credit only as it applies to U.S. 

citizens and residents.

In the IN segment of the income lesson, the topic of worldwide 

income was discussed. U.S. citizens and residents compute their 

U.S. taxes based on their worldwide income. This sometimes leads 

to a situation when a U.S. citizen may be paying tax twice on the 

same income. In order to avoid double taxation, a foreign tax credit 

was created. This allows an individual to take a tax credit for those 

taxes paid to a foreign government on income from sources in a foreign country. 

As explained in Lesson 5, Miscellaneous Tax Credits, like other tax 

credits, the foreign tax credit is a dollar-for-dollar reduction in the 

amount of tax. However, in some cases, not all taxes paid to a foreign government can be used in the computation of the foreign tax 

credit. 

After completing this lesson, you should be able to supplement the 

information you learned in the basic text and:

■ Determine which taxes are eligible for the foreign tax credit.

■ Apply the criteria for claiming the foreign tax credit

■ Accurately compute the foreign tax credit using Form 1116 or 

tax preparation software

■ Assist taxpayer in compiling the documents necessary for a paid 

professional to complete the return.

WHAT TAXES QUALIFY FOR THE CREDIT

There are several factors to consider when determining if a tax 

paid to a foreign government is eligible for the foreign tax credit. 

They include:

1. Was the income foreign source?

2. What type of tax was paid to the foreign government?

3. Will the taxpayer receive some kind of specific economic benefit 

from the payment of this tax?

In this part of the lesson, we’ll study the criteria for claiming the 

foreign tax credit.

FOREIGN TAX

CREDIT Lesson 5

International Segment
Lesson 5 I-5-2 International Segment

The taxpayer must have income from a foreign country on which 

he/she is taxed by a foreign country. The tax imposed on the income 

must be similar to the income tax imposed in the U.S. This simply 

means that the income must be from a country other than the U.S. 

and that the tax paid must be similar to U.S. income tax. Let’s look 

at some examples.

Example 1

Robb and Betty Grant are U.S. citizens who reside in France. The 

schedule B on their U.S. tax return contains the following:

 $500, Lee County National Bank (U.S.)

 $600, Banque National de Paris (French)

They paid income taxes on both types of interest to both countries. 

On their U.S. tax return, they can compute a foreign tax credit 

against the taxes that they pay to the U.S. on the interest received 

from the French bank. They would need to check with the French 

taxing authorities to determine if they can claim a similar tax 

credit on their French tax return for the interest income from the 

U.S. bank.

Example 2

Marie Elliott is a U.S. citizen who lives in Hong Kong. She owns a 

house in Hong Kong and paid $2,000 in real estate taxes for her 

home and $1,000 in personal property taxes. She also paid $300 in 

income taxes to the government of Hong Kong. She is not able to 

claim a foreign tax credit for either the real estate taxes paid or the 

personal property taxes paid since these two taxes are not income 

taxes. She can, however, use the $300 in income taxes paid to Hong 

Kong to compute a foreign tax credit. (Note—she can take the real

estate taxes that she paid and deduct them as itemized deductions 

if she itemizes on her U.S. tax return. Foreign personal property 

taxes are only deductible if they relate to the production of income 

or a trade/business.)

Exercise 1

The following is a list of the income on Anne’s U.S. income tax 

return. She is a U.S. citizen living in Canada. She also had to pay 

taxes on each of these types of income to Canada. Indicate on 

which of the following a foreign tax credit may be computed.

a. Wages from her job in the U.S.

b. Interest income from a U.S. bank.

c. Interest income from a Canadian bank.

d. Dividend income from a U.S. corporation.

e. Dividend income from a Canadian corporation.
Lesson 5

International Segment I-5-3

Exercise 2

Determine if the following taxes paid to a foreign government can 

be used to compute the foreign tax credit. All taxpayers are U.S. 

citizens.

a. Martha pays $1,200 a year in taxes. This tax is based on 

the number and types of appliances which she owns and 

uses in her home.

b. Jean pays an inheritance tax to the Spanish government. It is based on an inheritance she received upon 

the death of an uncle.

c. Dorothy lives in Jamaica. She paid $1,500 to the 

Jamaican government for her salaried income which she 

earned in Jamaica.

d. Henry lives in Haiti. He paid $100 in taxes to the 

Haitian government. This tax was based on his type of 

living accommodations, the location of his residence and 

the size of this family.

In addition to the requirements that the tax be paid to the foreign 

country on income derived from a foreign country and the tax be 

an income tax similar to the income tax as defined under U.S. law, 

the tax must also not be payment for a specific economic benefit. 

Simply put, the “tax” cannot actually be a “payment” that results 

in an individual receiving goods, services or the right to use certain 

properties which are not available to others who are subject to the 

income tax that is generally imposed by the foreign country. A taxpayer cannot receive any specific benefit, directly or indirectly from 

paying a tax.

Example 3

Bob lives in Country X. He owns and operates his own business 

in this country. This country has a two tier income tax system. 

Everyone pays income tax at graduated rates depending upon their 

income. Bob also pays income tax based upon the profits of his business. This second level of income tax gives Bob the right to reduced 

fees for telephones, utilities and rents for his business. The government of Country X calls it an income tax because it is based upon 

the profits of the business. If Bob did not pay this tax, he could not 

rent a government-owned building and he would pay significantly 

more for the utilities and his business telephone usage. Since Bob 

receives a specific economic benefit for the second tier of income 

tax that he pays, he cannot use those tax payments to compute a 

foreign tax credit on his U.S. tax return. However, the first tier of 

income taxes are similar to U.S. income taxes and can be used to 

figure his foreign tax credit.
Lesson 5 I-5-4 International Segment

Country Restrictions. Aside from the restrictions that we have 

already discussed, there are also certain countries to which a taxpayer may pay foreign income taxes but cannot claim a foreign tax 

credit. Generally the reason a credit may not be claimed for tax 

paid to one of these countries is because the Secretary of State has 

designated the country as one that repeatedly provides support for 

acts of international terrorism.

The credit can also be denied to countries with which the United 

States has no diplomatic relations, or countries whose government 

the United States does not recognize. At the time of this writing, 

income taxes paid to the following countries are not eligible for the 

foreign tax credit.

CUBA

IRAN

IRAQ

LIBYA

NORTH KOREA

SYRIA

SUDAN

Example 4

Ralph is a U.S. citizen who has investments in both Belgium and 

Iran. On these investments Ralph pays income tax to these two 

countries by withholding tax from his dividend checks. Ralph can 

claim the taxes paid to Belgium when computing the foreign tax 

credit. The income taxes paid to Iran do not qualify for a foreign tax 

credit.

TYPES OF INCOME

A separate Form 1116 must be completed for each different type 

of income. We will only be studying three income categories: passive income, high withholding tax, interest and general limitation 

income. Remember that you can only check one income category 

per form and separate Forms 1116 must be submitted for each category. Your tax preparation software will do this for you.
Lesson 5

International Segment I-5-5

Exhibit 1 Form 1116

of as of

2003

)

OMB No. 1545-0121 Foreign Tax Credit

Form 1116 (Individual, Estate, or Trust)

Department of the Treasury

Internal Revenue Service

 Attach to Form 1040, 1040NR, 1041, or 990-T. Attachment

 See separate instructions. Sequence No. 19

Name Identifying number as shown on page 1 of your tax return

Passive income Lump-sum distributions

High withholding tax Dividends from a DISC or former DISC

interest

Financial services income General limitation income

Certain distributions from a foreign

sales corporation (FSC) or former

FSC

a Shipping income

b

c

d

e

g

h

i

Use a separate Form 1116 for each category of income listed below. See Categories of Income on page 3 of the instructions. Check only one

box on each Form 1116. Report all amounts in U.S. dollars except where specified in Part II below.

f

Section 901(j) income

j

Certain income re-sourced by treaty

(99)

2003

Passive Income. Passive income generally includes the following 

types of income: dividends, interest, royalties, rents and annuities. 

If you are assisting a person who has one of these types of passive 

income from a foreign country, and he or she paid income taxes to a 

foreign country, you can use your software to compute a foreign tax 

credit.

Example 5

Darlene is a U.S. citizen living in Venezuela. She keeps a bank 

account in the Banco Nacional de Venezuela. In 2003, she received 

$380 in interest income from the Venezuelan bank. She also paid 

Venezuelan income taxes on this interest income. On her U.S. 

return, she would claim a foreign tax credit for the taxes paid to 

Venezuela on her interest income. She would check the box for the 

“Passive income” category on Form 1116.

High Withholding Tax Interest. Certain interest income is not 

included in the passive income category. If the taxpayer you are 

helping had interest income on which at least 5% foreign gross

income tax was withheld, then this income is classified as high 

withholding tax interest and not passive income.

Example 6

Michael is a U.S. citizen who lives in the United Kingdom. He 

maintains a bank account in a London bank. According to local 

law, the bank withholds a mandatory 27.5% of interest income 

as income tax. Since the withholding rate is at least 5%, the high 

withholding tax interest category would be checked on his Form 

1116.

Example 7

Regina lives in Singapore and is a U.S. citizen. She has both dividend income and interest income from countries outside the United 

States. Her foreign bank withholds 15% of her interest income 

for income taxes. She also pays foreign income taxes on her dividend income. Regina must complete two Forms 1116. Her foreign 

dividend income is “passive income” and indicated as such on one 

Form 1116. Her foreign interest income is in the “high withholding 
Lesson 5 I-5-6 International Segment

tax interest” category and is on another Form 1116. The credits on 

these separate Forms 1116 will eventually be combined. This will 

be studied later in this lesson.

General Limitation Income. The final income category on Form 

1116 is the “general limitation income” category. If the person 

you are helping has foreign income that does not come under any 

of the other categories on Form 1116, then that foreign income 

comes under the general limitation income category. Most often, 

this would be wages earned in a foreign country that an individual 

does not exclude, or excludes only part of, under the foreign earned 

income exclusion.

Example 8

Siegfried lives in Switzerland and is a U.S. citizen. He works in 

Switzerland and pays income taxes to Switzerland on his earnings. 

He does not elect to claim a foreign earned income exclusion. He 

can claim a foreign tax credit for the taxes paid on his earnings to 

the Swiss government. He checks the box for the general limitation 

income category on his Form 1116. 

High Taxed Income. If the individual you are assisting has passive income which is taxed by a foreign government at a rate that 

is higher than the highest U.S. income tax rate, then the foreign tax 

credit for that income would be computed under the general limitation category. (Passive income was discussed earlier in this lesson.) 

In 2003, the highest U.S. income tax rate is 38.6%. Therefore, if the 

person pays more than 38.6% on the foreign source passive income 

for which he or she claimed the credit, then the credit is computed 

under the “general limitation” category.

Example 9

Maria lives in Brazil and is a U.S. citizen. She has a bank account 

in Brazil and pays 45% income tax on her interest income. Even 

though interest income is normally passive income for purposes of 

the foreign tax credit, this income would be listed under the “general limitation” category on Form 1116 since the rate of income 

tax she pays on this passive income is higher than the highest U.S. 

income tax rate.

Example 10

Bernard is a resident of Barbados and a U.S. citizen. He keeps a 

bank account in Barbados. In 2003 he paid 17% income tax on his 

interest income from his bank account in Barbados. Since 17% (the 

tax rate he paid) is not more than 38.6% (the highest U.S. income 

tax rate) and since the 17% that Bernard paid was not paid by 

withholding, this income fails into the “passive income” category of 

Form 1116.
Lesson 5

International Segment I-5-7

OTHER FOREIGN TAX CREDIT CONCEPTS

We have already discussed the income categories that are listed on 

separate sections of the Form 1116. In addition, the top of Form 

1116 has a line to indicate the name of the country of residence of 

the taxpayer. This will need to be entered for tax software to correctly figure the tax credit. 

Part I is used to figure the taxable income from foreign sources in 

each income category. If the person you are helping has one type of 

foreign income that comes from several foreign countries, you use 

one Form 1116. You will note that there is room on Form 1116 for 

up to 3 countries.

Example 11

George is both a U.S. citizen and resident. He has interest income 

from both Canada and Mexico, as well as the U.S. His software will 

print only one Form 1116 since all the interest income is in the passive income category.

On Line 1, list all foreign income that fits under the category 

checked at the top of Form 1116. You will list that income separately for each foreign country.

Example 12

George had $300 in interest income from his Canadian bank and 

$200 in interest income from his Mexican bank. See the completed 

Form 1116, line 1 for his income in Exhibit 2 which follows.

Canada Mexico

300 200 500

P

July 21,

(subject to c

Taxable Income or Loss From Sources Outside the United States (for Category Checked Above)

Foreign Country or U.S. Possession

ha

Total

A B C (Add cols. A, B, and C.)

Enter the name of the foreign country or U.S.

possession 

Gross income from sources within country

shown above and of the type checked above (see

page 7 of the instructions):

1

1

Part I

l

Exhibit 2 Form 1116, Line 1

Note: If the taxpayer you are assisting has claimed the foreign 

earned income exclusion, enter on line 1 of Form 1116 for general 

limitation income only the amount of earned income not excluded.
Lesson 5 I-5-8 International Segment

Example 13

Monique lives in France and is a U.S. citizen. She earned $84,000 in 

2002 in France. Monique claimed the foreign earned income exclusion of $80,000 (discussed in an earlier lesson). As illustrated in 

Exhibit 3 below, she would only enter $4,000 on line 1

of her Form 1116 ($84,000 earned Income – $80,000 exclusion).

P

July 21,

(subject to c

Taxable Income or Loss From Sources Outside the United States (for Category Checked Above)

Foreign Country or U.S. Possession

ha

Total

A B C (Add cols. A, B, and C.)

Enter the name of the foreign country or U.S.

possession 

Gross income from sources within country

shown above and of the type checked above (see

page 7 of the instructions):

1

1

Part I

l

Exhibit 3 Form 1116, Line 1

France

4,000 4,000

Lines 2–5 are probably the hardest and most confusing lines to 

complete on the Form 1116. Let’s review the situations that we will 

not be studying.

1. Expenses directly allocable to the income. If the person 

you are assisting has expenses that are related directly to the 

income claimed on line 1 such as employee business expenses, 

and the income claimed on line 1 was earned income, then you 

may recommend that this person seek professional assistance or 

contact the IRS.

2. Investment Interest Expense. If a person borrowed money in 

order to purchase investment property such as stock, then some 

special allocations may need to be done. They may wish to contact the IRS or seek a professional preparer.

3. Foreign Losses. If the person you are helping had any type of 

foreign losses such as net losses from selling capital assets or a 

net loss from being a limited partner, they may wish to hire a 

professional preparer or contact the IRS if they wish to prepare 

their own return.

Now that we have discussed what areas are beyond the scope of 

VITA, let’s continue with the completion of Part I.

Line 3. Your software will complete line 3a if you completed a 

Schedule A for the person you are assisting to itemize his or her 

deductions. The total of the itemized deductions not directly related 

to foreign or U.S. income are medical expenses, real estate taxes 

and gifts to charity.

If the person you are assisting does not itemize deductions, then 

the standard deduction claimed on line 37 of the Form 1040 would 

be entered on line 3a. 
Lesson 5

International Segment I-5-9

Example 14

Betty is claiming a foreign tax credit. She is single and had itemized deductions of $6,900 for 2003. Her Schedule A includes $6,200 

of real estate taxes and $700 of charitable con-tributions. (See 

Exhibit 4.)

3 Pro rata share of other deductions not definitely

related:

Certain itemized deductions or standard

deduction (see instructions)

a

b Other deductions (attach statement)

c Add lines 3a and 3b

d Gross foreign source income (see instructions)

e Gross income from all sources (see instructions)

f Divide line 3d by line 3e (see instructions)

g Multiply line 3c by line 3f

Exhibit 4 Form 1116, Line 3

6,900

6,900

Example 15

Rebecca wishes to claim a foreign tax credit. She is single and had 

itemized deductions of $2,500. Since the standard deduction for a 

single person for 2003, is $4,750, it is more advantageous to take 

the standard deduction. Rebecca’s Form 1116 would therefore have 

a $4,750 entry on line 3a. (See Exhibit 5.)

All income from foreign sources in the category checked at the 

top of Form 1116 is listed on line 3d. If the foreign earned income 

exclusion was claimed on Form 2555 and if the Form 1116 is for the 

general limitation category, then the amount of the claimed exclusion is included here as well. For example, on line 3d for Monique 

from one of our prior examples the entry would be $84,000. That’s 

the sum of $4,000 from line 1 plus the $80,000 exclusion she 

claimed. Under most circumstances, line 3d and line 1 will be the 

same.

Line 3e is gross income from all sources. Usually, this line will be 

the same as line 22 of the Form 1040. If a Form 2555 was completed and the Foreign Earned Income Exclusion was claimed, 

then the amount of the exclusion must be added back to the gross

income amount on line 22.

The software’s next step is to determine the percentage of foreign 

source income to total income. This is done by dividing line 3d by 

line 3e and it will enter the answer on line 3f. Then it takes line 3c 

and multiplies it by the percentage determined on line 3f and then 

enters this answer on line 3g. For our purposes line 6 will then be 

the same as line 3g. This number represents the amount of your 

deductions allocated to foreign income in the category.

Your software will compute the rest of Part I and has begun to 

enter figures on Part III.
Lesson 5 I-5-10 International Segment

Part II. Foreign Taxes Paid or Accrued. Part II of Form 1116 

deals with the amount of foreign taxes paid or that may be owed 

(accrued). Since the foreign tax credit is allowed when a U.S. taxpayer either pays or accrues taxes to a foreign government, the 

amount paid or owed to a foreign government must be indicated on 

the tax return in this section.

Before we can discuss how to complete Part II, we need to discuss 

cash basis and accrual basis taxpayers. A cash basis taxpayer is 

one who reports income when actually or constructively received, 

and expenses when they are paid. The majority of people who file 

individual income tax returns are cash basis taxpayers. If the person is a cash basis taxpayer, he or she has a choice to take foreign 

tax credit using the cash or accrual method.

Example 16

Marie is a U.S. citizen who resides in Argentina, where she is currently employed. She is paid every week on Thursday. Her last 

payday for 2003 is December 30th. She is paid based upon the time 

she worked in the previous week Sunday through Saturday. Since 

she is a cash basis taxpayer, she claims on her 2003 tax return the 

income that she was paid from January 1, 2003 through December 

31, 2003 no matter when she earned it or when she may have been 

entitled to it. She also claims as deductions, expenses for which she 

actually paid in 2003 even though she may have incurred the debt 

prior to 2003.

An accrual basis taxpayer computes income and deductions differently. A person who is on the accrual basis computes income 

when he or she actually earned it or became entitled to it. 

Therefore, his or her deductions are computed based on when those 

debts were incurred, but not necessarily paid.

Example 17

If Marie was an accrual basis taxpayer instead of a cash basis taxpayer, then she would declare as her 2003 income the money she 

had earned from her employer through December 31, even though 

she would not have been paid for her last week’s work until early 

2004.

When computing the amount of foreign taxes for Part II of Form 

1116, you will need to know if the taxpayer is on a cash basis or an 

accrual basis. If the person you are helping does not know, then he 

or she is probably on a cash basis. Taxpayers on the accrual basis 

should be referred to professional tax preparers for assistance.

A taxpayer on the cash basis may choose to use the accrual method 

to determine the foreign tax credit. However, once this choice has 

been made the taxpayer must use the accrual method for the foreign tax credit on all future tax returns.
Lesson 5

International Segment I-5-11

In the U.S., we have a pay-as-you-go system. That means that we 

pay taxes on taxable income as we make it. When a wage-earner 

gets a paycheck, an amount has already been withheld by his or 

her employer for federal income tax. If there has not been withholding on taxable income, then estimated tax payments must be made.

Many foreign countries have a different system. In some cases, the 

individual simply reports his or her taxable income and the government involved computes the tax and bills the taxpayer. In other 

instances, taxpayers make payments in one year for income made 

the previous year. In these instances, a cash basis taxpayer may 

wish to use the accrual basis for computing the foreign tax credit 

since his or her U.S. tax would be based on the income made in 

2003 but they would not actually pay the taxes or know the actual 

tax amount until after the end of the tax year. But remember that 

once the choice to use the accrual method has been made, it must 

be used on all future tax returns in computing the foreign tax 

credit.

On Part II of Form 1116, you must indicate if the credit is being 

claimed for foreign taxes actually paid in 2003 or if it is being 

claimed for foreign taxes accrued during 2003. Just as there is 

space in Part I of the form to claim income from 3 different countries, there is space in Part II for claiming payments to these 3 different countries.

Part II also has two separate sections in which you indicate the 

amounts withheld, paid, or accrued in the foreign currency and 

then convert these amounts into U.S. dollars.

FOREIGN EXCHANGE RATE

One of the questions that frequently arise is what currency 

exchange rate should be used. If you are using the cash basis, then 

the exchange rate that is the most accurate for the date of the payment should be used. 

If the person you are helping had tax withheld throughout the year, 

then you can use the annual average exchange rate. If the person 

you are assisting is using the accrual method to claim his or her 

foreign taxes paid, you must generally use the average exchange 

rate for the tax year.

Column (x) of the Form 1116 Part II is a summary (in U.S. dollars) 

of all the foreign taxes paid or accrued on income in the category 

checked at the top of Form 1116. 

Line 8 of Part II is the total of foreign taxes paid or accrued to 

all foreign countries. If the foreign taxes are paid or accrued on 

foreign income that falls into more than one separate category of 

income, but the tax is not specifically allocable to any one of the 

items of income, an allocation of the tax to each separate category 

must be made. This allocation is made by multiplying the total foreign income by a fraction. The numerator of the fraction is the net 

income of each of the separate categories. The denominator is total 

net foreign income. 
Lesson 5 I-5-12 International Segment

Exercise 3

Charles is a U.S. citizen who lives and works in the United 

Kingdom. He takes the foreign earned income exclusion for his 

wages. His only other foreign income is interest income from his 

London bank. British income taxes were withheld at 27.5%. In 

2003, his gross interest income from his London bank was £1,200. 

The average exchange rate for 2003 for purposes of this exercise 

was £.6 to the U.S. dollar. Charles uses the single filing status on 

his tax return and claims a standard deduction for 2003. He had 

earned income of $60,000 which he excluded. He also had U.S. 

interest income of $3,000 and his only other income was a short 

term capital gain of $35,000 from a U.S. source. Since 27.5% is 

also the tax rate for interest income in the United Kingdom, he 

had no additional income tax due to Great Britain on his interest income. Parts of Charles’ Form 1040 are reproduced below. 

Compute the first page of the Form 1116 for Charles.
Lesson 5

International Segment I-5-13

P

July 2

(subject to ch

d Total number of exemptions claimed

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7

Income 8a Taxable interest. Attach Schedule B if required 8a

b Tax-exempt interest. Do not include on line 8a 8b Attach

Forms W-2 and

W-2G here.

Also attach

Form(s) 1099-R

if tax was

withheld.

9a Ordinary dividends. Attach Schedule B if required 9a

10 Taxable refunds, credits, or offsets of state and local income taxes (see page 25) 10

11 Alimony received 11

12 Business income or (loss). Attach Schedule C or C-EZ 12

Enclose, but do

not attach, any

payment. Also,

please use

Form 1040-V.

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions 15a 15b b Taxable amount (see page 25)

16a Pensions and annuities 16a b Taxable amount (see page 25) 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F 18

19 Unemployment compensation 19

20a Social security benefits 20a b Taxable amount (see page 27) 20b

21 21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income  22

IRA deduction (see page 29) 24

23

26

25

One-half of self-employment tax. Attach Schedule SE

27

Self-employed health insurance deduction (see page 33)

26

28

27

Self-employed SEP, SIMPLE, and qualified plans

29

28

Penalty on early withdrawal of savings

30

29

Alimony paid b Recipient’s SSN 

Add lines 23 through 32a 33

30

Subtract line 33 from line 22. This is your adjusted gross income 

31

Adjusted

Gross

Income

34

If you did not

get a W-2,

see page 23.

Cat. No. 11320B Form 1040 (2003)

Other income. List type and amount (see page 29)

Moving expenses. Attach Form 3903

24

25

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 76.

above 

32a 32a

Student loan interest deduction (see page 31)

31

33

Tuition and fees deduction (see page 32)

34

Educator expenses (see page 29) 23

b Qualified dividends (see page 25) 9b

b If box on 13a is checked, enter post-May 5 capital gain distributions 13b

Exhibit 7 Form 1040

60,000 00

5,000 00

35,000 00

(60,000 00)

40,000 00

40,000 00

Itemized deductions (from Schedule A) or your standard deduction (see left margin)

Form 1040 (2003) Page 2

35 Amount from line 34 (adjusted gross income) 35

Check

if:

36a

Tax and

Credits

36a

Single or

Married filing

separately,

$4,750

If you are married filing separately and your spouse itemizes deductions, or

you were a dual-status alien, see page 34 and check here 

b

36b

37 37

38 Subtract line 37 from line 35 38

39

If line 35 is $104,625 or less, multiply $3,050 by the total number of exemptions claimed on

line 6d. If line 35 is over $104,625, see the worksheet on page 35

39

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 41

45

44

You were born before January 2, 1939, Blind.

Spouse was born before January 2, 1939, Blind.

Tax (see page 36). Check if any tax is from: a Form(s) 8814 b Form 4972

44

M i d fili

Standard

Deduction

for—

42

43

45

Alternative minimum tax (see page 37). Attach Form 6251

Add lines 41 and 42 

Credit for child and dependent care expenses. Attach Form 2441

42

43

● People who

checked any

box on line

36a or 36b or who can be

claimed as a

dependent,

see page 34.

● All others:

Foreign tax credit. Attach Form 1116 if required

Total boxes  checked 

40,000 00

4,750 00

35,250 00

3,050 00

32,200 00

4,866 00

4,866 00
Lesson 5 I-5-14 International Segment

Proof as of

July 21, 2003

(subject to change)

OMB No. 1545-0121 Foreign Tax Credit

Form 1116 (Individual, Estate, or Trust)

Department of the Treasury

Internal Revenue Service

 Attach to Form 1040, 1040NR, 1041, or 990-T. Attachment

 See separate instructions. Sequence No. 19

Name Identifying number as shown on page 1 of your tax return

Passive income Lump-sum distributions

High withholding tax Dividends from a DISC or former DISC

interest

Financial services income General limitation income

Certain distributions from a foreign

sales corporation (FSC) or former

FSC

Resident of (name of country) 

Note: If you paid taxes to only one foreign country or U.S. possession, use column A in Part I and line A in Part II. If you paid taxes to

more than one foreign country or U.S. possession, use a separate column and line for each country or possession.

Taxable Income or Loss From Sources Outside the United States (for Category Checked Above)

Foreign Country or U.S. Possession Total

A B C (Add cols. A, B, and C.)

Enter the name of the foreign country or U.S.

possession 

Gross income from sources within country

shown above and of the type checked above (see

page 7 of the instructions):

1

1

Deductions and losses (Caution: See pages 9, 12, and

13 of the instructions):

2 Expenses definitely related to the income on

line 1 (attach statement)

3 Pro rata share of other deductions not definitely

related:

Certain itemized deductions or standard

deduction (see instructions)

a

b Other deductions (attach statement)

c Add lines 3a and 3b

d Gross foreign source income (see instructions)

e Gross income from all sources (see instructions)

f Divide line 3d by line 3e (see instructions)

g Multiply line 3c by line 3f

4 Pro rata share of interest expense (see instructions):

a Home mortgage interest (use worksheet on

page 12 of the instructions)

b Other interest expense

5 Losses from foreign sources

6 Add lines 2, 3g, 4a, 4b, and 5 6

7 Subtract line 6 from line 1. Enter the result here and on line 14, page 2  7

Foreign Taxes Paid or Accrued (see page 13 of the instructions)

Credit is claimed Foreign taxes paid or accrued for taxes

(you must check one) In foreign currency In U.S. dollars

Paid (s) Other

foreign taxes

paid or

accrued

(w) Other

foreign taxes

paid or

accrued

(x) Total foreign

taxes paid or

accrued (add cols.

(t) through (w))

Taxes withheld at source on: Taxes withheld at source on: Accrued

Country

(q) Rents

and royalties

(u) Rents

and royalties

(o) Date paid

or accrued (p) Dividends (r) Interest (t) Dividends (v) Interest

A

B

C

8 Add lines A through C, column (x). Enter the total here and on line 9, page 2  8

For Paperwork Reduction Act Notice, see page 16 of the instructions. Form 1116 (2003)

Shipping income

Cat. No. 11440U

Part I

Part II

a

b

c

d

e

g

h

i

k

(m)

(n)

l

Use a separate Form 1116 for each category of income listed below. See Categories of Income on page 3 of the instructions. Check only one

box on each Form 1116. Report all amounts in U.S. dollars except where specified in Part II below.

f

Section 901(j) income

j

Certain income re-sourced by treaty

(99)

2003

Exhibit 8 Form 1116I
Lesson 5

International Segment I-5-15

Part III. Now that we have completed the front page of the Form 

1116, let’s go to the back of the form. Part III is the actual computation of the Foreign Tax Credit. This is relatively simple if you just 

follow the form line by line. If you have utilized tax software and 

entered all the types of foreign source income and the amounts of 

tax paid on them to a foreign country, your form is completed at 

this point, except for three lines, Lines 10, 12 and 15.

Line 10. This line deals with carrybacks and carryovers. This 

occurs when a taxpayer pays more to a foreign government than he 

or she does to the United States on income attributable to the taxable income in the separate income category. Since the tax credit 

is limited to the amount of U.S., the surplus tax credit is available 

as a carryback or carryover. VITA volunteers will not be computing 

carrybacks or carryovers.

Line 12. A reduction to the foreign taxes paid or accrued has to be 

made under certain circumstances. For our purpose, we will cover 

the most common situation. This is the reduction for taxes allocable 

to income excluded under the foreign earned income exclusion. The 

formula for this reduction is:

Excluded Foreign Earned Income

Total Foreign Earned Income x Foreign Tax = Reduction

For our purposes, if the foreign law taxes foreign earned income 

and some other income (for example, earned income from U.S. 

sources or a type of income not subject to U.S. tax), and the taxes 

cannot be segregated, then the denominator of this fraction is the 

total amount of income subject to foreign tax.

Let’s look at an example.

Example 18

Marsha is a U.S. citizen who resides in Germany for all of 2003. 

She had wages of $85,000, and excluded $80,000 on her U.S. tax 

return. She also earned $5,000 interest on a German bank account. 

She paid $2,000 income tax to Germany on this income. She will 

allocate the $2,000 income tax as follows:

Step 1 — Allocate the tax to Passive and to General Limitation 

Income.

Passive Income: $5,000

$90,000 x $20,000 = $1,111

General Limitation Income: $85,000

$90,000 x $20,000 = $18,889
Lesson 5 I-5-16 International Segment

Step 2 — Calculate the credit reduction attributable to excluded 

income.

$80,000 (excluded income)

$85,000 (total foreign income) x $18,889 = $17,778

Form 1116 (2003) Page 2

Figuring the Credit

9 Enter the amount from line 8. These are your total foreign taxes paid

or accrued for the category of income checked above Part I 9

10 Carryback or carryover (attach detailed computation) 10

11 Add lines 9 and 10 11

12 Reduction in foreign taxes (see page 13 of the instructions) 12

13 Subtract line 12 from line 11. This is the total amount of foreign taxes available for credit 13

Part III

Exhibit 9 Form 1116

There are other reductions which can be indicated on line 12. 

However, they are all beyond the scope of VECTA. These include 

taxes attributable to boycott operations, or certain mineral income. 

It is suggested that taxpayers with these types of situations may 

wish to seek professional assistance.

Line 15—These adjustments are beyond the scope of VECTA.

More Than One Form 1116. Part IV of the Form 1116 is used as 

a summary of the foreign tax credit. As you can tell from our discussion thus far, there may be occasions when you will need to complete more than one Form 1116 for the same taxpayer. If this is the 

case, you would complete Part IV on only one Form 1116. It does 

not matter which Form 1116 you choose. You would indicate in Part 

IV of the summary Form 1116 the amount of the credit computed 

on line 21 of Part III from each Form 1116. Line 30 is then a total 

of all Forms 1116 and, for our purposes, line 32 should be the same 

as line 30. Please note that again the reduction of the credit for 

international boycott operations (line 31) is beyond the scope of this 

program and will not be discussed.

18,889

18,889

17,778

1,111
Lesson 5

International Segment I-5-17

Exhibit 10 Form 1116, page 2

Proof as of

July 21, 2003

(subject to change)

Form 1116 (2003) Page 2

Figuring the Credit

9 Enter the amount from line 8. These are your total foreign taxes paid

or accrued for the category of income checked above Part I 9

10 Carryback or carryover (attach detailed computation) 10

11 Add lines 9 and 10 11

12 Reduction in foreign taxes (see page 13 of the instructions) 12

13 Subtract line 12 from line 11. This is the total amount of foreign taxes available for credit 13

14 Enter the amount from line 7. This is your taxable income or (loss) from

sources outside the United States (before adjustments) for the category

of income checked above Part I (see page 14 of the instructions) 14

15 Adjustments to line 14 (see page 14 of the instructions) 15

16 Combine the amounts on lines 14 and 15. This is your net foreign

source taxable income. (If the result is zero or less, you have no foreign

tax credit for the category of income you checked above Part I. Skip

lines 17 through 21. However, if you are filing more than one Form

1116, you must complete line 19.)

Individuals: Enter the amount from Form 1040, line 38. If you are a

nonresident alien, enter the amount from Form 1040NR, line 36.

Estates and trusts: Enter your taxable income without the deduction

for your exemption

17

17

18 Divide line 16 by line 17. If line 16 is more than line 17, enter “1” 18

Individuals: Enter the amount from Form 1040, line 41. If you are a nonresident alien, enter the

amount from Form 1040NR, line 39.

19

19

20 Multiply line 19 by line 18 (maximum amount of credit) 20

Enter the smaller of line 13 or line 20. If this is the only Form 1116 you are filing, skip lines 22 through

30 and enter this amount on line 31. Otherwise, complete the appropriate line in Part IV (see 

page 16 of the instructions) 

21

21

Summary of Credits From Separate Parts III (see page 16 of the instructions)

22 Credit for taxes on passive income 22

23 Credit for taxes on high withholding tax interest 23

24 Credit for taxes on financial services income 24

25 Credit for taxes on shipping income 25

26

Credit for taxes on dividends from a DISC or former DISC and certain

distributions from a FSC or former FSC

26

27

Credit for taxes on certain income re-sourced by treaty

27

28

Credit for taxes on lump-sum distributions

28

29 Credit for taxes on general limitation income 29

30 Add lines 22 through 29 30

32 Reduction of credit for international boycott operations. See instructions for line 12 on page 13 32

33 Subtract line 32 from line 31. This is your foreign tax credit. Enter here and on Form 1040, line 44;

Form 1040NR, line 42; Form 1041, Schedule G, line 2a; or Form 990-T, line 40a  33

Part IV

Part III

Caution: If you figured your tax using the special rates on qualified dividends or capital gains, see page

15 of the instructions.

16

Printed on recycled paper

Estates and trusts: Enter the amount from Form 1041, Schedule G, line 1a, or the total of Form 990-T,

lines 36 and 37

Form 1116 (2003)

31 Enter the smaller of line 19 or line 30 31

Caution: If you are completing line 19 for separate category g (lump-sum distributions), see page 15 of the instructions.
Lesson 5 I-5-18 International Segment

  SUMMING UP THIS LESSON  

 In order to qualify for a foreign tax credit, income on which 

the taxes are paid must be foreign source.

 The tax being paid must be similar to U.S. income tax.

 The individual paying the tax cannot derive a specific economic benefit and still claim the foreign tax credit.

 The foreign tax credit is computed on Form 1116.

 A separate Form 1116 must be completed for passive income, 

interest income which is subject to a gross withholding rate 

of at least 5%, and other income that falls under the general 

limitation category.

 If passive income, minus allocations, is subject to tax at a rate 

that is higher than 35%, then it falls into the general limitation category.

 If an individual claims the foreign earned income exclusion, 

the excluded amount is not shown on line 1 of Part I of the 

Form 1116.

 A cash basis taxpayer may choose the accrual method to 

claim the foreign tax credit. Once the choice has been made, 

the taxpayer must continue to use the accrual method.

 If the accrual method of claiming the foreign tax credit is 

used, use the average annual currency exchange rate to convert the foreign money into U.S. dollars.

 If all or part of the taxes claimed in Part II of Form 1116 are 

attributable to income excluded under the foreign earned 

income exclusion, then the taxes available for credit must be 

reduced by the taxes paid or accrued on the excluded income. 

The reduction is entered on Part III, line 12.

 If there is more than one Form 1116 for the same person, 

Part IV need only be completed on one of the forms.
Lesson 5

International Segment I-5-19

FOREIGN TAX

CREDIT ANSWERS TO EXERCISES Lesson 5

International Segment

1. c, e

2. a. no

 b. no

 c. yes

 d. no
Lesson 5 I-5-20 International Segment

Proof as of

July 21, 2003

(subject to change)

OMB No. 1545-0121 Foreign Tax Credit

Form 1116 (Individual, Estate, or Trust)

Department of the Treasury

Internal Revenue Service

 Attach to Form 1040, 1040NR, 1041, or 990-T. Attachment

 See separate instructions. Sequence No. 19

Name Identifying number as shown on page 1 of your tax return

Passive income Lump-sum distributions

High withholding tax Dividends from a DISC or former DISC

interest

Financial services income General limitation income

Certain distributions from a foreign

sales corporation (FSC) or former

FSC

Resident of (name of country) 

Note: If you paid taxes to only one foreign country or U.S. possession, use column A in Part I and line A in Part II. If you paid taxes to

more than one foreign country or U.S. possession, use a separate column and line for each country or possession.

Taxable Income or Loss From Sources Outside the United States (for Category Checked Above)

Foreign Country or U.S. Possession Total

A B C (Add cols. A, B, and C.)

Enter the name of the foreign country or U.S.

possession 

Gross income from sources within country

shown above and of the type checked above (see

page 7 of the instructions):

1

1

Deductions and losses (Caution: See pages 9, 12, and

13 of the instructions):

2 Expenses definitely related to the income on

line 1 (attach statement)

3 Pro rata share of other deductions not definitely

related:

Certain itemized deductions or standard

deduction (see instructions)

a

b Other deductions (attach statement)

c Add lines 3a and 3b

d Gross foreign source income (see instructions)

e Gross income from all sources (see instructions)

f Divide line 3d by line 3e (see instructions)

g Multiply line 3c by line 3f

4 Pro rata share of interest expense (see instructions):

a Home mortgage interest (use worksheet on

page 12 of the instructions)

b Other interest expense

5 Losses from foreign sources

6 Add lines 2, 3g, 4a, 4b, and 5 6

7 Subtract line 6 from line 1. Enter the result here and on line 14, page 2  7

Foreign Taxes Paid or Accrued (see page 13 of the instructions)

Credit is claimed Foreign taxes paid or accrued for taxes

(you must check one) In foreign currency In U.S. dollars

Paid (s) Other

foreign taxes

paid or

accrued

(w) Other

foreign taxes

paid or

accrued

(x) Total foreign

taxes paid or

accrued (add cols.

(t) through (w))

Taxes withheld at source on: Taxes withheld at source on: Accrued

Country

(q) Rents

and royalties

(u) Rents

and royalties

(o) Date paid

or accrued (p) Dividends (r) Interest (t) Dividends (v) Interest

A

B

C

8 Add lines A through C, column (x). Enter the total here and on line 9, page 2  8

For Paperwork Reduction Act Notice, see page 16 of the instructions. Form 1116 (2003)

Shipping income

Cat. No. 11440U

Part I

Part II

a

b

c

d

e

g

h

i

k

(m)

(n)

l

Use a separate Form 1116 for each category of income listed below. See Categories of Income on page 3 of the instructions. Check only one

box on each Form 1116. Report all amounts in U.S. dollars except where specified in Part II below.

f

Section 901(j) income

j

Certain income re-sourced by treaty

(99)

2003

Exercise 3 Form 1116I

Charles Green

x

000 - 00 - 6492

United Kingdom

United

Kingdom

2,000

4,750

4,750

2,000

100,000

.0200

95

95

12/31/03 330

x

550 550

2,000

95

1,905

550
Lesson 6 6-1

BASIC

FINISHING

THE RETURN Lesson 6

INTRODUCTION AND OBJECTIVES

In this lesson you will learn how to report federal 

income tax payments and figure the overpayment or 

balance due. You will also learn how to determine if 

estimated taxes should be paid. Additionally, you will 

learn how to finish the return and have the taxpayer 

sign the return.

After completing this lesson you should be able to:

■ Calculate and report federal income tax withheld 

from all sources.

■ Calculate and report estimated tax payments.

■ Calculate the refund or amount due.

■ Determine if estimated taxes should be paid.

■ Determine if changes to the taxpayer’s W-4 or

W-4P should be suggested.

Please pay close attention to the section about 

identifying the returns that you work on. It is 

critical for you to enter the correct site identification number in the preparer’s signature 

section of the return. The number goes in the 

designated area on the forms with the preprinted “P” followed by 8 digits or in the PTIN/

SSN field of the return.

This lesson will provide detailed information on how 

to finish the tax return. The following checklist is provided as a quick reference of the steps needed to finish the return.

CHECKLIST FOR FINISHING THE RETURN

Withholdings, Payments and Other Credits:

■ Add all Federal Income Tax Withholding from 

Form W-2, box 2, and include on return.

■ Add all Federal Income Tax Withholding from box 

4 of Forms 1099R, 1099INT, 1099DIV and 1099G. 

Include in the payments section of the return.

■ Include all estimated tax payments in the payment section.

POTENTIAL

PITFALLS

Form W-2, box 4, 

shows social security 

tax withheld and box 

6 shows Medicare tax 

withheld. These are 

not the same as federal 

 income tax withheld. Do 

not report the amounts 

in box 4 and box 6 as 

federal income tax 

withheld.

POTENTIAL

PITFALLS

When a taxpayer 

worked for more than 

one employer during 

the year, add up the 

amounts shown in box 

4 of all Forms W-2. 

If the total in box 4 

of all forms exceeds 

$5,263.80 the taxpayers 

should claim a refund of 

excess social security 

tax withheld. Use the 

worksheet in Pub. 

505, Tax Withholding 

and Estimated Tax to 

compute the refund.
6-2 Lesson 6

BASIC

■ Include the amount of last year’s refund that was applied to 

this year in the payment section. Note: If you need assistance 

with how to do this with TaxWise®, ask your site coordinator 

or computer specialist.

■ Calculate all of the refundable credits (covered in later lessons) 

that the taxpayer is entitled to and include them in the payments section of the return. Using TaxWise® software will help 

you determine what credits that the taxpayer is entitled to.

■ Add all payments together and enter them on the total payments line. TaxWise® will do this step for you.

■ Subtract the total payments from the total tax. TaxWise® will 

also complete this step for you.

■ Record the account number and the routing number for taxpayers who want their refund direct deposited. Note: TaxWise® will 

ask you for this information on the Main Information screen 

and on the tax form. This is to help ensure that you have keyed 

in the correct information. Complete the line to apply part of the 

refund to next year, if the taxpayer wishes to use this option.

Paying Taxes or Adjusting Withholding Taxes if Balance 

Due:

■ Explain the payment option (check, credit card, direct debit and 

installment agreement) to a taxpayer who owes money.

■ Inform the taxpayer about the identifying information to 

include on payments made by check.

■ Explain that interest and penalties continue to accrue on the 

unpaid balance even if the taxpayer has a valid installment 

agreement.

■ Explain estimated taxes to taxpayers who expect to owe tax in 

2004.

■ Assist the taxpayer with completing form 1040ES for 2004. 

TaxWise® can do this for you. It will even print the vouchers for 

the payments.

■ Provide the taxpayer with the mailing address for the estimated 

payments. (Some sites provide unstamped envelopes for the taxpayers.)

■ Encourage taxpayers to consider adjusting their withholding (on 

Form W-4 or W-4P) if they have a large refund or owe more than 

$1,000 on the return.

Advance Earned Income Tax Credit (AEIC):

■ Inform taxpayers about the Advance Earned Income Credit, if 

they were eligible for EIC this year and have at least one qualifying child. Be prepared to give the taxpayer a Form W-5, if they 

request it.
Lesson 6 6-3

BASIC

Name, Address, and Taxpayer Identification Section of 

Return:

■ Complete the name and address section of the tax return. Use 

the taxpayer’s label (if available) on a return prepared by hand. 

For computer generated returns, this section will be completed 

based on the information you entered in the Main Information 

section of the TaxWise® software.

■ Make sure that you include the Taxpayer Identification Number 

for all taxpayers and dependents listed on the return. Note: If 

you are using TaxWise®, you will get an error when you run 

diagnostics if you have not included the identifying number. 

TaxWise® also has a diagnostic feature that helps you check the 

accuracy of the identifying number by comparing it to a database of information from the Social Security Administration. 

This does not guarantee that the name and social security number match. You should always try to look at the actual Social

Security cards if possible.

■ Mark the Presidential Election Campaign Box for the taxpayer. 

Note: If the taxpayer has a total tax of zero, the presidential 

campaign box should be marked no.

Return Assembly and Copy:

■ Assemble the return. If filing a paper return for the taxpayer, 

forms should be in the order of the sequence number in the 

upper right corner. Procedures on assembling electronic returns 

may vary from site to site. Please ask your site coordinator for 

this information.

■ Retain a copy of all electronic returns. Remember that you are 

not allowed to retain copies of the tax returns at your site past 

the end of the filing season. The retained copies should be forwarded to your local IRS territory office, where they will be 

retained until the end of the calendar year (as prescribed by the 

electronic filing regulations).

Site Identification Number on Forms 1040, 1040A, & 1040EZ

Congress annually asks the IRS to provide the number of returns 

that were filed by volunteer tax assistance sites. For statistical 

purposes, the IRS requests that all Federal returns be identified 

with a Site Identification Number. The Site Identification Number 

is entered in the Paid Preparer’s section of the tax return. The 

Internal Revenue Service Submission Processing Center will count 

each return processed using this data. 

More about this topic is covered later in this lesson.

.
6-4 Lesson 6

BASIC

On Site Quality Review:

■ Submit the completed return to the quality reviewer at your 

site. Note: Not all sites have enough volunteers to have a designated quality reviewer. In this case, ask another volunteer to 

review the form you prepared. Using TaxWise® is not a substitute for quality review.

Signing the Return and Third Party Designation:

■ Mark the area where the taxpayer should sign the return and/or 

Form 8453. Publication 3189 will contain additional information 

on how to use the PIN program to sign electronic returns.

■ Complete the third party designation section of the return if 

the taxpayer wishes to allow someone else to discuss the return 

with the IRS. (You can’t designate yourself.)

Taxpayer Question:

■ Ask the taxpayer if they have any additional questions. 

Where to Mail Paper Returns:

■ Tell the taxpayer where to mail the return (if filing by paper). 

Electronically filed returns are automatically transmitted to 

the correct IRS Processing Center. Paper tax returns must be 

mailed in by the taxpayer to the IRS processing Center for the 

area (state) where the taxpayer resides. Each tax package contains a pre-addressed envelope for a particular area based on 

the last address filed with the IRS. If the taxpayer has moved or 

does not have a pre-addressed envelope the address and other 

mailing information is located in the individual federal tax 

package and in your Quick Reference Guide, Publication 1977. 

On-site. Some sites provide unstamped pre-addressed envelopefor their taxpayers. (You might be able to get the envelopes 

donated from a local office supply store. Your site receptionist 

could address the envelopes or you could print computer labels 

to use on them.)

PAYMENTS

The federal government has a pay-as-you-earn tax system. The 

information for the payments section of the return has three 

sources: federal income tax withholdings, estimated tax payments, 

and refundable credits.

Income tax withheld can appear on:

■ Form W-2, Wage and Tax Statement, in box 2

■ Form 1099-R, Distributions From Pensions, Annuities, 

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, 

etc., in box 4

■ Form 1099-INT, Interest Income, in box 4
Lesson 6 6-5

BASIC

■ Form 1099-DIV, Dividends and Distributions, in box 4

■ Form W-2G, Certain Gambling Winnings, in box 2

■ Form 1099-G, Certain Government and Qualified State Tuition 

Program Payments, box 4

■ SSA-1099, Social Security Benefits

■ RRB-1099, Railroad Retirement Benefits Tier 1

■ RRB-1099R, Railroad Retirement Benefits Tier 2

■ Form 1099B, Proceeds from Broker and Barter Exchange 

Transactions
6-6 Lesson 6

BASIC

Example 1

Kamica has one Form W-2 (Exhibit 1).

The entry on line 7, Form 1040EZ, line 39, Form 1040A, or line 62, 

Form 1040, is $988.

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

Exhibit 1 Kamica’s Form W-2

Kamica A. Howard

134 Dawes Blvd.

Tampa, FL 33621

XYZ Associates

2112 Third Street

Tampa, FL 33621

10-0864213 12,350.00

12,350.00

12,350.00

988.00

765.70

179.08

(Rev. February 2003)
Lesson 6 6-7

BASIC

Example 2

Lucas has a Form 1099-INT (Exhibit 2), a Form 1099-R (Exhibit 3), 

and a Form 1099-DIV (Exhibit 4). His total income tax withheld is 

entered on line 39, Form 1040A. It is $1,247.

Exhibit 2 Lucas’s Form 1099-INT

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0112 Payer’s RTN (optional)

Interest Income

PAYER’S Federal identification number RECIPIENT’S identification number 1 Interest income not included in box 3

$

Early withdrawal penalty Interest on U.S. Savings

Bonds and Treas. obligations

RECIPIENT’S name 2 3

$ $

Street address (including apt. no.) 4 Federal income tax withheld

$

Foreign country or U.S.

possession

City, state, and ZIP code 6 Foreign tax paid 7

Account number (optional)

$

Form 1099-INT Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-INT

5 Investment expenses

$

2003 Second Federal Bank

210 Miller Avenue

Denver, CO 86011

10-4213597 000-00-4213 935.00

Lucas B. George

1360 Shannon Avenue

Denver, CO 86011

187.00

Exhibit 3 Lucas's Form 1099-R

Employee contributions

or insurance premiums

CORRECTED (if checked)

PAYER’S name, street address, city, state, and ZIP code 1 Gross distribution Distributions From

Pensions, Annuities,

Retirement or

Profit-Sharing

Plans, IRAs,

Insurance

Contracts, etc.

$

2a Taxable amount

$

Total

distribution

Taxable amount

not determined

2b

RECIPIENT’S identification

number

PAYER’S Federal identification

number

3 Capital gain (included

in box 2a)

4 Federal income tax

withheld

$ $

RECIPIENT’S name Net unrealized

appreciation in

employer’s securities

5 6

$ $

Distribution

code

Street address (including apt. no.) 7 8 Other

%

City, state, and ZIP code

Account number (optional) 10 State tax withheld 11 State/Payer’s state no.

$

13 Local tax withheld 14 Name of locality

$

Form 1099-R Department of the Treasury - Internal Revenue Service

12

15

State distribution

Local distribution

$

Copy B

Report this

income on your

Federal tax

return. If this

form shows

Federal income

tax withheld in

box 4, attach

this copy to

your return.

This information is

being furnished to

the Internal

Revenue Service.

$

$

$

$ $

$

OMB No. 1545-0119

Your percentage of total

distribution

9a

%

Form 1099-R

9b Total employee contributions

$

IRA/

SEP/

SIMPLE

APEX Triangles 2003

213 Hickory Meadows

Denver, CO 86011

10-9753124 000-00-4213

Lucas B. George

1360 Shannon Ave.

Denver, CO 86011

12,000.00

960.00
6-8 Lesson 6

BASIC

Exhibit 4 Lucas's Form 1099-DIV

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0110

Dividends and

Distributions

PAYER’S Federal identification number RECIPIENT’S identification number

RECIPIENT’S name

Street address (including apt. no.)

City, state, and ZIP code

Account number (optional)

Form 1099-DIV Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-DIV

4 Federal income tax withheld

$

8 Cash liquidation distr.

$

6 Foreign tax paid

$

3 Nontaxable distributions

$

5 Investment expenses

9 Noncash liquidation distr.

$

7 Foreign country or U.S. possession

$

$

2a Total capital gain distr.

2d Unrecap. sec. 1250 gain

$ $

2c Qualified 5-year gain

$

2e Section 1202 gain

$

1 Ordinary dividends

$

2b 28% rate gain

2003

Denver Sheet Metal

214 16th Street

Denver, CO 86013

10-2846731 000-00-4213

Lucas B. George

1360 Shannon Avenue

Denver, CO 86011

500.00

100.00

Estimated Tax Payments

Add all estimated tax payments made by the taxpayer for the year. 

Be sure to include:

■ Payment made from last year’s overpayment (see last year’s tax 

return.)

■ Quarterly payments made using the Form 1040ES, including 

the one made in January of the current tax year.

Record total estimated tax payments on Line 40 of Form 1040A or 

Line 63 of Form 1040.

Refundable Credits

Make sure that any refundable credits you have calculated are 

entered on the proper lines. The Earned Income Credit is reported 

on line 8 of the Form 1040 EZ, Line 41 of the Form 1040A, and Line 

64 of the Form 1040. Any refundable Child Tax Credit is reported 

on Line 42 of the Form 1040A and Line 66 of the Form 1040. If 

excess Social Security deductions were made because of multiple 

employers, that amount is shown on Line 65 of the Form 1040.

Total Payments

Add the total of withholdings, estimated tax payments made, and 

refundable credits together. Enter this total on Line 9 of the Form 

1040EZ, Line 43 of the Form 1040A, or Line 69 of the Form 1040.
Lesson 6 6-9

BASIC

FIGURING THE OVERPAYMENT OR THE TAX DUE

Overpayments

If there has been more tax payments made than the amount of tax 

liability (line 10, Form 1040EZ, line 38, Form 1040A, or line 61, 

Form 1040), this is considered an overpayment. A taxpayer may 

wish to have a portion of the overpayment applied to next year’s 

taxes. If so, then enter the amount to be applied to the following 

year on line 46 of the Form 1040A or line 72 of the Form 1040. 

Subtract this amount from the total overpayment and enter the 

remainder on line 45a of the Form 1040A or line 71a of the Form 

1040.

Only a total refund can be entered on the Form 1040EZ, line 12a. 

Any overpayment on Form 1040EZ must be refunded; It cannot be 

applied to next year’s taxes.

Example 3

Exhibit 5 shows Form 1040A, lines 28 through 46, for Ron his tax 

due. His total tax is $3,491. His total payments are $5,000. Ron 

overpaid and wants $900 to be applied to his 2004 estimated tax. 

Note that line 45a plus line 46 equals the amount on line 44.

Exhibit 5 Form 1040A, page 2

Proof as of

July 21, 2003

(subject to change)

30

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b

c

 d



41 Earned income credit (EIC). 41

34 34

Child tax credit (see page 38).

Type:

3,491.00

 0.00

3,491.00

3,491.00

2,600.00

2,400.00

5,000.00

1,509.00

 609 .00

 900 .00

 0 .00

ALERT

 You must reduce the 

2003 child tax credit by 

any advance payment 

that the taxpayer 

received in 2003. 
6-10 Lesson 6

BASIC

Refunds

If the taxpayer wants an overpayment refunded, advise that a 

check should be mailed within 6-8 weeks after the return is filed. 

Remind the taxpayer of the availability to have the refund deposited directly into a financial account, such as a bank account.

Direct Deposit

Instead of getting a paper check, taxpayers may choose to have 

their refund deposited directly into their account at a bank or other 

financial institution such as a mutual fund, brokerage firm, or 

credit union.

Note. Taxpayers should check with their financial institution to 

make sure their direct deposit will be accepted and to get the correct routing and account number.

Exhibit 6 shows the general location of the routing and account 

number on a sample check. The routing number must be nine digits 

(the first two digits must begin with 01 through 12 or 21 through 

32, otherwise the direct deposit will be rejected and a check sent 

instead). The account number can be up to 17 characters (both 

numbers and letters). It can include hyphens but not spaces or special symbols. The number should be entered from left to right with 

any unused boxes left blank.

Exhibit 6

LERON BROWN

RENA BROWN

123 Main Street

Anyplace, CA 10000

PAY TO THE

ORDER OF

1234

15-000000000

|:250250025 |:202020❚ 86❚'1234

ANYPLACE BANK

Anyplace, NY 10000

For

DOLLARS

$

20

Routing SAMPLE

number

(line 70b)

Account

number

(line 70d) Do not include

the check number

Tax Due

If there are less tax payments than the amount of tax liability, then 

there is tax due to be paid with the return. When this happens, 

remind the taxpayer to make the check or money order payable 

to the “United States Treasury.” Taxpayers can also pay by credit 

card or by authorizing a direct debit from their checking or savings account on the date they choose (anytime up to April 15, 2004). 

Encourage a 1040 filer to voluntarily send Form 1040-V, Payment 

Voucher, with his or her payment. The instructions for completing 

the voucher appear on the 1040-V. The taxpayer should write his or 

her name, address, social security number, daytime telephone number, and “2003 Form 1040 (or 1040A or 1040EZ, whichever applies)” 
Lesson 6 6-11

BASIC

on the check or money order. The payment and Form 1040-V should 

be enclosed, but not attached to the tax return. Taxpayers should 

not mail cash with their returns.

To help IRS process the payment, the taxpayer should enter the 

amount on the right side of the check like this: $XXX.XX. Do not 

use dashes or lines (for example, do not enter “$XXX—” or “$XXX 

XX/100”). 

 Electronic Payment Options

If the taxpayer owes an amount on his or her return, he/she can 

make the payment electronically. To pay by credit card, the taxpayer must use one of the service providers listed in the instructions for Forms 1040, 1040A, or 1040EZ. The taxpayer can also 

pay by authorizing a direct debit out of his/her checking or savings 

account by April 15, 2004.

If the taxpayer cannot pay the full amount owed shown on his/her 

return, the taxpayer may ask permission to make monthly installment payments. To ask for an installment agreement, the taxpayer 

should file Form 9465, Installment Agreement Request, with the tax 

return.

Estimated Tax Penalty. If line 10, Form 1040EZ, line 47, Form 

1040A, or line 73, Form 1040, is $1,000 or more and it is more 

than 10 percent of the tax shown on the return, or if the taxpayer 

underpaid his or her 2003 estimated tax liability, the taxpayer can 

owe a penalty for underpayment of estimated tax. If so, report the 

penalty on line 48 for Form 1040A or line 74 of Form 1040. Line 47 

or line 73 should include the amount owed with the return plus the 

penalty reported on line 48 of Form 1040A or line 74 of Form 1040, 

respectively.

Because the Form 2210, Underpayment of Estimated Tax by 

Individuals, Estates, and Trusts, used to compute estimated tax 

penalty is complicated, the IRS encourages taxpayers to let the 

IRS figure the penalty for them. The IRS will figure the penalty 

for underpayment of estimated tax and, if a penalty is owed, the 

taxpayer will be sent a bill. If taxpayers want the IRS to figure the 

penalty for them, the taxpayers should leave the penalty line on 

their return blank and should not complete Form 2210. As long 

as the taxpayer files the return by April 15, 2004, the IRS will not 

charge interest on the penalty if the bill is paid by the date specified on the bill.
6-12 Lesson 6

BASIC

FIGURING ESTIMATED TAX FOR NEXT YEAR

Estimated tax is the amount a taxpayer expects to owe for the 

year after deducting any tax credits or federal income tax withheld. 

In other words, it is the amount the taxpayer anticipates will be 

owed on his or her 2004 federal income tax return.

If a taxpayer is an employee, the taxpayer’s employer generally 

must withhold income, Medicare, and social security taxes on the 

wages paid. Also, most payers of taxable pensions withhold income 

tax and pay it to the government. However, a taxpayer may receive 

many types of taxable income that are not subject to having tax 

withheld.

A taxpayer who receives interest, dividends, alimony, unemployment compensation, rent, gains from the sale of assets, prizes, or 

awards, generally will have no income tax withheld on the payments. As a result, the taxpayer may find that he or she owes estimated tax. Most self-employed taxpayers will also find they are 

required to pay estimated tax.

Who Must Pay Estimated Tax

Estimated tax payments are required if certain conditions are met. 

Generally a taxpayer must make payments of estimated tax if:

1. He or she expects to owe $1,000 or more in tax for 2004 after 

subtracting federal income tax withheld and credits from taxable income,

AND

2. He or she expects the 2004 tax withheld and credits to be less 

than the smaller of:

a) 90 percent of the tax to be shown on his or her 2004 tax 

return, or

b) 100 percent of the tax shown on his or her 2003 tax return. 

The return must cover all 12 months.

Married taxpayers can pay estimated tax either separately or 

jointly. How they pay their estimated tax will not affect their choice 

of filing a joint return or separate returns for the year. Joint estimated tax payments may be divided between the spouses if they 

later choose to file separate returns.

POTENTIAL

PITFALLS

When fi guring estimated 

tax, be sure to include 

all taxes, such as tax on 

lump-sum distributions 

and self-employment tax.
Lesson 6 6-13

BASIC

Example 4

Jayne is single and retired. She works part time as an usher in 

a movie theater. She estimates her 2004 income will be $16,421, 

which includes $3,500 of interest income from which there will be 

no tax withheld. Jayne calculates that she expects to owe $1,008 

(after taking into account her expected tax withheld and credits). 

Jayne meets condition 1 (mentioned earlier) and may have to pay 

estimated tax. Further checking tells Jayne that her expected 2004 

tax withheld will be less than 100 percent of the tax shown on her 

2003 return and less than 90 percent of the tax she will show on 

her 2004 tax return. Since Jayne also meets condition 2 (mentioned 

earlier), she is required to pay estimated tax.

Limit on the use of prior year’s tax. Married taxpayers with 

joint AGI exceeding $150,000 or $75,000 if married filing separately cannot use 100% of their 2003 tax to figure their 2004 estimated tax payments.

For more information, see Publication 505, Tax Withholding and 

Estimated Tax.

How to Figure Estimated Tax

Estimated tax is paid by using Form 1040-ES, Estimated Tax For 

Individuals. Form 1040-ES also contains a worksheet that can be 

used in figuring a taxpayer’s estimated tax. The taxpayer should 

keep the worksheet for his or her records.

To figure the estimated tax, the taxpayer must first figure his or 

her expected adjusted gross income, taxable income, taxes, and 

credits for 2004. All available facts that will affect those items during the year must be taken into account. Use the 2003 tax return 

as a starting point for estimating 2004 income, deductions, and 

credits. However, be careful to make adjustments both for anticipated changes in the taxpayer’s situation and for recent changes in 

the tax law.

Form 1040-ES contains both the 2004 Tax Rate Schedules and the 

2004 standard deduction and exemption amounts. Be sure to use 

the 2004 figures when figuring the estimated tax.
6-14 Lesson 6

BASIC

When to Pay Estimated Tax

For estimated tax purposes, the year is divided into four payment 

periods. Each period has a specific due date.

Date taxpayer

receives income

Due date of fi rst

installment

No. of

payments

January 1– March 31 April 15, 2004 4

April – May 31 June 16, 2004 3

June 1 – August 31 September 15, 2004 2

September 1 – December 31January 17, 2005 1

Most of the taxpayers that you assist will pay their estimated tax 

in four equal installments. However, a taxpayer does not have to 

make estimated tax payments until he or she has income on which 

tax is owed. If a taxpayer receives income after one or more of the 

payment periods have passed, he or she will begin making payments during the period when the income is received.

The minimum payment due during the period when the income is 

received is one-fourth of the total estimated tax for the year, generally, plus an additional fourth of the yearly total for each period 

which has already passed. The balance of the estimated tax will be 

paid during the remaining periods (one-fourth of the yearly total 

for each remaining period).

The taxpayer also has the option of paying all the estimated tax 

at once. Instead of paying by installments, he or she may choose to 

pay the entire amount by the due date of the period during which 

the income is received.

Some taxpayers choose to pay all of their estimated tax with the 

first payment, April 15, 2004. It alleviates the need for them to 

remember to make the remaining payments.

Also, a taxpayer can apply all or part of an overpayment from his or 

her 2003 Form 1040 or Form 1040A to the estimated tax for 2004. 

The overpayment amount to be credited is entered on Form 1040, 

line 72, or Form 1040A, line 46. All of the credit can be applied to 

the first payment or it can be spread out among any or all of the 

payments.

If any due date falls on a Saturday, Sunday, or legal holiday, the 

payment is due on the next business day.

If a taxpayer files his or her 2004 Form 1040 or Form 1040A by 

January 31, 2005, and pays the entire amount of tax owed at that 

time, he or she is not required to make the estimated tax payment 

that would be due on January 18, 2005.

POTENTIAL

PITFALLS

Advise the taxpayer to 

use the pre-addressed 

envelopes that came 

with his or her Form 

1040-ES package, or 

mail payment vouchers 

to the address shown in 

the Form-ES instructions 

for the place where he 

or she lives. Do not use 

the address shown in 

the Form 1040 or Form 

1040A instructions.
Lesson 6 6-15

BASIC

How Much Estimated Tax to Pay

The computed estimated tax is based on expected income and 

deductions and should take into account all facts known at the time 

the estimate is made. If the taxpayer is unsure about the accuracy 

of the estimate, he or she may want to pay more than the required 

minimum 90 percent of the 2003 estimated tax. Taxpayers who do 

not pay enough tax by the due date of each payment period may 

be charged a penalty, even if the filed 2004 return shows a refund. 

Generally, the simplest and safest procedure is to make sure that 

the total of tax withheld plus the amount of estimated tax for each 

payment period during 2004 is at least one-fourth of the tax shown 

on the 2003 return. For more information, see Publication 505.

How to Pay Estimated Tax

Estimated tax payments can be sent electronically to the IRS 

by direct debit payment from the taxpayer’s checking or savings account, by credit card, or can be sent along with a payment 

voucher from Form 1040-ES. Each voucher is inscribed with its due 

date. Be sure to use the correct voucher for each payment. For more 

information on electronic filing and payments, see Form 1040-ES 

instructions.

If the taxpayer paid estimated tax in 2003, he or she should have 

received a Form 1040-ES package containing preprinted vouchers. 

These vouchers show the taxpayer’s preprinted name, address, and 

social security number. To use them, simply enter the amount of 

the payment on the appropriate line. If a taxpayer does not have 

the preprinted forms, use a set of blank vouchers from Form 1040-

ES and enter the information on the appropriate lines. Advise the 

taxpayer to write his or her social security number and “2004 Form 

1040-ES” on the check or money order (payable to the “United 

States Treasury”) when paying estimated tax.

FORM W-4 AND W-4P

An employer withholds tax based on wages paid and information the employee provides on Form W-4, Employee’s Withholding 

Allowance Certificate. The employee uses his or her expected 

income, deductions, adjustments to income, and credits to figure 

the total withholding allowances to claim on Form W-4. In addition, 

an employee can claim extra allowances in certain situations.

A taxpayer who receives distributions from a pension, an annuity, an IRA, a stock bonus plan, or certain deferred compensation

plans should use Form W-4P, Withholding Certificate for Pension 

or Annuity Payments, to notify the payer whether, and how much, 

income tax should be withheld.
6-16 Lesson 6

BASIC

Income, deductions, and credits should be estimated carefully. 

Taxpayers who do not have enough federal income tax withheld 

can be subject to interest and penalties. Taxpayers who have a very 

large refund or who owe should consider adjusting their withholding.

Some taxpayers want their withholding to be high enough to 

ensure that they receive a tax refund. They do not want to pay 

an additional amount when filing their tax return. If a taxpayer 

wishes, it is legal to claim fewer allowances than he or she is 

allowed. More tax than required will be withheld each pay period 

and, at the end of the year, the taxpayer should be eligible for a 

refund of overpaid taxes.

Forms W-4 and W-4P also contain:

■ Instructions

■ Personal Allowances Worksheet

■ Deductions and Adjustments Worksheet

■ Two-Earner/Two-Job, Multiple Pension/More Than One Income

Worksheets

■ Tables

The worksheets incorporate the number of allowances, adjustments, deductions, and credits that the employee expects on his or 

her 2004 income tax return. Some or all of these additional worksheets will then be used by the employee in completing the allowance certificate.

If an employee has a working spouse or income from two jobs, only 

one set of Form W-4 Worksheets should be completed. Complete 

the Form W-4 Worksheets using the combined expected income 

(from all sources and for both spouses if filing a joint return), 

adjustments, deductions, and exemptions. The number of total 

allowances from this Form W-4 can then be divided among all jobs. 

Withholding will usually be the most accurate when an employee 

claims zero allowances on all jobs except for the highest paying one. 

Reminder: A separate Form W-4 is needed for each job.

Certain events can occur during the year that can change an 

employee’s marital status, exemptions, allowances, deductions or 

credits. When this happens, the employee may have to change his 

or her withholding allowances by submitting a new Form W-4 to 

the employer. The original Form W-4 remains in effect until the 

employee changes it.

For more information on withholding, refer to Publication 919, How

Do I Adjust My Tax Withholding?

W-5, Advance Earned Income Credit (AEIC)

At this time, you as the preparer have the opportunity and the 

means to assist the taxpayer with the Form W-5, Earned Income

Credit Advance Payment Certificate. The amount of the AEIC pay-
Lesson 6 6-17

BASIC

ments are based on wages by payroll cycle. Only persons with at 

least one qualifying child can get AEIC payments. If the taxpayer 

qualifies for the Earned Income Credit for 2003 refer them to 

Publication 596, Earned Income Credit or Form W-5 for additional 

information.

Completing and Assembling the Return

After all the decisions have been made regarding payments, overpayments, and estimated taxes, you should complete the taxpayer 

identification section, assemble the return, and submit it for quality review. When the review is completed, have the taxpayer sign 

the return and provide instructions on where and when to send it 

to the IRS. These steps are provided below.

 Taxpayer Identification Section

This section is completed after the rest of the return. Often, this 

saves time because after you begin preparing Form 1040A, you may 

discover that Form 1040EZ or Form 1040 is more appropriate. If 

this happens, you will not have to complete the taxpayer identification section twice.

Taxpayers who filed returns last year probably received a forms 

package by mail this year. The package includes a preaddressed 

label which shows the name and address of the taxpayer(s).

Peel the label off and place it in the address area of the return. 

Mark through any errors on the label, and print the correct information on the label. Be sure to enter the social security number(s) 

(or Taxpayer Identification Number (ITIN) to the right of the label 

area.

If a taxpayer did not receive a forms package or does not have 

a pre-addressed label, PRINT the required information. Enter 

the taxpayer’s name and social security number (or ITIN) on the 

first line. If married taxpayers are filing a joint return, enter one 

spouse’s complete name and social security number (or ITIN) on 

the first line and the other spouse’s complete name and social security number (or ITIN) on the second line. Be sure that each taxpayer’s name and social security number (or ITIN) appear on one line, 

separate from the spouse’s information. If you enter the husband’s 

name and the wife’s social security number (or ITIN) on the same 

line, there can be a considerable delay in processing the return.

Enter the address where any refund or notices should be sent. If 

the post office delivers mail to a post office box rather than to a 

street address, enter the P.O. box number on the line for the home 

address.

The Presidential Election Campaign Fund appears in the name 

and address area of Forms 1040EZ, 1040A, or 1040. Check Yes

if the taxpayer wishes to have $3 go to the Presidential Election 
6-18 Lesson 6

BASIC

Campaign Fund. Otherwise, check No. Checking Yes will not 

change the tax or reduce the refund. On a joint return, each taxpayer chooses whether or not $3 should go to the fund.

Assembling the Return

Make sure that all forms, schedules, and attachments show the 

taxpayer’s name and social security number. List the names in the 

same order that they appear on the front of the return and use the 

first social security (or ITIN) number that appears on the front of 

the return.

Attach forms and schedules behind Form 1040 according to the 

attachment sequence number shown in the upper right corner of 

the form or schedule. Items without an attachment sequence number should be placed at the end. For Form 1040A, attach any forms 

or schedules in order by number with Schedule EIC last.

Attach Form(s) W-2 to the left margin of the return. If any Form 

1099 shows federal income tax withheld, include that amount in 

the payments section of the return.

When any Form 1099 shows federal income tax withheld, attach a 

copy to the return, along with any Form(s) W-2.

IDENTIFYING RETURNS

■ If taxpayers ask about the site identification number designation at the bottom of the return in the paid preparer’s section, 

explain that this is entered for statistical purposes. Inform the 

taxpayers that the site identification number does not affect the 

likelihood of an IRS examination (audit) of the return.

■ If you prepare over 50 percent of the tax return and you are 

reasonably sure that the return will be filed as you prepared it, 

enter the site identification number at the bottom of the return 

in the Paid Preparer Section in the PTIN/SSN field.

■ Most sites will have forms preprinted with the site identification number format entered in the Paid Preparer Section of the 

return. You must enter the number that has been assigned by 

the Territory Office for that site.

■ If you do not have forms with the pre-printed site identification 

number format, print the appropriate site identification number 

for that site in the Paid Preparer Section of the return.

POTENTIAL

PITFALLS

Using the pre-addressed 

lable reduces processing 

time. However, to 

protect the taxpayer’s 

privacy, the peel-off 

label that he or she 

received in the mail with 

the tax return booklet 

does not have his or 

her SSN (or that of his 

or her spouse if fi ling a 

joint return) printed on 

it. Therefore, be sure

the taxpayer’s SSN (and 

spouse’s, if applicable) 

is entered in the space 

provided on the tax 

form (1040, 1040A, or 

1040EZ).

Further, if the taxpayer 

fi led a joint return for 

2002 and is fi ling a 

joint return for 2003 

with the same spouse, 

be sure the taxpayer’s 

and spouse’s names and 

SSNs are entered in the 

same order as on the 

2002 tax return. 
Lesson 6 6-19

BASIC

SITE IDENTIFICATION NUMBER

 The Internal Revenue Service (IRS) will capture statistical information using the Individual Master File Report (IMF Report) and 

the Electronic Tax Administration (ETA) report. Based on this 

change, it is very important that all returns prepared by a volunteer tax preparation site be identifi ed as VITA or TCE prepared.

The following procedures must be used when returns are prepared 

in a VITA or TCE site.

■ The site identification number should be entered in the 

Preparer Section of the return. (See Exhibit 7).

■ The following procedures must be followed when returns are 

prepared in a VITA or TCE site.

1. Paper Returns

■ All sites will enter the letter P followed by an 8 digit site identification number that is provided by the territory office. Sites 

should use the overprint form with the bold P format indicated 

in the Paid Preparer Section. Each of the numbers represent a 

certain area determined by the territory office. For instance, the 

fifth digit of the number will be 1 for VITA, 2 for Military VITA, 

3 for Co-located site, 4 for TCE and 5 for AARP.

■ If you use a return without the bold P format for the number 

enter the assigned number in the space provided in the Paid 

Preparer section of the return. Forms 1040EZ, 1040A, and 

1040 with the bold “P” format is available from IRS and will be 

ordered by each site coordinator.

2. Electronically Filed Returns

■ E-file administrators will set up computers to default to the 

proper location on the return where the number will already be 

entered. Ensure the default number has been entered for the 

site you are working.

Exhibit 7 illustrates a site identification number entered on three 

tax forms.
6-20 Lesson 6

BASIC

Exhibit 7 Site Identification Number Form 1040EZ (

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24. Cat. No. 11329W

12

12

Amount

you owe

b Routing number

Account number

c Type: Checking

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 

P10-05-1234 Site Identifi cation

Number ➤

(subj

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration

of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.

44

45a Amount of line 44 you want refunded to you. 

Routing

number

Account

number

Checking Savings  b

c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



Form 1040A (2003)

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Printed on recycled paper

Type:

P10-05-1234 Site Identifi cation

Number ➤

Exhibit 7 Form 1040A
Lesson 6 6-21

BASIC

Exhibit 7 Form 1040 g y

69

70a 70a

71 71

If line 68 is more than line 60, subtract line 60 from line 68. This is the amount you overpaid

72 72

Amount of line 69 you want refunded to you 

Refund

73

Amount of line 69 you want applied to your 2004 estimated tax 

Estimated tax penalty (see page 57)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and

belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

73

Amount

You Owe

Sign

Here Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

Preparer’s

Use Only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation

Amount you owe. Subtract line 68 from line 60. For details on how to pay, see page 57 

Direct deposit?

See page 56

and fill in 70b,

70c, and 70d.

Routing number

Account number

b c Checking Savings

d





69



Joint return?

See page 21.

Daytime phone number

( )

Spouse’s occupation

( )

Form 1040 (2003)

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 58)? Third Party

Designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Type:

Site Identifi cation

Number ➤ P10-05-1234

QUALITY SERVICE

The goal of the TCE and VITA Programs is to provide high 

quality service.

On-Site Quality Review Program

Every site should have a quality review program. Properly 

reviewed returns will help prevent taxpayers from receiving an 

error notice from the IRS. At larger sites, an experienced volunteer 

should be designated as the quality reviewer. At small sites, volunteers may review each other’s work. A Quality Review Checklist, 

like the one shown below, may be used for this purpose.
6-22 Lesson 6

BASIC

 Quality Review Checklist

Entity

■ Are the name, address, and social security number correct 

for each taxpayer on the return?

■ Is the social security number(s) or ITIN(s) entered to the right 

of the label area?

■ Is the Presidential Election Campaign Fund box(es) checked?

■ Is the filing status correct? Is the box checked?

■ Are the exemptions and dependents checked, listed, and added 

correctly?

■ Are dependents’ social security numbers or ITINs entered?

 Income

■ Are income items correctly transferred from Form W-2, Form 

1099-INT, Form 1099-DIV, Form 1099-G, Form 1099-R, and 

Form SSA-1099 (or RRB-1099), for example?

■ Is tax-exempt interest income reported? Is “TEI” written to the 

left of line 2 on Form 1040EZ?

■ Is the taxable portion of social security benefits, IRA distributions, pensions, and/or annuity income correctly figured?

■ Are there IRA withdrawals to report?

■ Is there any other income to report (lottery, fees, etc.)?

■ If the taxpayer paid alimony, is the recipient’s social security 

number entered?

Tax and Credits

■ Are all appropriate boxes on line 37a, Form 1040 or line 23a, 

Form 1040A or line 5, Form 1040EZ checked?

■ Is the standard deduction correct? Complete worksheet if taxpayer is someone else’s dependent.

■ Is the tax correct?

■ Is the taxpayer eligible to claim the credit for child and dependent care expenses, child tax credit, education credits, adoption 

credit, or credit for the elderly or the disabled?

Payments

■ Does the tax withheld agree with the total of amounts shown

on all Forms W-2, 1099-INT, 1099-DIV, and 1099-R?

■ Are the estimated tax payments correct?

■ Is the taxpayer eligible to claim the earned income credit?

■ Is the overpayment or the amount owed correct? Does the 

taxpayer want any part of the refund applied to next year’s 

estimated tax? Does the taxpayer want the refund or any part 

directly deposited?
Lesson 6 6-23

BASIC

 Quality Review Checklist

(continued)

Other

■ Did you use a calculator to check your math?

■ Are all Forms W-2 and 1099 (showing tax withheld), as well as 

schedules and forms, attached to the return?

■ Is the appropriate site identification number entered?

■ Did the taxpayer(s) sign, date, and fill in his/her occupation on 

the return?

■ Is the taxpayer eligible to claim the Earned income credit? 

Advanced earned income credit?

Signature Section

Make sure the taxpayer signs and dates the return before mailing. 

An unsigned return cannot be processed and may be sent back to 

the taxpayer. On a joint return, both spouses must sign, even if only 

one spouse had income. Also, make sure the occupation(s) of the 

taxpayer (or of both spouses, if married filing jointly) is entered.

If a taxpayer died before filing a return for 2003, the taxpayer’s 

spouse or personal representative may have to file and sign a 

return for that taxpayer. A personal representative can be an 

executor, administrator, or anyone who is in charge of the deceased

taxpayer’s property. If the deceased taxpayer did not have to file a 

return but had tax withheld, a return must be filed to get a refund. 

The person who files the return should enter “DECEASED,” the

deceased taxpayer’s name, and the date of death across the top of 

the return.

If the taxpayer’s spouse died in 2003 and the taxpayer did not 

remarry in 2003, the taxpayer can file a joint return. (The taxpayer 

can also file a joint return if his or her spouse dies in 2004 before 

filing a 2003 return.) A joint return should show the taxpayer’s 

spouse’s 2003 income before death and the taxpayer’s income for all 

of 2003. The taxpayer should enter “Filing as surviving spouse” in 

the area where the taxpayer signs the return. If someone else is the 

personal representative, he or she must also sign.

The surviving spouse or personal representative should promptly 

notify all payers of income, including financial institutions, of the 

taxpayer’s death. This will ensure the proper reporting of income 

earned by the taxpayer’s estate or heirs. A deceased taxpayer’s 

social security number should not be used for tax years after the 

year of death, except for estate tax return purposes.
6-24 Lesson 6

BASIC

Third-Party Designee

If the taxpayer wants to allow a friend, family member, or any 

other person he or she chooses to discuss his or her 2003 tax return 

with the IRS, the taxpayer should check the “Yes” box in the “Third 

party designee” area of the return. Also, the taxpayer should enter 

the designee’s name, phone number, and any five numbers the designee chooses as his or her personal identification number (PIN).

If the taxpayer checks the “Yes” box, he or she, and his or her 

spouse if filing a joint return, is authorizing the IRS to call the designee to answer any questions that may arise during the processing 

of the return. The taxpayer is also authorizing the designee to:

■ Give the IRS any information that is missing from the return,

■ Call the IRS for information about the processing of the return 

or the status of the taxpayer’s refund or payment(s), and

■ Respond to certain IRS notices that the taxpayer has shared 

with the designee about math errors, offsets, and return preparation. The notices will not be sent to the designee.

The taxpayer is not authorizing the designee to receive any refund 

check, bind the taxpayer to anything (including any additional tax 

liability), or otherwise represent the taxpayer before the IRS. If the 

taxpayer wants to expand the designee’s authorization, he or she 

should see Publication 947, Practice Before the IRS and Power of 

Attorney.

The authorization cannot be revoked. However, the authorization 

will automatically end no later than the due date (without regard 

to extensions) for filing the taxpayer’s 2004 tax return. This is April 

15, 2005, for most people.

As a volunteer preparer you may not be designated as a 

“Third Party Designee.”

Ending the Interview

Make sure the taxpayer keeps a copy of all Forms W-2 and 1099 

with a copy of the tax return. Advise the taxpayer to keep these 

copies for at least three years. As the volunteer assistor, you should 

not keep a copy of the return.

If an envelope has been provided for the taxpayer’s records place 

the copies into it. Advise the taxpayer to bring the tax return 

and records back next year.
Lesson 6 6-25

BASIC

VOLUNTEER ASSISTANCE WORKSHEET

The Volunteer Assistance Worksheet is currently under revision 

and was not available at publication date. Your local Stakeholder 

Partnerships, Education and Communication (SPEC) office will 

provide you with the revised Volunteer Assistance Worksheet when 

you attend training along with the training module that explains 

the new worksheet and reporting requirements.

Exercise 1

A. Helen paid $500 in estimated tax to the United States 

Treasury. Where is this reported on Form 1040A? 

B. Shirley paid $200, the amount owed onlast year’s income tax 

return. Is this the $200 an estimated tax payment for this 

year’s income tax return? 

C. Elmer wants his refund deposited in his checking account. 

What information should you enter on line 45b of Form1040A?

D. Jennifer had tax withheld from her wages on Form W-2. She 

also had some withholding on her Form 1099-R. Can these 

items be combined and listed on one line on her tax return? 

Exercise 2

Look at the completed Form 1040EZ shown in Exhibit 8 and identify 

at least 3 areas that have not been properly completed.
6-26 Lesson 6

BASIC

Exhibit 8

Proof as of

July 21, 2003

(subject to change)

Do you, or your spouse if a joint return, want $3 to go to this fund? 

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

Department of the Treasury—Internal Revenue Service

Form Income Tax Return for Single and 1040EZ Joint Filers With No Dependents 2003 OMB No. 1545-0675

Note. Checking “Yes” will not change your tax or reduce your refund.

Presidential

Election

Campaign

(page 14)

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.

Attach your Form(s) W-2.

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check

Yes or No.

Yes. No.

5

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.

This is your taxable income. 

6

6

Payments

and tax

Earned income credit (EIC).

7 7

Tax. Use the amount on line 6 above to find your tax in the tax table on pages

25–29 of the booklet. Then, enter the tax from the table on this line.

10

10

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24.

Income

Cat. No. 11329W



4 4

12

12

Add lines 7 and 8. These are your total payments. 

8 8

9 9

Federal income tax withheld from box 2 of your Form(s) W-2.

Unemployment compensation and Alaska Permanent Fund dividends

(see page 16).

3

3

Amount

you owe

b Routing number

Account number

c Type: Checking

Enter amount from

worksheet on back.

If single, enter $7,800.

If married filing jointly, enter $15,600.

See back for explanation.

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

(99)

Yes No Yes No

You Spouse

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Your first name and initial Last name Your social security number

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see page 14. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.

Important! 



Label

(See page 14.)

Use the IRS

label.

Otherwise,

please print

or type.



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 

Jorge Mendez

Lucinda Mendez

1040 Main Street

Anywhere USA 99999

123 45 6789

00

00

00

00

00

00

00

14,900

2

14,900

1,700

1,700

1,490

2

Lucinda Mendez 1/23/04
Lesson 6 6-27

BASIC

  SUMMING UP THIS LESSON  

The information for the payment section of the return comes 

from these sources: 

 Federal income tax withheld by the employer, and 

 Forms 1099, and

 Estimated tax payments paid by the taxpayer (not reported 

on Form 1040EZ), and 

 Refundable credits.

If the amount owed is $1,000 or more, the taxpayer may have 

to pay an estimated tax penalty. If there is an overpayment, the 

taxpayer can take one of the following courses of action:

 Receive a complete refund,

 Apply the overpayment to the next year’s estimated tax, or

 Receive a partial refund and apply the remainder of the overpayment to the next year’s estimated tax.

Estimated tax payments must be made if a taxpayer:

 Expects to owe $1,000 or more in tax for 2003 after subtracting income tax withheld and credits,

AND

 Expects his or her 2004 tax withheld and credits to be less 

than the smaller of: 90 percent of the tax to be shown on his 

or her 2004 tax return or, generally, 100 percent of the tax 

shown on his or her 2003 tax return.

Withholding allowances for employees are reported on Form 

W-4. Allowances for pension or annuity recipients are reported 

on Form W-4P. They are figured by taking into account:

 Expected income

 Deductions

 Credits

 Adjustments to income
6-28 Lesson 6

BASIC

  SUMMING UP THIS LESSON  

(continued)

To finish the return:

 Consider the taxpayer’s possible eligibility for Advance 

Earned Income Credit.

 Complete the taxpayer’s identification section after you have 

finished the rest of the return.

 Enter the site identification number in the paid preparer’s 

section.

 Assemble the return correctly, attaching any Forms W-2 and 

Forms 1099 showing federal income tax withholding.

 Check each return for completeness and accuracy.

 Submit each return for on-site quality review.

 Have the taxpayer(s) sign and date the return.
Lesson 6 6-29

BASIC

 FINISHING THE RETURN—

FINAL STEPS ANSWERS TO EXERCISES

Answers to Exercise 1

(A) Line 40

(B) No

(C) The routing number for his bank account, and type of account.

(D) Yes

Answers to Exercise 2

■ Wife’s SSN is missing

■ Presidential Election Campaign is not marked

■ Husband’s signature is missing

■ The Site Identification Number is missing in the preparer’s 

SSN/PTIN section of the form.

■ Line 4 is blank

■ Line 5 is blank

■ Line 6 is incorrect

■ Line 11a is incorrect

■ Occupations are missing

■ Spouse’s signature is missing

Lesson 6
6-30 Lesson 6

BASIC

STUDENT NOTES
Lesson 6

Military Segment M-6-1

FINISHING AND FILING

THE RETURN

Lesson 6

Military Segment

INTRODUCTION AND OBJECTIVES

General rules for filing returns may be found in the Basic segment 

of this lesson. This segment addresses special concerns of members 

of the Armed Forces and includes information for combat zone participants. 

At the end of this lesson you should be able to:

• Determine where and when to file a federal tax return.

• Identify situations in which extensions of time to file are 

granted and determine the length of these extensions.

• Identify the deadline extension for combat zone participants.

TAXPAYER IDENTIFICATION

A member of the Armed Forces should include his or her name, 

social security number, and permanent home address on his or 

her return. A member who is due a refund and does not want it 

mailed to his or her permanent home address should enter a current address on the return. If the postal service does not deliver to 

the member’s street address and the member had a post office box, 

he or she should enter the post office box number on the line for the 

present home address. A military person living overseas should 

use an APO or FPO address.

CHANGE OF ADDRESS

If a taxpayer changes his or her mailing address during the year, 

the taxpayer should notify the Internal Revenue Service of the 

change on Form 8822, Change of Address. However, if the taxpayer 

moves after filing a tax return, he or she should fill out and mail 

Form 8822 to the Internal Revenue Service Center where his or her 

returns were previously filed. Addresses for the service centers are 

listed on the back of the form. 

WHERE TO FILE

Taxpayers should send their federal returns to the campus for the 

place where they reside. For example, Sgt. Keene, who is stationed 

in Maine but whose permanent home address is in California, 

should send her federal return to the campus in Maine. The tax 

form instructions give the addresses for the campuses, including 

the Philadelphia Campus for APO and FPO addresses.
Lesson 6 M-6-2 Military Segment

WHEN TO FILE

Most individual tax returns cover a calendar year, January through 

December. Taxpayers who live in the United States or Puerto Rico 

and who use the calendar-year period should file their individual 

tax returns by April 15 of the following year. If April 15 falls on a 

Saturday, Sunday, or legal holiday, the due date is the next business 

day. (For 2003 tax returns, the due date is April 15, 2004.)

If a taxpayer has a balance due, they can pay by check, money 

order, direct debit (automatic withdrawal) or credit card. See Form 

1040, 1040A, or 1040EZ instructions for complete details.

Taxpayers who cannot pay the tax due with their tax return should 

attach Form 9465, Installment Agreement Request. The Internal 

Revenue Service will try to arrange an installment payment 

agreement that reflects the taxpayer’s ability to pay the tax owed. 

However, taxpayers should pay as much as possible with their 

return to reduce the amount of interest and penalties that will be 

charged on the unpaid balance.

EXTENSIONS

Taxpayers can receive extensions of time to file their returns. 

Different rules apply to taxpayers who live in the United States 

and those who live outside the United States. Deadline extensions 

are also available to members of the Armed Forces who served in a 

combat zone.

IRS will charge interest on taxes not paid by the due date, even 

if an extension of time to file is granted, unless the combat zone 

extension is applicable.

Within the United States

A taxpayer living in the United States can receive an automatic 

4-month extension of time to file his or her federal tax return. To 

get the automatic extension, the taxpayer must file Form 4868, 

Application for Automatic Extension of Time To File U.S. Individual 

Income Tax Return, by the due date for the tax return. Also seen 

Paying by credit card, later.

The taxpayer is not required to pay any of the tax due when submitting the form. However, the taxpayer will owe interest on any 

tax that is owed but not paid by the due date. Interest will be 

charged from the due date to the date of payment. In addition, the 

taxpayer may be charged a late-payment penalty if the amount of 

tax paid before the due date (from withheld taxes or estimated tax 

payments) is less than 90% of the actual tax owed.

For more details on penalties, refer to filing information in 

Publication 17 and Lesson 6 in the Volunteer Assistor’s Guide.

If Form 4868 is filed late, the request for an extension will be 

denied. The Internal Revenue Service will inform the taxpayer if 

the request is denied.
Lesson 6

Military Segment M-6-3

Taxpayers cannot use the automatic extension if they:

■ Choose to have the IRS figure their tax, or

■ Are under a court order to file their returns by the regular due 

date.

When the tax return is actually filed, any payment made with the 

application should be entered in line 66, Form 1040; added to the 

total on line 43, Form 1040A; or added to the total on line 9, Form 

1040EZ.

The taxpayer can request an extension beyond this 4-month period 

by filing Form 2688, Application for Additional Extension of Time 

To File U.S. Individual Income Tax Return, or by letter. Except in 

undue hardship cases, this additional extension will not be granted 

unless Form 4868 has been filed first. Form 2688 or the taxpayer’s 

letter will not be considered if filed after the extended due date.

Outside the United States and Puerto Rico

U.S. citizens and resident aliens who are living outside the United 

States and Puerto Rico on April 15 and whose main place of business or assigned tour of duty is outside the United States and 

Puerto Rico are allowed an automatic 2-month extension of time 

until June 15, 2004, to file a 2003 return. However, interest will be 

charged from the due date to the date the tax is paid.

Note: Traveling outside the United States and Puerto Rico on the 

due date does not qualify the taxpayer for an automatic 2-month 

extension.

Taxpayers using this automatic extension must attach a statement 

to their return stating that they were living outside the United 

States and Puerto Rico on the due date and that their main place of 

business or their assigned tour of duty is outside the United States 

and Puerto Rico.

Joint returns. For married persons who file jointly, only one 

spouse needs to meet the requirements to take advantage of the 

automatic extension to June 15.

Separate returns. For married persons who file separately, only 

the spouse who meets the requirements qualifies for the automatic 

extension. If both spouses meet the requirements, each may take 

advantage of the extension.

As discussed earlier, taxpayers who live outside the United States 

and Puerto Rico and whose main place of business or assigned 

tour of duty is outside the United States and Puerto Rico can also 

request an additional extension by filing Form 4868 by the automatic extension date of June 15 or by paying the tax due by credit 

card by April 15, 2004. The due date will then be extended to 

August 16. To obtain the additional extension, the taxpayer must 

file Form 4868 and write “Taxpayer Abroad” in the top margin of 

the form. If more time is needed, the taxpayer should file Form 

2688.
Lesson 6 M-6-4 Military Segment

 Combat Zone Participants

The deadline for filing tax returns, paying taxes, filing claims for 

refund, and taking other actions with the IRS is automatically 

extended for members of the Armed Forces who served in a combat 

zone, qualified hazardous duty area, or began performing qualifying service outside of a combat zone or qualified hazardous duty 

area. The designation of the combat zone and the combat pay exclusion are described in Lesson 2, Military Segment.

The deadline for taking actions with the IRS is extended for at 

least 180 days after the later of:

1. The last day a member is in a combat zone, qualified hazardous 

duty area, or has qualifying service outside of the combat zone/

qualified hazardous duty area (or the last day the area qualifies 

as a combat zone/qualified hazardous duty area), or

2. The last day of any continuous qualified hospitalization (defined 

in Lesson 2, Military Segment) for injury from service in the 

combat zone, qualified hazardous duty area, or qualified service 

outside the combat zone/qualified hazardous duty area.

Time in a missing status (missing in action or prisoner of war) 

counts as time in a combat zone.

In addition to the 180 days, the deadline is extended by the number 

of days that were left for the member to take the action with the 

IRS when he/she entered a combat zone, qualified hazardous duty 

area (or began performing qualifying service outside of the combat 

zone/qualified hazardous duty area). If the member entered the 

combat zone/qualified hazardous duty area (or began performing 

qualifying service outside of the combat zone/qualified hazardous 

duty area) before the period of time to take action began, the deadline is extended by the entire time he/she had to take the action. 

For example, the member has 3 1⁄2 months (Jan. 1–Apr. 15, 2003) to 

file his/her 2002 tax return.

Any days of the 3 1⁄2 month period that are left when he/she entered 

a combat zone (or the entire 3 1⁄2 months if the member entered the 

combat zone before January 1) are added to the 180 days to find 

the last day allowed for filing the 2002 tax return.
Lesson 6

Military Segment M-6-5

Example 1

Capt. Margaret Jackson entered Saudi Arabia on December 1, 

2001. She remained there through March 31, 2002, when she 

departed for the United States. She was not injured and did not 

return to the combat zone. The deadlines for filing Capt. Jackson’s 

2001, 2002, and 2003 tax returns are figured as follows:

The 2001 tax return deadline is January 10, 2004. Capt. Jackson 

has 285 days (180 plus 105) after her last day in the combat zone 

(March 31) to file her 2001 tax return. The 105 additional days are 

the number of days in the 3 1⁄2-month filing period that were left 

when she entered the combat zone (Jan 1–Apr. 15). There are 105 

days in the 2003 filing period.

The 2002 tax return deadline is January 10, 2004. Capt. Jackson 

has 285 days (180 plus 105) after her last day in the combat zone to 

file her 2002 tax return.

The 2003 tax return deadline is not extended. The 180-day 

extension period after March 31, 2003, ends in September 27, 2003, 

which is before the start of the filing period for her 2003 return.

Example 2

Petty Officer Leonard Bishop’s ship entered the Persian Gulf on 

January 5, 2002. On February 15, 2002. Leonard was injured and 

was flown to a U.S. hospital. He remained in the hospital through 

April 21, 2003. The deadlines for filing Petty Officer Bishop’s 2001, 

2002, and 2003 returns are figured as follows:

The 2001 tax return deadline is January 27, 2004. Petty Officer 

Bishop has 281 days (180 plus 101) after his last day in the hospital (April 21, 2003) to file his 2001 return. The 101 additional days 

are the number of days in the 3 1⁄2-month filing period that were 

left when he entered the combat zone (Jan. 5–Apr. 15).

The 2002 tax return deadline is January 31, 2004. Petty Officer 

Bishop has 285 days (180 plus 105) after April 21, 2003, to file his 

2002 tax return.

The 2003 tax return deadline is April 15, 2004. The 180-day 

period after April 21, 2003, ends October 18, 2003, which is before 

the start of the filing period for his 2003 return. The due date for 

his 2003 return is not extended. He has until April 15, 2004 to file 

his 2003 tax return.

A detailed explanation of the deadline extension provision for filing 

returns and taking care of other tax matters is included in Lesson 

16, Tax Options for Combat Zone Participants.

Interest. The IRS will pay interest from the regular due date of a 

return if the return is timely filed (including extensions).

Identification of combat zone returns. Taxpayers can choose to 

file their returns before the end of an extension period. They should 

file their returns in accordance with procedures provided by the 

Armed Forces.
Lesson 6 M-6-6 Military Segment

Third-Party Designee. If the taxpayer wants to allow a friend, 

family member, or any other person he or she chooses to discuss his 

or her 2003 tax return with the IRS, the taxpayer should check the 

“Yes” box in the “Third part designee” area if the return. Also, the 

taxpayer should enter the designee’s name, phone number, and any 

five numbers the designee chooses as his or her personal identification number (PIN).

If the taxpayer checks the “Yes” box, he or she, and his or her 

spouse if filing a joint return, is authorizing the IRS to call the designee to answer any questions that may arise during the processing 

of the return. The taxpayer is also authorizing the designee to:

■ Give the IRS any information that is missing from the return,

■ Call the IRS for information about the processing of the return 

or the status of the taxpayer’s refund or payment(s), and

■ Respond to certain IRS notices that the taxpayer has shared 

with the designee about math errors, offsets, and return preparation. The notices will not be sent to the designee.

The taxpayer is not authorizing the designee to receive any refund 

check, bind the taxpayer to anything (including any additional tax 

liability), or otherwise represent the taxpayer before the IRS. If the 

taxpayer wants to expand the designee’s authorization, he or she 

should see Publication 947, Practice Before the IRS and Power of 

Attorney.

The authorization cannot be revoked. However, the authorization 

will automatically end no later than the due date (without regard 

to extensions) for filing the taxpayer’s 2003 tax return. This is April 

15, 2005, for most people.

Power of Attorney. Use Form 2848, Power of Attorney and 

Declaration of Representative, to grant authority to an individual to 

represent you before the IRS and to receive tax information. If an 

individual is acting on behalf of a taxpayer serving in the combat 

zone and does not have a power of attorney specifying that he/she 

can handle federal tax matters, the IRS will accept a general power 

of attorney or other statement signed by the person for whom the 

individual is acting. The general power of attorney or statement 

must authorize the individual to act on the other person’s behalf 

even though federal tax matters are not specified. A copy must be 

attached to the tax return.

Signature. If it is not possible for the spouse of someone serving in 

the combat zone to obtain that person’s signature on a joint return, 

power or attorney, or other signed authorization to act on his or her 

behalf, the IRS will accept a written statement explaining that the 

husband or wife is serving in the combat zone.

The statement must be signed by the spouse filing the tax return 

and attached to the return.
Lesson 6

Military Segment M-6-7

Exercise 1

Pvt. Franklin, a U.S. citizen, is a calendar-year taxpayer. What 

would be the due date for him to file a return if his assigned tour 

of duty were in the following places?

A. Puerto Rico

 Answer 

B. Germany

 Answer 

C. United States

 Answer 

Exercise 2

Capt. Regis is stationed in England on April 15. He is concerned 

about when he should file his federal tax return. Answer the following questions for Capt. Regis.

A. What extensions of time are available to him?

 Answer 

B. How can he get those extensions?

 Answer 

Exercise 3

Capt. Mitchell entered the Persian Gulf area combat zone on 

October 9, 2001, and left the combat zone on May 10, 2003. She 

was not injured and did not return to the combat zone.

A. When are her 2001 and 2002 returns due after applying the 

deadline extension provision?

 Answer 

  SUMMING UP THIS SEGMENT  

In this lesson you have learned where members of the Armed 

Forces should file their returns. You learned when the returns 

are due for taxpayers who live both inside and outside the 

United States and Puerto Rico and how extensions of time to file 

can affect the due date. You have also learned that members of 

the Armed Forces who served in a combat zone are allowed additional time to file their returns.
Lesson 6 M-6-8 Military Segment

FILINGTHE RETURN ANSWERS TO EXERCISES

Lesson 6

Military Segment

1. a. April 15

 b. June 15 if he attached a statement to his return indicating 

that he was on an assigned tour of duty in Germany on the 

due date.

c. April 15

2. a. An automatic 2-month extension of time to June 15 and an 

additional 2-month extension to August 15 (for a total of 4 

months).

b. Captain Regis can obtain the automatic 2-month extension 

by attaching a statement to his tax return indicating that he 

was on an assigned tour of duty outside the United States 

and Puerto Rico on April 15. If Captain Regis needs an additional extension of time, he should file Form 4868 by the 

automatic extension date of June 15 and write “Taxpayer 

Abroad” in the top margin of the form. If he still needs additional time, he should request it before the extended due 

date of August 15 by filing Form 2688, or by letter.

3. a. Capt. Mitchell has 285 days (180 plus 105) after her last day 

in the combat zone (May 10, 2003) to file her 2001 return. 

She has 285 days (180 plus 105) after her last day in the 

combat zone to file her 2002 return. These additional days 

are the number of days in the 3 1⁄2 month filing period that 

were left when she entered the Persian Gulf. Her 2001 

return and her 2002 return are both due February 19, 2004.
Lesson 7 7-1

WAGE EARNER

CREDIT FOR CHILD AND

DEPENDENT CARE EXPENSES Lesson 7

INTRODUCTION AND OBJECTIVES

In this lesson you will learn about the credit for child 

and dependent care expenses. This nonrefundable 

credit is one of the most commonly used credits. The 

requirements for claiming the credit are the same 

regardless of the form used. In fact, Form 2441 (used 

with Form 1040) and Schedule 2 (used with Form 

1040A) are virtually identical. In order to qualify for 

this credit, the taxpayer must satisfy all six tests of 

eligibility.

Some taxpayers receive employer provided dependent 

care benefi ts. Dependent care benefi ts include 

amounts the employer paid directly to the taxpayer 

or to the care provider. These benefi ts can also 

include the fair market value of care in a day care 

facility provided or sponsored by the employer. The 

taxpayer’s salary may have been reduced to pay for 

these benefi ts. The employer provided benefi ts will be 

reported on Form W-2, Box 10.

After completing this lesson you should be able to: 

■ Determine who is eligible for the child and dependent care credit. 

■ Calculate the credit, the exclusion and report the 

expenses on the correct form. 

QUALIFYING PERSON TEST

The child and dependent care expenses must be for at 

least one qualifying person.

A qualifying person is:

■ A child who was under the age of 13 when the care 

was provided and for whom a dependency exemption 

can be claimed. Special rules apply, however, if the 

parents are divorced or separated. (See next page).

■ A dependent who was physically or mentally not 

able to care for himself or herself and for whom a 

dependency exemption can be claimed (or could be 

claimed except the person had $3,050 or more of 

gross income).

■ A spouse who was physically or mentally not able to 

care for himself or herself.
7-2 Lesson 7

WAGE EARNER

Example 1

Jim paid someone to care for his wife, Janet. Janet is physically 

unable to care for herself. Jim also paid to have someone prepare 

meals for his 12-year-old daughter, Jill. Both Janet and Jill are 

qualifying persons for the credit.

Example 2

Bob and Rhonda paid child care expenses for their son, Ronnie. 

Ronnie turned 13 on July 15. Ronnie is a qualifying person until 

he reached the age of 13.

Children of Divorced or Separated Parents Exception

If the taxpayer is the custodial parent, he or she can treat the 

child as a qualifying person for the credit even if he or she cannot 

claim the child’s dependency exemption. If the taxpayer is not the 

custodial parent, he or she cannot treat the child as a qualifying

person for the credit even if he or she can claim the child’s 

dependency exemption.

This exception applies only if all the following are true:

■ One or both parents had custody of the child for more than half 

the year.

■ One or both parents provided more than half of the child’s support for the year.

■ Either

1. The custodial parent signed Form 8332, Release of Claim to 

Exemption for Child of Divorced or Separated Parents, or a 

similar statement, agreeing not to claim the child’s exemption for the year, or

2. The noncustodial parent provided at least $600 for the 

child’s support and can claim the child’s exemption under a 

pre-1985 decree of divorce or separate maintenance, or written agreement.

Example 3

Amanda is divorced and has custody of her 8-year-old daughter, 

Carrie. Amanda signed Form 8332 to allow her ex-spouse to claim 

the dependency exemption for Carrie. In order to work, Amanda 

paid child care expenses for Carrie. Carrie is a qualifying person 

for the credit. Amanda can claim the credit for child and dependent care expenses. The ex-spouse cannot claim the credit.
Lesson 7 7-3

WAGE EARNER

KEEPING UP A HOME TEST

To claim the credit, the taxpayer must pay more than half the cost 

of keeping up a home for himself or herself and one or more qualifying persons. The cost of keeping up a home normally includes 

property taxes, mortgage interest, rent, utility charges, home 

repairs, insurance on the home, and food eaten in the home. Public 

assistance benefits are funds provided by the state not by the taxpayer.

EARNED INCOME TEST

The taxpayer (and spouse if married) must have earned income 

during the year. Earned income includes wages, salaries, tips, 

other taxable employee compensation, net earnings from selfemployment, strike benefits, and disability pay reported as wages.

A spouse is treated as having earned income for any month he or 

she is a full-time student or physically or mentally not able to care 

for himself or herself. Only one spouse can be treated as having 

earned income in any one month.

A full-time student is defined as enrolled and attending a school 

for the number of hours or classes the school considers full-time. 

The taxpayer (or spouse) must be a student for some part of five 

calendar months during the year. 

WORK-RELATED EXPENSE TEST

Child and dependent care expenses must be work related to qualify 

for the credit. Expenses are considered work related only if both of 

the following are true:

1. The expenses allow the taxpayer (and spouse if married) to 

work or look for work and

2. The expenses are for a qualifying person’s care.

A spouse is treated as working during any month he or she is a 

full-time student or is physically or mentally not able to care for 

himself or herself.

To be work related, the expenses must be to provide care for a 

qualifying person. Expenses are for the care of a qualifying person 

only if their main purpose is the person’s well being and protection.

Expenses for care do not include amounts paid for food, clothing, 

education, and entertainment. However, small amounts paid for 

these items can be included if they are incident to and cannot be 

separated from the cost of care.

Education. Expenses to attend first grade or a higher grade are 

not expenses for care.

Camp. The cost of sending a child to an overnight camp is not considered a work-related expense.
7-4 Lesson 7

WAGE EARNER

Payments to relatives. Do not count amounts paid to:

1. A dependent for whom the taxpayer (or spouse if married) can 

claim as an exemption, or

2. The taxpayer’s child who is under age 19 at the end of the year, 

even if he or she is not the taxpayer’s dependent

JOINT RETURN TEST

Generally, a married couple must file a joint retun to take the 

credit. However, if the taxpayer is legally separated or living apart 

from his or her spouse, the taxpayer may be able to file a separate 

return and still take the credit.

If the taxpayer’s filing status is married filing separately and all 

of the following apply, the taxpayer is considered unmarried for 

purposes of figuring the credit:

1. The taxpayer lived apart from his or her spouse during the last 

six months of the year, and

2. The qualifying person lived in the taxpayer’s home for more 

than half of the year, and

3. The taxpayer provided over half the cost of keeping up the 

home, and

4. The taxpayer met the other five tests for eligibility to take the 

credit.

PROVIDER IDENTIFICATION TEST

The taxpayer must provide the care provider’s name, address, 

and taxpayer identification number. If the taxpayer is unable to 

provide this information or if the information is incorrect, he or she 

must show they used due diligence to obtain the information.

Due Diligence. The taxpayer can show due diligence by getting 

and keeping any of the following documents:

1. Form W-10, Dependent Care Provider’s Identification and 

Certification.

2. Copy of the provider’s social security card.

3. Copy of the provider’s driver’s license if it includes the social 

security number.

4. A copy of the provider’s Form W-4 if the provider is the 

taxpayer’s household employee.

5. A copy of the statement furnished by the taxpayer’s employer if 

the provider is a dependent care plan.

6. A letter or invoice from the provider if it shows the name, 

address, and taxpayer identification number (EIN or SSN).
Lesson 7 7-5

WAGE EARNER

Provider Refusal. If the care provider refuses to give the 

taxpayer the identifying information, report whatever information 

is available, enter “see page 2” for the missing information, and 

provide a statement at the bottom of page 2 of Form 2441 or 

Schedule 2.

LIMIT ON EXPENSES

The amount of expenses eligible for the credit is limited to the 

lowest of the following amounts for the year.

■ The lower paid spouse’s earned income (in the case of married 

taxpayers).

■ The single taxpayer’s earned income.

■ The actual expenses paid.

■ The overall limit of $3,000 for one qualifying person or $6,000 

for two or more qualifying persons.

Example 4

Mark earned $14,000. His wife, Evelyn, earned $5,600. Day care 

expenses for their three-year-old daughter were $2,200. The 

maximum amount of qualifying child care expenses is $2,200. This 

is the lowest of:

■ The lower paid spouse’s earnings ($5,600),

■ The amount actually paid ($2,200), and

■ The overall limit for one qualifying person ($3,000).

Some taxpayers receive dependent care benefits from their 

employers. If so, the overall limit of $3,000/$6,000 is reduced, dollar 

for dollar, by any reimbursement excluded from the taxpayer’s 

income. The amount of dependent care benefits received is shown 

in box 10 of Form W-2.

Example 5

Geraldine has one dependent child, Donald, who is 6 years old. She 

paid $2,900 in qualified expenses. Box 10 of Geraldine’s Form 

W-2 shows she received $1,400 during the year from her employer’s 

dependent care assistance program. Because she received 

dependent care benefits, Part III of Form 2441 must be completed 

before completing Part II.

Nonworking Spouse

Married taxpayers usually must both work in order to claim the 

credit. However, if a spouse is either a full-time student during 

any five months of the year, or is not capable of caring for himself 

or herself for some period during the year, a credit can still be 

claimed. To figure the credit, the earned income for each month the 

spouse is either a full-time student or disabled is considered to be 

at least:

ALERT

Beginning in 2003, the 

maximum expenses for 

the credit increased 

to $3,000 for one 

qualifying person and 

$6,000 for two or more 

qualifying persons.

ALERT

Beginning in 2003, 

the amount of earned 

income for the 

nonworking spouse 

increased to $250 with 

one qualifying person 

and $500 for two or 

more qualifying persons.
7-6 Lesson 7

WAGE EARNER

■ $250 with one qualifying person in the home, or

■ $500 with two or more qualifying persons in the home.

Example 6

Janice worked full time. Her husband, Ken, was a full-time student 

from January through May. Their son, Jason, was in daycare while 

Ken attended school. Ken’s earned income for the time he attended 

school is considered to be $1,250 (5 months ✕ $250).

Exercise 1

A. Karen earned $18,000. She paid $3,200 for child care expenses 

for her four-year-old daughter, Crystal. What is the maximum 

amount of child care expenses Karen can claim? 

B. Andrea is married to Bill. They have a seven-year-old son, 

Charles. Charles lived with Andrea for the entire year. Andrea 

paid all the expenses of keeping up the home for herself and 

Charles. Andrea also paid for before-school and after-school 

child care. Her total child care expenses were $1,800. Bill left 

the area 18 months ago. He did not live with Andrea at all during 2003, but he did send $1,200 in child support. Andrea and 

Bill will file separate returns. Andrea signed Form 8332 to 

allow Bill to claim the dependency exemption for Charles. Who 

can claim the credit for child and dependent care expenses?

C. Ellen is divorced. She has custody of her 12-year-old daughter, 

Terri. Terri takes care of herself after school. In the summer, 

Ellen spends $2,000 to send Terri to a two week long overnight 

camp. Are the camp expenses qualified expenses for the credit

for child and dependent care credit? 
Lesson 7 7-7

WAGE EARNER

FIGURING THE CREDIT

The credit is a percentage of qualifying expenses. For taxpayers 

with adjusted gross incomes of $15,000 or less, the credit is 35 

percent of qualifying expenses. As adjusted gross income increases, 

the percentage decreases. The lowest percentage is 20 percent 

for an AGI equal to or greater than $43,000. There is no upper 

limitation on income for this credit. The tables on Schedule 2 ( Form 

1040A) and on Form 2441 show the percentage for each adjusted

gross income bracket. After the credit is figured using Form 2441 

or Schedule 2, it is reported on Form 1040, line 45, or Form 1040A, 

line 29.

Example 7

David A. and Edith B. Fullerton are married and file a joint return. 

Last year, they paid $3,500 for the care of their son, Jonathan. The 

payment was made to Karen’s Kiddie Care, 456 Chapman Avenue, 

Wilmington, DE 19850 (EIN 00-0009101). The $3,500 payment 

includes a $1,000 dependent care benefit Edith received from her 

employer. Edith earned $18,979 and David earned $22,450 last 

year. Their adjusted gross income is $39,429 and their tax liability 

is $2,492. 

Exhibits 1 and 2 show the completed Form 2441 ( Form 1040) for 

David and Edith.

ALERT

Beginning in 2003, 

the credit percentages 

increased and the 

maximum AGI amount 

that qualifi es for the 

highest percentage 

increased to $15,000.
7-8 Lesson 7

WAGE EARNER

Exhibit 1 The Fullerton’s Form 2441, page 1

Proof as of

July 21, 2003

(subject to change)

OMB No. 1545-0068 Child and Dependent Care Expenses Form 2441

 Attach to Form 1040.

Department of the Treasury

Internal Revenue Service

Attachment

 See separate instructions. Sequence No. 21

Name(s) shown on Form 1040 Your social security number

Persons or Organizations Who Provided the Care—You must complete this part. 

(If you need more space, use the bottom of page 2.)

(b) Address

(number, street, apt. no., city, state, and ZIP code)

(d) Amount paid

(see instructions)

(c) Identifying number

(SSN or EIN) 1 (a) Care provider’sname

Credit for Child and Dependent Care Expenses

2

Add the amounts in column (c) of line 2. Do not enter more than $3,000 for one qualifying

person or $6,000 for two or more persons. If you completed Part III, enter the amount

from line 26

Enter your earned income

3

3

If married filing jointly, enter your spouse’s earned income (if your spouse was a student

or was disabled, see the instructions); all others, enter the amount from line 4

4 4

Enter the smallest of line 3, 4, or 5

5

5

6

7 Enter the amount from Form 1040, line 35 7



Decimal

amount is

If line 7 is:

Decimal

amount is

If line 7 is:

But not

Over over

But not

Over over

$0—15,000 .35 $29,000—31,000 .27

15,000—17,000 .34 31,000—33,000 .26

17,000—19,000 .33 33,000—35,000 .25

19,000—21,000 .32 35,000—37,000 .24

21,000—23,000 .31 37,000—39,000 .23

23,000—25,000 .30

Multiply line 6 by the decimal amount on line 8. If you paid 2002 expenses in 2003, see

the instructions 

9

For Paperwork Reduction Act Notice, see page 3 of the instructions. Form 2441 (2003)

Before you begin: You need to understand the following terms. See Definitions on page 1 of the instructions.

Cat. No. 11862M

Part I

Part II

Enter on line 8 the decimal amount shown below that applies to the amount on line 7

Did you receive

dependent care benefits? Yes

No

8

Complete only Part II below.

Complete Part III on the back next.





Caution. If the care was provided in your home, you may owe employment taxes. See the instructions for Form 1040, line 59.

.

(99)

Information about your qualifying person(s). If you have more than two qualifying persons, see the instructions.

(a) Qualifying person’s name

First Last

(b) Qualifying person’s social

security number

(c) Qualified expenses you

incurred and paid in 2003 for the

person listed in column (a)

8

6

● Dependent Care Benefits ● Qualifying Person(s) ● Qualified Expenses ● Earned Income

10 Enter the amount from Form 1040, line 43, minus any amount on Form 1040, line 44 

Credit for child and dependent care expenses. Enter the smaller of line 9 or line 10

here and on Form 1040, line 45

11

9

10

11

25,000—27,000

27,000—29,000

.29

.28

39,000—41,000

41,000—43,000

43,000—No limit

.22

.21

.20

2003

David A. and Edith B. Fullerton 000 00 2935

Karen's Kiddie Care 456 Chapman Ave

Wilmington DE 19850 00-0009101 3,500

Jonathan Fullerton 000 00 2194 2,500

2,000

22,450

18,979

2,000

39,429

22

440

2,492

440
Lesson 7 7-9

WAGE EARNER

Exhibit 2 The Fullerton’s Form 2441, page 2

Proof as of

July 21, 2003

(subject to change)

Form 2441 (2003) Page 2

Dependent Care Benefits

Enter the total amount of dependent care benefits you received for 2003. This amount

should be shown in box 10 of your W-2 form(s). Do not include amounts that were

reported to you as wages in box 1 of Form(s) W-2

Enter the amount forfeited, if any (see the instructions)

Subtract line 13 from line 12

Enter the total amount of qualified expenses incurred

in 2003 for the care of the qualifying person(s)

13

15

Enter the smaller of line 14 or 15 16

14

Enter your earned income

15

17

Enter the amount shown below that

applies to you.

18

Enter the smallest of line 16, 17, or 18

16

19

Excluded benefits. Enter here the smaller of the following:

17

20

● The amount from line 19 or

● $5,000 ($2,500 if married filing separately and you

were required to enter your spouse’s earned

income on line 18).

Taxable benefits. Subtract line 20 from line 14. Also, include this amount on Form 1040,

line 7. On the dotted line next to line 7, enter “DCB”

18

21

Part III



To claim the child and dependent care

credit, complete lines 22–26 below.

22

23

24

19

20

21

22 Enter $3,000 ($6,000 if two or more qualifying persons)

Subtract line 23 from line 22. If zero or less, stop. You cannot take the credit.

Exception. If you paid 2002 expenses in 2003, see the instructions for line 9

Enter the smaller of line 24 or 25. Also, enter this amount on line 3 on the front of this

form and complete lines 4–11

Enter the amount from line 20

26

23

24

26

13

14

Printed on recycled paper

12

12

Complete line 2 on the front of this form. Do not include in column (c) any benefits shown

on line 20 above. Then, add the amounts in column (c) and enter the total here

25

25

Form 2441 (2003)

● If married filing jointly, enter your

spouse’s earned income (if your spouse

was a student or was disabled, see the

instructions for line 5).

● If married filing separately, see the

instructions for the amount to enter.

● All others, enter the amount from line 17.

1,000

0

1,000

3,500

1,000

22,450

18,979

1,000

1,000

0

3,000

1,000

2,000

2,500

2,000
7-10 Lesson 7

WAGE EARNER

Exercise 2

Sam L. (000-00-9832) and Sue D. Windham are married and will 

file a joint return. They have two dependent children whom they 

send to day care to allow both parents to work. Sam’s earned 

income is $18,500 and Sue’s earned income is $19,350. Their AGI 

(Form 1040, line 35) is $37,850 and their tax liability ( Form 1040, 

line 43) is $1,723.

During 2003, they paid The Learning Center day care (496 Irvine 

Road, Newark, NJ 07102, EIN 11-0007965) $5,450 to care for 

their children. The Windhams paid $2,950 of the total and Sue’s 

employer paid $2,500 under a dependent care benefits program. 

The $2,500 is in Box 10 of Sue’s Form W-2.

The children and the amounts paid for day care are as follows:

Doug SSN 000-00-2387 $3,000 $1,250 dependent care

 benefit

Sally SSN 000-00-4923 $2,450 $1,250 dependent care

 benefit

Complete their Form 1040, Form 2441 (Exhibits 3 and 4).

 TAXWISE HINTS

Use the flow charts in Publication 4012, VITA/TCE Resource 

Guide, to determine credit eligibility. For each qualifying child, 

check the “DC” box on the Main Information Sheet, Dependents/

Non-dependents box. TaxWise will add a Form 2441 or Schedule 2 

to the forms tree. Complete all entries annotated in red. TaxWise 

will then calculate any exclusion amounts, calculate the credit, 

complete the form and insert the credit amount on Form 1040 or 

Form 1040A.

  SUMMING UP THIS LESSON  

The Credit for Child and Dependent Care Expenses is a nonrefundable credit which allows a taxpayer to reduce their tax 

liability for a portion of the expenses.

Beginning in 2003, the maximum expense amount increased 

to $3,000 for one qualifying person and $6,000 for two or more 

qualifying persons.

The maximum credit rate increased from 30% to 35%.

A taxpayer must satisfy the six tests to qualify for the credit. 

The tests are the qualifying person test; the keeping up a home 

test; the earned income test; the work-related expense test; the 

joint return test; and the provider identification test.

The credit is calculated and reported on Form 2441 ( Form 1040) 

or Schedule 2 ( Form 1040A).
Lesson 7 7-11

WAGE EARNER

Complete this form.

Exhibit 3 Exercise 2 Form 2441, page 1

Proof as of

July 21, 2003

(subject to change)

OMB No. 1545-0068 Child and Dependent Care Expenses Form 2441

 Attach to Form 1040.

Department of the Treasury

Internal Revenue Service

Attachment

 See separate instructions. Sequence No. 21

Name(s) shown on Form 1040 Your social security number

Persons or Organizations Who Provided the Care—You must complete this part. 

(If you need more space, use the bottom of page 2.)

(b) Address

(number, street, apt. no., city, state, and ZIP code)

(d) Amount paid

(see instructions)

(c) Identifying number

(SSN or EIN) 1 (a) Care provider’sname

Credit for Child and Dependent Care Expenses

2

Add the amounts in column (c) of line 2. Do not enter more than $3,000 for one qualifying

person or $6,000 for two or more persons. If you completed Part III, enter the amount

from line 26

Enter your earned income

3

3

If married filing jointly, enter your spouse’s earned income (if your spouse was a student

or was disabled, see the instructions); all others, enter the amount from line 4

4 4

Enter the smallest of line 3, 4, or 5

5

5

6

7 Enter the amount from Form 1040, line 35 7



Decimal

amount is

If line 7 is:

Decimal

amount is

If line 7 is:

But not

Over over

But not

Over over

$0—15,000 .35 $29,000—31,000 .27

15,000—17,000 .34 31,000—33,000 .26

17,000—19,000 .33 33,000—35,000 .25

19,000—21,000 .32 35,000—37,000 .24

21,000—23,000 .31 37,000—39,000 .23

23,000—25,000 .30

Multiply line 6 by the decimal amount on line 8. If you paid 2002 expenses in 2003, see

the instructions 

9

For Paperwork Reduction Act Notice, see page 3 of the instructions. Form 2441 (2003)

Before you begin: You need to understand the following terms. See Definitions on page 1 of the instructions.

Cat. No. 11862M

Part I

Part II

Enter on line 8 the decimal amount shown below that applies to the amount on line 7

Did you receive

dependent care benefits? Yes

No

8

Complete only Part II below.

Complete Part III on the back next.





Caution. If the care was provided in your home, you may owe employment taxes. See the instructions for Form 1040, line 59.

.

(99)

Information about your qualifying person(s). If you have more than two qualifying persons, see the instructions.

(a) Qualifying person’s name

First Last

(b) Qualifying person’s social

security number

(c) Qualified expenses you

incurred and paid in 2003 for the

person listed in column (a)

8

6

● Dependent Care Benefits ● Qualifying Person(s) ● Qualified Expenses ● Earned Income

10 Enter the amount from Form 1040, line 43, minus any amount on Form 1040, line 44 

Credit for child and dependent care expenses. Enter the smaller of line 9 or line 10

here and on Form 1040, line 45

11

9

10

11

25,000—27,000

27,000—29,000

.29

.28

39,000—41,000

41,000—43,000

43,000—No limit

.22

.21

.20

2003
7-12 Lesson 7

WAGE EARNER

Complete this form.

Exhibit 4 Exercise 2 Form 2441, page 2

Proof as of

July 21, 2003

(subject to change)

Form 2441 (2003) Page 2

Dependent Care Benefits

Enter the total amount of dependent care benefits you received for 2003. This amount

should be shown in box 10 of your W-2 form(s). Do not include amounts that were

reported to you as wages in box 1 of Form(s) W-2

Enter the amount forfeited, if any (see the instructions)

Subtract line 13 from line 12

Enter the total amount of qualified expenses incurred

in 2003 for the care of the qualifying person(s)

13

15

Enter the smaller of line 14 or 15 16

14

Enter your earned income

15

17

Enter the amount shown below that

applies to you.

18

Enter the smallest of line 16, 17, or 18

16

19

Excluded benefits. Enter here the smaller of the following:

17

20

● The amount from line 19 or

● $5,000 ($2,500 if married filing separately and you

were required to enter your spouse’s earned

income on line 18).

Taxable benefits. Subtract line 20 from line 14. Also, include this amount on Form 1040,

line 7. On the dotted line next to line 7, enter “DCB”

18

21

Part III



To claim the child and dependent care

credit, complete lines 22–26 below.

22

23

24

19

20

21

22 Enter $3,000 ($6,000 if two or more qualifying persons)

Subtract line 23 from line 22. If zero or less, stop. You cannot take the credit.

Exception. If you paid 2002 expenses in 2003, see the instructions for line 9

Enter the smaller of line 24 or 25. Also, enter this amount on line 3 on the front of this

form and complete lines 4–11

Enter the amount from line 20

26

23

24

26

13

14

Printed on recycled paper

12

12

Complete line 2 on the front of this form. Do not include in column (c) any benefits shown

on line 20 above. Then, add the amounts in column (c) and enter the total here

25

25

Form 2441 (2003)

● If married filing jointly, enter your

spouse’s earned income (if your spouse

was a student or was disabled, see the

instructions for line 5).

● If married filing separately, see the

instructions for the amount to enter.

● All others, enter the amount from line 17.
Lesson 7 7-13

WAGE EARNER

 CREDIT FOR CHILD AND DEPENDENT CARE

EXPENSES ANSWERS TO EXERCISES Lesson 7

Exercise 1

(A) $3,000, which is the lowest of: earned income ($18,000); the 

amount actually paid ($3,200); and the limit of one qualifying

person ($3,000).

(B) Andrea. Even though she is filing a separate tax return, she is 

eligible for the credit because she signed a Form 8332 to allow 

her husband to claim the depenency exemption..

(C) No.
7-14 Lesson 7

WAGE EARNER

 CREDIT FOR CHILD AND DEPENDENT CARE

Lesson 7 EXPENSES ANSWERS TO EXERCISES

Exhibit 5 Exercise 2 The Windham’s Form 2441, page 1

Proof as of

July 21, 2003

(subject to change)

OMB No. 1545-0068 Child and Dependent Care Expenses Form 2441

 Attach to Form 1040.

Department of the Treasury

Internal Revenue Service

Attachment  See separate instructions. Sequence No. 21

Name(s) shown on Form 1040 Your social security number

Persons or Organizations Who Provided the Care—You must complete this part. 

(If you need more space, use the bottom of page 2.)

(b) Address

(number, street, apt. no., city, state, and ZIP code)

(d) Amount paid

(see instructions)

(c) Identifying number

(SSN or EIN) 1 (a) Care provider’sname

Credit for Child and Dependent Care Expenses

2

Add the amounts in column (c) of line 2. Do not enter more than $3,000 for one qualifying

person or $6,000 for two or more persons. If you completed Part III, enter the amount

from line 26

Enter your earned income

3

3

If married filing jointly, enter your spouse’s earned income (if your spouse was a student

or was disabled, see the instructions); all others, enter the amount from line 4

4 4

Enter the smallest of line 3, 4, or 5

5

5

6

7 Enter the amount from Form 1040, line 35 7



Decimal

amount is

If line 7 is:

Decimal

amount is

If line 7 is:

But not

Over over But notOver over

$0—15,000 .35 $29,000—31,000 .27

15,000—17,000 .34 31,000—33,000 .26

17,000—19,000 .33 33,000—35,000 .25

19,000—21,000 .32 35,000—37,000 .24

21,000—23,000 .31 37,000—39,000 .23

23,000—25,000 .30

Multiply line 6 by the decimal amount on line 8. If you paid 2002 expenses in 2003, see

the instructions 

9

For Paperwork Reduction Act Notice, see page 3 of the instructions. Form 2441 (2003)

Before you begin: You need to understand the following terms. See Definitions on page 1 of the instructions.

Cat. No. 11862M

Part I

Part II

Enter on line 8 the decimal amount shown below that applies to the amount on line 7

Did you receive

dependent care benefits? Yes

No

8

Complete only Part II below.

Complete Part III on the back next.





Caution. If the care was provided in your home, you may owe employment taxes. See the instructions for Form 1040, line 59.

.

(99)

Information about your qualifying person(s). If you have more than two qualifying persons, see the instructions.

(a) Qualifying person’s name

First Last

(b) Qualifying person’s social

security number

(c) Qualified expenses you

incurred and paid in 2003 for the

person listed in column (a)

8

6

● Dependent Care Benefits ● Qualifying Person(s) ● Qualified Expenses ● Earned Income

10 Enter the amount from Form 1040, line 43, minus any amount on Form 1040, line 44 

Credit for child and dependent care expenses. Enter the smaller of line 9 or line 10

here and on Form 1040, line 45

11

9

10

11

25,000—27,000

27,000—29,000

.29

.28

39,000—41,000

41,000—43,000

43,000—No limit

.22

.21

.20

2003

Sam L. and Sue D. Windham 000 00 9832

The Learning Cente

496 Irvine Rd

Newark NJ 07102 11-0007965 5,450

Doug Windham 000 00 2387 1,750

Sally Windham 000 00 4923 1,200

2,950

18,500

19,350

2,950

37,850

23

679

1,723

679
Lesson 7 7-15

WAGE EARNER

 CREDIT FOR CHILD AND DEPENDENT CARE

EXPENSES ANSWERS TO EXERCISES Lesson 7

Exhibit 6 Exercise 2 The Windham’s Form 2441, page 2

Proof as of

July 21, 2003

(subject to change)

Form 2441 (2003) Page 2

Dependent Care Benefits

Enter the total amount of dependent care benefits you received for 2003. This amount

should be shown in box 10 of your W-2 form(s). Do not include amounts that were

reported to you as wages in box 1 of Form(s) W-2

Enter the amount forfeited, if any (see the instructions)

Subtract line 13 from line 12

Enter the total amount of qualified expenses incurred

in 2003 for the care of the qualifying person(s)

13

15

Enter the smaller of line 14 or 15 16

14

Enter your earned income

15

17

Enter the amount shown below that

applies to you.

18

Enter the smallest of line 16, 17, or 18

16

19

Excluded benefits. Enter here the smaller of the following:

17

20

● The amount from line 19 or

● $5,000 ($2,500 if married filing separately and you

were required to enter your spouse’s earned

income on line 18).

Taxable benefits. Subtract line 20 from line 14. Also, include this amount on Form 1040,

line 7. On the dotted line next to line 7, enter “DCB”

18

21

Part III



To claim the child and dependent care

credit, complete lines 22–26 below.

22

23

24

19

20

21

22 Enter $3,000 ($6,000 if two or more qualifying persons)

Subtract line 23 from line 22. If zero or less, stop. You cannot take the credit.

Exception. If you paid 2002 expenses in 2003, see the instructions for line 9

Enter the smaller of line 24 or 25. Also, enter this amount on line 3 on the front of this

form and complete lines 4–11

Enter the amount from line 20

26

23

24

26

13

14

Printed on recycled paper

12

12

Complete line 2 on the front of this form. Do not include in column (c) any benefits shown

on line 20 above. Then, add the amounts in column (c) and enter the total here

25

25

Form 2441 (2003)

● If married filing jointly, enter your

spouse’s earned income (if your spouse

was a student or was disabled, see the

instructions for line 5).

● If married filing separately, see the

instructions for the amount to enter.

● All others, enter the amount from line 17.

2,500

0

2,500

5,450

2,500

18,500

19,350

2,500

2,500

0

6,000

2,500

3,500

2,950

2,950
7-16 Lesson 7

WAGE EARNER

STUDENT NOTES
Lesson 8 8-1

WAGE EARNER

 EDUCATION CREDITS Lesson 8

INTRODUCTION AND OBJECTIVES

For tax year 2003, there are nine different tax benefits 

for higher education. Some of these benefits are 

not taxed (i.e., Coverdell education savings account, 

qualified tuition program, early IRA withdrawals, 

employer provided educational assistance and 

educations savings bond program). The student loan 

interest deduction and tuition and fees deduction were 

covered in Lesson 3, Adjustments. In this lesson you 

will learn about the two education credits: Hope credit 

and the lifetime learning credit.

After completing this lesson, you should be able to:

■ Calculate the Hope credit on Form 8863.

■ Calculate the lifetime learning credit on Form 

8863.

GENERAL REQUIREMENTS

Taxpayers can claim the Hope Scholarship Credit

(Hope credit) and the Lifetime Learning Credit for 

higher education expenses paid in 2003 for an eligible 

student. Both credits are nonrefundable and can be 

claimed on either Form 1040 or Form 1040A. These 

two credits are also called education credits.

To claim either of the education credits the taxpayer 

must:

■ File using any filing status other than married 

filing separately,

■ Meet all of the general requirements,

■ Meet all of the specific requirements for the 

individual credit, and

■ Meet the income limits.

The general requirements provide that the taxpayer 

must have incurred qualified expenses for an 

eligible student to attend an eligible educational 

institution during the tax year. 
8-2 Lesson 8

WAGE EARNER

Qualified Expenses

The Hope credit and the lifetime learning credit are based on 

qualified tuition and related expenses the taxpayer pays for himself 

or herself, the taxpayer’s spouse, or dependents the taxpayer claims 

on his or her tax return.

Qualified tuition and related expenses are tuition and fees required 

for enrollment or attendance at an eligible educational institution 

and generally include fees for:

■ Course-related books, supplies and equipment, and

■ Student activities.

The fees must be paid to the institution as a condition of 

enrollment or attendance.

Qualified tuition and related expenses do not include the cost of:

■ Insurance,

■ Medical expenses (including student health fees),

■ Room and board,

■ Transportation or similar personal, living, or family expenses, 

even if the fees must be paid to the institution as a condition of 

enrollment or attendance.

When considering qualified tuition and related expenses for the 

Hope credit, the cost of courses for athletics, sports, games, hobbies 

or noncredit courses are not used unless the course is part of the 

student’s degree program. However, when computing the qualified 

tuition and related expenses for the lifetime learning credit, these 

types of expenses are includible if the course was taken to acquire 

or improve the job skills of the student.

If a taxpayer prepaid qualified tuition and related expenses for 

an academic period that begins in the first three months of the 

following year, he or she can use the prepaid amount in figuring the 

credit.

Example 1

Thomas pays $1,500 in December 2003 for qualified tuition for 

the winter semester that begins in January 2004. He can use the 

$1,500 paid in December of 2003 to compute his credit for 2003.

Payments with borrowed funds.

Taxpayers can claim the Hope credit and lifetime learning credit 

for qualified tuition and related expenses paid with the proceeds of 

a loan. Use the expenses to figure the credit for the year in which 

the expenses are paid, not the year in which the loan is repaid.
Lesson 8 8-3

WAGE EARNER

 Eligible Student

The taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent 

(for whom the taxpayer claims a dependency exemption) can be an 

eligible student.

In addition, for the Hope credit, the student must be:

■ Enrolled in a program that leads to a degree, certificate or other 

recognized educational credential.

■ Taking at least one-half of the normal full-time workload for his 

or her course of study for at least one academic period beginning 

during the calendar year.

■ Enrolled for one of the first two years of his or her postsecondary education.

■ Free of any felony conviction for possessing or distributing a 

controlled substance.

WHO CAN CLAIM EXPENSES?

The taxpayer must claim a dependent exemption for the eligible 

student in order to claim an education credit. Either the taxpayer 

or the dependent, but not both, can claim an education credit for 

that dependent’s higher education expenses.

If the taxpayer... Then only...

Claims an exemption on the tax 

return for a dependent who is an 

eligible student

The taxpayer can claim the Hope 

or lifetime learning credit based on 

that student’s expenses. The student 

cannot claim the credit.

Does not claim an exemption for a 

dependent who is an eligible student 

(even if entitled to the exemption)

The student can claim the Hope or 

lifetime learning credit. The taxpayer 

cannot claim the student’s expenses.

If someone other than the taxpayer, the taxpayer’s spouse, or the 

dependent (such as a relative or former spouse) makes a payment 

directly to the eligible educational institution to pay for qualified 

tuition and related expenses, the student is treated as receiving the 

payment from the other person. The student is considered to have 

paid the qualified tuition and related expenses to the eligible institution. If the taxpayer claims an exemption for the student, the 

taxpayer is considered to have paid the expenses. If the taxpayer 

does not claim a dependent exemption for the student, the student 

may claim the credit.
8-4 Lesson 8

WAGE EARNER

Example 2

Mary Birch paid her grandson, Todd’s, tuition for 2003 directly 

to the university. For purposes of claiming the Hope credit, her 

grandson is treated as receiving the money as a gift and in turn 

paying his qualified tuition and related expenses himself. Unless 

an exemption for Todd is claimed on someone else’s return, only 

Todd can use the payment to claim the Hope credit. If Todd’s 

parents claim his exemption, they may be able to use the expenses 

to claim the Hope credit. If anyone else claims an exemption for 

Todd, Todd cannot claim a Hope credit.

Eligible Educational Institution

An eligible educational institution is generally any accredited 

public, nonprofit, or proprietary (private) postsecondary institution 

eligible to participate in the student aid programs administered 

by the Department of Education. Most universities and colleges, 

including community colleges, meet these requirements.

 Income Requirements

The Hope credit and the lifetime learning credit are phased out 

(gradually reduced) if the taxpayer’s modified AGI is over $41,000 

(over $83,000 if married filing jointly). If a taxpayer’s modified AGI 

is $51,000 or more ($103,000 or more if married filing jointly), no 

credit is allowed. Education credits are not allowed to persons who 

are married filing separately.

 Modified Adjusted Gross Income (MAGI)

For most taxpayers, modified adjusted gross income (MAGI) is 

adjusted gross income (AGI) as figured on their federal income tax 

return. MAGI when using Form 1040A is the AGI on line 22 of that 

form. MAGI when using Form 1040 is the AGI on line 35 of that 

form, modified by adding back any:

1) Foreign earned income exclusion

2) Foreign housing exclusion

3) Exclusion of income for bona fide residents of America 

Samoa, and

4) Exclusion of income from Puerto Rico.
Lesson 8 8-5

WAGE EARNER

 HOPE CREDIT

A Hope credit can be claimed for each eligible student that is 

claimed on the taxpayer’s return.

Credit Amounts

The Hope credit is figured on Form 8863, Education Credits (Hope 

and Lifetime Learning Credits). The maximum Hope credit is 

$1,500 per student for each of the first two taxable years of his 

or her postsecondary education. For each eligible student who 

qualifies for the Hope credit:

■ If the expenses are $1,000 or less, the credit is the amount of 

the expenses,

■ If the expenses are $2,000 or more, the credit is $1,500, and

■ If the expenses are between $1,000 and $2,000, the credit is 

$1,000 plus one-half of the expenses over $1,000. For example, 

if the expenses are $1,500, the credit is $1,250 ($1,000 plus onehalf of $500).

Example 3

Sue and Ted paid $7,000 in qualified tuition and fees for their 

daughter to attend the local university. They determined it would 

be more beneficial for them to take the Hope Credit rather than the 

Tuition and Fees Deduction. Their Form 8863 is shown in Exhibit 

1.
8-6 Lesson 8

WAGE EARNER

Draft as of

7/07/2003

OMB No. 1545-1618 Education Credits Form 8863

 See instructions. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 50

Name(s) shown on return Your social security number

Hope Credit. Caution: You cannot take the Hope credit for more than 2 tax years for the same student.

1

2

3

Lifetime Learning Credit

Form 8863 (2003)

Part I

Part II

3

(a) Student’s name

(as shown on page 1

of your tax return)

Cat. No. 25379M

Add the amounts in columns (d) and (f)

Tentative Hope credit. Add the amounts on line 2, columns (d) and (f). If you are claiming

the lifetime learning credit for another student, go to Part II; otherwise, go to Part III 

8

Add the amounts on line 4, column (c), and enter the total

9

9

Enter the smaller of line 5 or $10,000

10

Subtract line 10 from line 9. If zero or less, stop; you cannot take

any education credits

10

12

16

17

4

11

11

15

For Paperwork Reduction Act Notice, see page 3.

(f) Enter one-half

of the amount in

column (e)

(e) Subtract

column (d) from

column (c)

(d) Enter the

smaller of the

amount in

column (c) or

$1,000

(c) Qualified

expenses (see

instructions). Do

not enter more

than $2,000 for

each student).

2

Caution: You

cannot take the

Hope credit and

the lifetime learning

credit for the same

student in the same

year.

(a) Student’s name (as shown on page 1

of your tax return)

First name Last name

(c) Qualified

expenses (see

instructions)

Tentative lifetime learning credit. Multiply line 6 by 20% (.20) and go to Part III 

5

6

7

5

6

7

Part III Allowable Education Credits

8 Tentative education credits. Add lines 3 and 7

Enter: $103,000 if married filing jointly; $51,000 if single, head of

household, or qualifying widow(er)

Enter the amount from Form 1040, line 35 *, or Form 1040A, line 22

If line 11 is equal to or more than line 12, enter the amount from line 8 on line 14 and

go to line 15. If line 11 is less than line 12, divide line 11 by line 12. Enter the result as

a decimal (rounded to at least three places)

13

14 Multiply line 8 by line 13 

15 Enter the amount from Form 1040, line 43, or Form 1040A, line 28 

Enter the total, if any, of your credits from Form 1040, lines 44 through 46, or 

Form 1040A, lines 29 and 30

16

Subtract line 16 from line 15. If zero or less, stop; you cannot take any education

credits 

17

18 Education credits. Enter the smaller of line 14 or line 17 here and on Form 1040,

line 47, or Form 1040A, line 31  18

14

13  .

(Hope and Lifetime Learning Credits)

(b) Student’s

social security

number (as

shown on page 1

of your tax return)

(b) Student’s social security

number (as shown on page

1 of your tax return)

Enter: $20,000 if married filing jointly; $10,000 if single, head of

household, or qualifying widow(er) 12

*See Pub. 970 for the amount to enter if you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico.

 Attach to Form 1040 or Form 1040A.

Last name

First name

2003

Caution: You cannot take both an education credit and the tuition and fees deduction (Form 1040, line 26, or Form 1040A, line 19) for the same student in the same year.

Sue and Ted Green 000 00 9876

Mary

Green 000 00 1234 2,000 1,000 1,000 500

1,000 500

1,500

1,500

103,000

35,000

68,000

20,000

1,500

3,349

0

3,349

1,500

Exhibit 1 Sue and Ted’s Form 8863
Lesson 8 8-7

WAGE EARNER

 LIFETIME LEARNING CREDIT

The lifetime learning credit is based on the total qualified 

education expenses paid by the taxpayer and not on the number of 

eligible students. Education expenses are qualified for the lifetime 

learning credit if they are:

■ For courses taken as part of a postsecondary degree program, or

■ For courses that are not part of a postsecondary degree 

program, but that are taken to improve or acquire job skills.

Example 4

Samantha, a professional photographer, enrolls in an advanced 

photography course at a local community college. Although the 

course is not part of a degree program, she enrolls in it to improve 

her job skills. The course fee paid by Samantha is considered 

qualified tuition for the purpose of claiming the lifetime learning 

credit.

Example 5

Cleve, an engineer, plans to vacation in Europe next year. In 

preparation for the trip, he enrolls in a noncredit photography 

class at a local community college. Because Cleve is not taking the 

course as part of a degree program or to acquire or improve his job 

skills, the cost of the course is not a qualifying expense for claiming 

the lifetime learning credit.

Credit amounts

The lifetime learning credit is also figured on Form 8863. The 

maximum amount of the credit is $2,000 per taxpayer for all 

eligible students. The credit amount is figured by multiplying total 

qualified educational expenses, up to $10,000, by 20%.

Example 6

Judy Green is single and took a course at the local college to 

recertify her to teach in public schools. Her qualified tuition 

expenses were $500. She chooses to take the lifetime learning 

credit rather than the Tuition and Fees Deduction. Her completed 

Form 8863 is shown in Exhibit 2.

ALERT

The maximum lifetime 

learning credit increased 

from $1,000 to $2,000 

for 2003.
8-8 Lesson 8

WAGE EARNER

Draft as of

7/07/2003

OMB No. 1545-1618 Education Credits

Form 8863

 See instructions. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 50

Name(s) shown on return Your social security number

Hope Credit. Caution: You cannot take the Hope credit for more than 2 tax years for the same student.

1

2

3

Lifetime Learning Credit

Form 8863 (2003)

Part I

Part II

3

(a) Student’s name

(as shown on page 1

of your tax return)

Cat. No. 25379M

Add the amounts in columns (d) and (f)

Tentative Hope credit. Add the amounts on line 2, columns (d) and (f). If you are claiming

the lifetime learning credit for another student, go to Part II; otherwise, go to Part III 

8

Add the amounts on line 4, column (c), and enter the total

9

9

Enter the smaller of line 5 or $10,000

10

Subtract line 10 from line 9. If zero or less, stop; you cannot take

any education credits

10

12

16

17

4

11

11

15

For Paperwork Reduction Act Notice, see page 3.

(f) Enter one-half

of the amount in

column (e)

(e) Subtract

column (d) from

column (c)

(d) Enter the

smaller of the

amount in

column (c) or

$1,000

(c) Qualified

expenses (see

instructions). Do

not enter more

than $2,000 for

each student).

2

Caution: You

cannot take the

Hope credit and

the lifetime learning

credit for the same

student in the same

year.

(a) Student’s name (as shown on page 1

of your tax return)

First name Last name

(c) Qualified

expenses (see

instructions)

Tentative lifetime learning credit. Multiply line 6 by 20% (.20) and go to Part III 

5

6

7

5

6

7

Part III Allowable Education Credits

8 Tentative education credits. Add lines 3 and 7

Enter: $103,000 if married filing jointly; $51,000 if single, head of

household, or qualifying widow(er)

Enter the amount from Form 1040, line 35 *, or Form 1040A, line 22

If line 11 is equal to or more than line 12, enter the amount from line 8 on line 14 and

go to line 15. If line 11 is less than line 12, divide line 11 by line 12. Enter the result as

a decimal (rounded to at least three places)

13

14 Multiply line 8 by line 13 

15 Enter the amount from Form 1040, line 43, or Form 1040A, line 28 

Enter the total, if any, of your credits from Form 1040, lines 44 through 46, or 

Form 1040A, lines 29 and 30

16

Subtract line 16 from line 15. If zero or less, stop; you cannot take any education

credits 

17

18 Education credits. Enter the smaller of line 14 or line 17 here and on Form 1040,

line 47, or Form 1040A, line 31  18

14

13  .

(Hope and Lifetime Learning Credits)

(b) Student’s

social security

number (as

shown on page 1

of your tax return)

(b) Student’s social security

number (as shown on page

1 of your tax return)

Enter: $20,000 if married filing jointly; $10,000 if single, head of

household, or qualifying widow(er) 12

*See Pub. 970 for the amount to enter if you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico.

 Attach to Form 1040 or Form 1040A.

Last name

First name

2003

Caution: You cannot take both an education credit and the tuition and fees deduction (Form 1040, line 26, or Form 1040A, line 19) for the same student in the same year.

Judy Green 000 00 2586

Judy Green 000 00 2586 500

500

500

100

100

51,000

29,524

21,476

10,000

100

1,701

0

1,701

100

Exhibit 2 Judy’s Form 8863
Lesson 8 8-9

WAGE EARNER

NO DOUBLE BENEFITS

A taxpayer cannot:

■ Deduct higher education expenses and claim a credit based on 

those same expenses,

■ Claim a Hope credit and a lifetime learning credit based on the 

same qualified education expenses, or

■ Claim a credit based on expenses paid with tax-free scholarship, 

grant, employer-provided educational assistance or a distribution from a Coverdell ESA.

However, a taxpayer can claim a credit based on expenses paid 

with the eligible student’s earnings, loans, gifts, inheritances, or 

personal savings.

An eligible student cannot claim an education credit if he or she 

is claimed as a dependent on another taxpayer’s tax return. Any 

amounts paid by the student are considered paid by the taxpayer 

who claims the student as a dependent.

The following table summarizes the differences between the credits.

Table: Comparison of Education Credits

Lifetime Learning Credit Hope Scholarship Credit

per taxpayer credit per eligible student credit

$2,000 limit per taxpayer $1,500 limit per eligible student

available for an unlimited

number of years

available ONLY for the fi rst two 

years of postsecondary

education

credit available for courses

taken as part of a postsecondary 

degree program or to acquire or 

improve job skills (including 

non-credit courses and graduate 

level work)

must be pursuing a degree or 

other educational credential

available for one or more courses must take at least 1/2 of the normal full-time workload for one 

academic period

no other restrictions felony drug conviction restriction

 Adjustments to Qualified Expenses

Tax-free educational assistance can include the following:

• Scholarships,

• Pell grants,

• Employer-provided educational assistance,

• Veteran’s educational assistance, and 
8-10 Lesson 8

WAGE EARNER

• Any other nontaxable payments (other than gifts, bequests, 

or inheritances) received for education expenses.

If the taxpayer paid qualified tuition expenses with these tax-free 

funds, a credit cannot be claimed for these amounts. Qualified

expenses must be reduced by the amount of any tax-free educational assistance received. 

Example 3

In 2003, Jackie paid $3,000 for tuition and $5,000 for room and 

board at her local university. To help pay these costs, she was 

awarded a $2,000 scholarship and a $4,000 student loan.

The scholarship is a qualified scholarship that is excludable from 

Jackie’s income. For purposes of the education credit, she must 

first use the scholarship to reduce her tuition (her only qualified 

expense). The student loan is not considered tax-free educational 

assistance so she does not use it to reduce the qualified expenses. 

Therefore, Jackie is treated as having paid only $1,000 in qualified 

expenses ($3,000 tuition - $2,000 scholarship).

Refunds. Qualified tuition and related expenses do not include 

expenses for which the taxpayer received a refund. If the refund 

or tax-free assistance is received in the same year in which the 

expenses were paid or in the following year before the tax return 

is filed, reduce the qualified expenses by the amount received and 

figure the education credits using the reduced amount of qualified 

expenses.

If the refund or tax-free assistance is received after the tax return 

is filed for the year in which the expenses were paid, figure the 

amount by which the education credits would have been reduced if 

the refund or tax-free assistance had been received in the year for 

which the education credits were claimed. Include that amount as 

an additional tax for the year the refund or tax-free assistance was 

received. Enter the amount and “ECR” on line 42.

Example 4

Sally paid $2,250 tuition on December 26, 2002, for her daughter 

who began college on January 16, 2003. She filed her 2002 tax 

return on February 12, 2003, and claimed a Hope credit of $1,500. 

After Sally filed her return, her daughter dropped two courses 

but maintained one-half of a full-time workload. Sally received 

a refund of $750. She must refigure her 2002 Hope credit using 

$1,500 of qualified expenses instead of $2,250. The refigured credit 

is $1,250. She must include the difference of $250 on line 41 of her 

2003 Form 1040 and annotate next to the line: $250 ECR. 
Lesson 8 8-11

WAGE EARNER

Exercise 1

Bruce (SSN 000-00-9541) and Toni Green are married and file 

a joint tax return. For 2003, their modified AGI ($65,500) is the 

same as their AGI. They completed Form 1040 through line 44. 

Their tax amount on Line 43 is $6,203. Toni is attending the local 

community college part time to earn credits toward an associate 

degree in nursing. She paid $2,500 in tuition and fees. Their son, 

Ben, is a full time freshman at the state university. Bruce and 

Toni paid $8,000 in tuition and fees for Ben in 2003. They choose 

to take the lifetime learning credit for Toni and the Hope credit 

for Ben. They will claim no other credits. Toni’s SSN is 000-00-

4651. Ben’s SSN is 000-00-3945. Complete their Form 8863.

 TAXWISE HINTS

To input qualified tuition expenses and prepare a Form 8863 using 

TaxWise, select Form 8863, enter the student’s name in either the 

Hope credit section or the lifetime learning credit section and complete all the entries annotated in red. TaxWise will automatically 

complete the form and carry the mathematical calculations to the 

Form 1040.

  SUMMING UP THIS LESSON 

The maximum credit amount for the lifetime learning credit for 

tax year 2003 increased to $2,000. 

The Hope and lifetime learning credits are nonrefundable credits 

that allow a taxpayer to claim all or a portion of qualified tuition 

and related expenses paid for post-secondary education.

Generally, a taxpayer can claim the Hope or lifetime learning 

credit if they pay qualified tuition and related expenses of higher 

education for an eligible student who is either the taxpayer, the 

taxpayer’s spouse, or a dependent whom the taxpayer can claim 

an exemption on his or her tax return. 

A taxpayer cannot: 

 Deduct higher education expenses on his or her tax return 

and also claim a Hope or lifetime learning credit based on 

those same expenses,

 Claim a Hope credit and a lifetime learning credit based on 

the same qualified education expenses, or

 Claim a credit based on expenses paid with tax-free scholarship, grant, or employer-provided educational assistance.

The Hope and lifetime learning credits are claimed on Form 

8863 which can be filed with either Form 1040 or Form 1040A. 
8-12 Lesson 8

WAGE EARNER

Draft as of

7/07/2003

OMB No. 1545-1618 Education Credits

Form 8863

 See instructions. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 50

Name(s) shown on return Your social security number

Hope Credit. Caution: You cannot take the Hope credit for more than 2 tax years for the same student.

1

2

3

Lifetime Learning Credit

Form 8863 (2003)

Part I

Part II

3

(a) Student’s name

(as shown on page 1

of your tax return)

Cat. No. 25379M

Add the amounts in columns (d) and (f)

Tentative Hope credit. Add the amounts on line 2, columns (d) and (f). If you are claiming

the lifetime learning credit for another student, go to Part II; otherwise, go to Part III 

8

Add the amounts on line 4, column (c), and enter the total

9

9

Enter the smaller of line 5 or $10,000

10

Subtract line 10 from line 9. If zero or less, stop; you cannot take

any education credits

10

12

16

17

4

11

11

15

For Paperwork Reduction Act Notice, see page 3.

(f) Enter one-half

of the amount in

column (e)

(e) Subtract

column (d) from

column (c)

(d) Enter the

smaller of the

amount in

column (c) or

$1,000

(c) Qualified

expenses (see

instructions). Do

not enter more

than $2,000 for

each student).

2

Caution: You

cannot take the

Hope credit and

the lifetime learning

credit for the same

student in the same

year.

(a) Student’s name (as shown on page 1

of your tax return)

First name Last name

(c) Qualified

expenses (see

instructions)

Tentative lifetime learning credit. Multiply line 6 by 20% (.20) and go to Part III 

5

6

7

5

6

7

Part III Allowable Education Credits

8 Tentative education credits. Add lines 3 and 7

Enter: $103,000 if married filing jointly; $51,000 if single, head of

household, or qualifying widow(er)

Enter the amount from Form 1040, line 35 *, or Form 1040A, line 22

If line 11 is equal to or more than line 12, enter the amount from line 8 on line 14 and

go to line 15. If line 11 is less than line 12, divide line 11 by line 12. Enter the result as

a decimal (rounded to at least three places)

13

14 Multiply line 8 by line 13 

15 Enter the amount from Form 1040, line 43, or Form 1040A, line 28 

Enter the total, if any, of your credits from Form 1040, lines 44 through 46, or 

Form 1040A, lines 29 and 30

16

Subtract line 16 from line 15. If zero or less, stop; you cannot take any education

credits 

17

18 Education credits. Enter the smaller of line 14 or line 17 here and on Form 1040,

line 47, or Form 1040A, line 31  18

14

13  .

(Hope and Lifetime Learning Credits)

(b) Student’s

social security

number (as

shown on page 1

of your tax return)

(b) Student’s social security

number (as shown on page

1 of your tax return)

Enter: $20,000 if married filing jointly; $10,000 if single, head of

household, or qualifying widow(er) 12

*See Pub. 970 for the amount to enter if you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico.

 Attach to Form 1040 or Form 1040A.

Last name

First name

2003

Caution: You cannot take both an education credit and the tuition and fees deduction (Form 1040, line 26, or Form 1040A, line 19) for the same student in the same year.

Exhibit 3 Bruce and Toni’s Form 8863
Lesson 8 8-13

WAGE EARNER

 EDUCATION CREDITS ANSWERS TO EXERCISES

Exercise 1 Bruce and Toni’s Form 8863

Draft as of

7/07/2003

OMB No. 1545-1618 Education Credits Form 8863

 See instructions. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 50

Name(s) shown on return Your social security number

Hope Credit. Caution: You cannot take the Hope credit for more than 2 tax years for the same student.

1

2

3

Lifetime Learning Credit

Form 8863 (2003)

Part I

Part II

3

(a) Student’s name

(as shown on page 1

of your tax return)

Cat. No. 25379M

Add the amounts in columns (d) and (f)

Tentative Hope credit. Add the amounts on line 2, columns (d) and (f). If you are claiming

the lifetime learning credit for another student, go to Part II; otherwise, go to Part III 

8

Add the amounts on line 4, column (c), and enter the total

9

9

Enter the smaller of line 5 or $10,000

10

Subtract line 10 from line 9. If zero or less, stop; you cannot take

any education credits

10

12

16

17

4

11

11

15

For Paperwork Reduction Act Notice, see page 3.

(f) Enter one-half

of the amount in

column (e)

(e) Subtract

column (d) from

column (c)

(d) Enter the

smaller of the

amount in

column (c) or

$1,000

(c) Qualified

expenses (see

instructions). Do

not enter more

than $2,000 for

each student).

2

Caution: You

cannot take the

Hope credit and

the lifetime learning

credit for the same

student in the same

year.

(a) Student’s name (as shown on page 1

of your tax return)

First name Last name

(c) Qualified

expenses (see

instructions)

Tentative lifetime learning credit. Multiply line 6 by 20% (.20) and go to Part III 

5

6

7

5

6

7

Part III Allowable Education Credits

8 Tentative education credits. Add lines 3 and 7

Enter: $103,000 if married filing jointly; $51,000 if single, head of

household, or qualifying widow(er)

Enter the amount from Form 1040, line 35 *, or Form 1040A, line 22

If line 11 is equal to or more than line 12, enter the amount from line 8 on line 14 and

go to line 15. If line 11 is less than line 12, divide line 11 by line 12. Enter the result as

a decimal (rounded to at least three places)

13

14 Multiply line 8 by line 13 

15 Enter the amount from Form 1040, line 43, or Form 1040A, line 28 

Enter the total, if any, of your credits from Form 1040, lines 44 through 46, or 

Form 1040A, lines 29 and 30

16

Subtract line 16 from line 15. If zero or less, stop; you cannot take any education

credits 

17

18 Education credits. Enter the smaller of line 14 or line 17 here and on Form 1040,

line 47, or Form 1040A, line 31  18

14

13  .

(Hope and Lifetime Learning Credits)

(b) Student’s

social security

number (as

shown on page 1

of your tax return)

(b) Student’s social security

number (as shown on page

1 of your tax return)

Enter: $20,000 if married filing jointly; $10,000 if single, head of

household, or qualifying widow(er) 12

*See Pub. 970 for the amount to enter if you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico.

 Attach to Form 1040 or Form 1040A.

Last name

First name

2003

Caution: You cannot take both an education credit and the tuition and fees deduction (Form 1040, line 26, or Form 1040A, line 19) for the same student in the same year.

Bruce and Toni Green 000 00 9541

Ben

Green 000 00 3945 2,000 1,000 1,000 500

1,000 500

1,500

Toni Green 000 00 4651 2,500

2,500

2,500

500

2,000

103,000

65,500

37,500

20,000

2,000

6,203

0

6,203

2,000
8-14 Lesson 8

WAGE EARNER

STUDENT NOTES
Lesson 9 9-1

WAGE EARNER

 EARNED INCOME CREDIT Lesson 9

INTRODUCTION AND OBJECTIVES

In this lesson you will learn about the earned income 

tax credit. This is a refundable credit, and taxpayers 

must file a tax return to receive the credit.

After completing this lesson you should be able to:

■ Use the EITC rules to determine which taxpayers 

are eligible for the earned income tax credit.

■ Calculate and report the credit using the EIC worksheet.

■ Explain the benefits of the Advanced Earned

Income Credit (AEIC).

■ Report the AEIC on the tax return.

GENERAL REQUIREMENTS

Some taxpayers are able to claim the earned income 

credit. This is a refundable credit, and eligible taxpayers can receive a refund of this credit even if they owe 

no tax and had no income tax withheld.

All taxpayers (and spouses, if filing a joint return) must 

meet the general requirements to claim the credit. 

Other requirements apply depending on whether or not 

the taxpayer has a qualifying child (defined later).
9-2 Lesson 9

WAGE EARNER

Generally, to claim the earned income tax credit, a taxpayer must:

■ Have earned income during the year,

■ Not have investment income of more than $2,600. 

Investment income includes taxable interest and dividends, 

tax exempt interest, capital gain net income, net income from 

rents and royalties not derived from a trade or business, and net 

income from passive activities,

■ Use any filing status except married filing a separate return,

■ Have a tax return that covers a 12-month period. This does not 

apply if a short period return is filed because of an individual’s 

death,

■ Show on the tax return the SSN of the taxpayer (and spouse if 

filing a joint return). See identification numbers, later.

■ Not be the qualifying child of another person,

■ Not exclude from gross income any income earned in foreign 

countries, or deduct or exclude a foreign housing amount (File 

Form 2555 or Form 2555-EZ), and

■ Not be a nonresident alien. Nonresident aliens may qualify for 

the credit only if they are married to a U.S. citizen or resident 

and their filing status is married filing jointly.

POTENTIAL

PITFALLS

If the taxpayer’s fi ling 

status is married fi ling 

separately, the taxpayer 

cannot claim the earned 

income credit.
Lesson 9 9-3

WAGE EARNER

Table 9-1. Earned Income Credit in a Nutshell

Part A

Rules for Everyone

Part B

Rules If You Have 

a Qualifying Child

Part C

Rules If You Do Not 

Have a Qualifying Child

Rule 1. You must have a valid social 

security number.

Rule 7. Your child must meet the 

relationship, age, and residency 

tests.

Rule 10. You must be at least age 

25 but under age 65.

Rule 2. Your filing status cannot be 

“Married filing separately.”

Rule 8. Your qualifying child cannot 

be used by more than one person to 

claim the EIC.

Rule 11. You cannot be the dependent of another person.

Rule 3. You must be a U.S. citizen 

or resident alien all year.

Rule 9. You cannot be a qualifying 

child of another person.

Rule 12. You cannot be a qualifying 

child of another person.

Rule 4. You cannot file Form 2555 

or Form 2555–EZ (relating to foreign 

earned income).

Rule 13. You must have lived in the 

United States more than half the 

year.

Rule 5. Your investment income 

must be $2,600 or less.

Rule 6. You must have earned 

income.

Part D

Figuring and Claiming the EIC

Rule 14. Your earned income must be less than:

• $33,692 ($34,692 for married filing jointly) if you 

have more than one qualifying child,

• $29,666 ($30,666 for married filing jointly) if you 

have one qualifying child, or

• $11,230 ($12,230 for married filing jointly) if you do 

not have a qualifying child

Rule 15. Your AGI must be less than:

• $33,692 ($34,692 for married filing jointly) if you 

have more than one qualifying child,

• $29,666 ($30,666 for married filing jointly) if you 

have one qualifying child, or

• $11,230 ($12,230 for married filing jointly) if you do 

not have a qualifying child

 Identification Numbers

To claim the EIC, the taxpayer (and spouse if filing a joint return) 

must have a valid Social Security number (SSN) issued by the 

Social Security Administration (SSA). Any qualifying child listed on 

Schedule EIC must also have a valid SSN. If a social security card 

has a legend that says “Not valid for employment” and the number was issued so that the taxpayer (or spouse or qualifying child) 

could receive a federally funded benefit, the taxpayer cannot claim 

the EIC. An example of a federally funded benefit is Medicaid.

Individual Taxpayer Identification Numbers (ITINs) and Adoption 

Taxpayer Identification Numbers (ATINs) cannot be used when 

claiming the EIC.

If a taxpayer has a social security card that contains the legend 

“valid for work only with INS authorization,” the taxpayer may 

claim the credit, assuming he or she meets the other requirements.
9-4 Lesson 9

WAGE EARNER

Taxpayers With One or More Qualifying Children

If the taxpayer has a qualifying child (defined later), the following 

additional requirements apply.

■ The taxpayer’s earned income and adjusted gross income must 

each be less than:

a) $29,666 ($30,666 if married filing jointly) if he or she has one 

qualifying child, or

b) $33,692 ($34,692 if married filing jointly) if he or she has 

more than one qualifying child,

■ The taxpayer must show on Schedule EIC the name, age, and 

SSN for each qualifying child listed (see Identification Numbers,

earlier).

Taxpayers With No Qualifying Child

If the taxpayer does not have a qualifying child, the following additional requirements apply.

■ The taxpayer’s earned income and adjusted gross income must 

each be less than $11,230 ($12,230 if married filing jointly).

■ The taxpayer (or the taxpayer’s spouse, if filing a joint return) 

must be at least age 25 but under age 65 at the end of the year.

■ Neither the taxpayer (nor the taxpayer’s spouse if filing jointly) 

can be eligible to be claimed as a dependent on another person’s 

return.

■ The principal place of abode of the taxpayer (and the taxpayer’s 

spouse, if filing jointly) must be in the United States for more 

than half the year.

Earned Income

Earned income is wages, salaries, tips and other employee compensation, but only if the amounts are includible in gross income; plus 

net earnings from self-employment. Table 1 provides examples of 

what to include and not to include as earned income in computing 

the earned income credit.

Amounts received for work performed while an inmate in a penal 

institution are not considered earned income for purposes of the 

earned income credit. Enter “PRI” and the amount of the income 

earned while an inmate next to line 7 ( Form 1040 or 1040A) or line 

1 ( Form 1040 EZ). This income is still considered taxable for purposes of determining the taxpayer’s federal income tax.

If the taxpayer was a household employee who did not receive a 

Form W-2 because he or she was paid less than $1,300, the income 

must still be included on line 7 ( Form 1040A or 1040) or line 1 

(Form 1040EZ). Enter “HSH” and the amount not reported on Form 

W-2 next to line 7 ( Form 1040A or 1040) or Line 1 ( Form 1040EZ).
Lesson 9 9-5

WAGE EARNER

Table 9-2. Examples of Earned Income for the Earned Income Credit

Earned Income

 Includes Does not include

Taxable wages, salaries, 

and tips

Union strike benefits

Taxable long-term 

disability benefits 

received prior to 

minimum retirement 

age

Net earnings from selfemployment

Gross income of a 

statutory employee

Interest and dividends

Social Security and railroad retirement benefits

Welfare benefits

Workfare payments

Pensions or annuities

Veteran’s benefits (including VA rehabilitation 

payments)

Workers’ compensation benefits

Alimony

Child Support

Nontaxable foster care payments

Unemployment compensation

Taxable scholarship or fellowship grants that are 

not reported on Form W-2

Earnings for work performed while an inmate at a 

penal institution

Salary deferrals (for example, under a 401(k) or 

403(b) plan or the Federal Thrift Savings Plan)

Combat zone excluded pay (box 12, code Q of Form 

W-2)

Basic housing and subsistence allowances for the 

U.S. Military (box 12, code Q of Form W-2)

The value of meals or lodging provided by an 

employer for the convenience of the employer

Housing allowance or rental value of a parsonage 

for the clergy

Excludable dependent care benefits (line 18 of either 

Form 2441, Form 1040, or Schedule 2, Form 1040A)

Salary reductions such as under a cafeteria plan

Excludable employer provided educational 

assistance benefi ts (may be shown in box 13 of Form 

W-2)

Anything else of value received from someone for 

services performed, if it is not currently taxable
9-6 Lesson 9

WAGE EARNER

QUALIFYING CHILD

For purposes of the earned income credit, a taxpayer has a qualifying child, if the child meets three tests.

■ Relationship Test

■ Residency Test, and

■ Age Test

Relationship Test

To meet the relationship test, the qualifying child must be the taxpayer’s:

1. Son, daughter, stepson, stepdaughter or a descendant of the taxpayer’s son, daughter, stepson, or stepdaughter.

2. Brother, sister, stepbrother, stepsister or a descendant of the 

taxpayer’s brother, sister, stepbrother or stepsister. The taxpayer 

must care for any of these children as his or her own child. A 

descendant must be lineal descendant.

3. Eligible foster child.

An eligible foster child is a child placed with the taxpayer by an 

authorized placement agency and whom the taxpayer cares for as 

his or her own child. An authorized placement agency is an agency 

of a state or political subdivision of a state, including a court, or 

tax-exempt organization licensed by the state.

An adopted child (and a child placed with the taxpayer for adoption) is treated as a child by blood.

Residency Test

To meet the residency test, the child must live with the taxpayer 

in the United States for more than half of the tax year. If a child 

fails to meet the residency test because the child was born or died 

during the year, the child is considered to meet the test if the child 

lived with the taxpayer while the child was alive. The taxpayer 

does not need to have a home. It is suffi cient if the taxpayer and 

child live together in a series of homeless shelters.

Age Test

To meet the age test, the child must be:

■ Under age 19 at the end of the year,

■ A full-time student under age 24 at the end of year, or

■ Permanently and totally disabled at any time during the tax 

year, regardless of age.

A married taxpayer can be a qualifying child of the taxpayer if he 

or she can be claimed as a dependent by the taxpayer.
Lesson 9 9-7

WAGE EARNER

Qualifying Child of More Than One Taxpayer

If a child is a qualifying child of more than one taxpayer, the taxpayers may choose which of them will claim the credit on the basis 

of that child. If two or more children are qualifying children of the 

same taxpayers (not filing a joint return together), the taxpayers 

may agree that one will claim the credit on the basis of one child 

and the other will claim the credit on the basis of the other child.

Example 1

Jane (age 30) is unmarried. In 2003, Jane lived with her four children and her mother, Linda. Provided they each meet the eligibility 

and income requirements, Jane may claim the EIC based on one 

or two of the children, and Linda may claim the EIC based on the 

other two children not claimed by Jane.

If two or more taxpayers actually claim the credit on the basis of 

the same qualifying child, the statute determines which of them 

is entitled to the credit on the basis of that child. This is the tiebreaker rule. The taxpayer who is entitled to the credit is —

■ The parent, if one taxpayer is a parent of the child.

■ The parent the child lived with longest during the tax year, if 

both taxpayers are parents of the child and they do not file a 

joint return together.

■ The parent with the higher AGI, if both taxpayers are parents of 

the child, the child lived with both parents for the same length 

of time during the tax year, and they do not file a joint return 

together.

■ The taxpayer with the higher AGI, if neither is a parent of the 

child.

Example 2

John (age 26) is unmarried. In 2003, John and his daughter, Lynn, 

lived with John’s father, Paul. John’s sole income was wages of 

$19,000. Paul’s sole income was wages of $12,000.

Lynn is a qualifying child of both John and Paul. John and Paul 

agree that Paul will claim the EIC on the basis of Lynn, because 

Paul’s credit would be more than John’s. If John later decides to 

claim the credit, under the tie-breaker rule, Paul will lose the credit 

he claimed.

Example 3

Ralph is single and has two qualifying children. He earned $23,247 

in taxable wages and his adjusted gross income is $26,928.

Ralph can claim the earned income credit because his earned 

income and adjusted gross income are each less than $33,692.
9-8 Lesson 9

WAGE EARNER

Example 4

Maureen has $23,050 in earned income; her adjusted gross income 

is $23,175. Her filing status is single. Maureen’s 20-year-old 

daughter, Angie, lived with her for eight months of the year. Angie 

is not married and is a full-time college student.

Maureen can claim the earned income credit because she has a 

qualifying child and her earned income and adjusted gross income 

are under $29,666.

DISALLOWED EARNED INCOME CREDIT

If a taxpayer’s earned income credit was disallowed in for any 

year after 1996 as a result of the deficiency procedures, he or she 

cannot claim the credit again unless Form 8862, Information To 

Claim Earned Income Credit After Disallowance, is attached to the 

return. If the credit is claimed without attaching Form 8862, it will 

be automatically denied, under the math error procedures.

A deficiency procedure occurs when the IRS questions the taxpayer’s eligibility for the earned income credit for reasons other than 

a mathematical or clerical error. If the credit was disallowed in the 

earlier year because of a mathematical or clerical error, Form 8862 

should not be completed. For more information on deficiency procedures, see Publication 596.

A taxpayer who is determined to have claimed the EIC due to reckless or intentional disregard of rules or regulations is ineligible to 

claim the EIC for a subsequent period of 2 years.

A taxpayer who is determined to have fraudulently claimed the 

EIC is ineligible to claim the EIC for a subsequent period of 10 

years.

CERTIFICATION — EARNED INCOME CREDIT

The Internal Revenue Service will execute a pilot initiative during 

the 2004 Filing Season with the balanced goal of providing better 

service and improving the integrity of the administration of the 

Earned Income Tax Credit. A part of this initiative was an EITC 

certification component. The twin objectives of the certification 

process are to 1) reduce overpayments and 2) improve participation 

of eligible EITC customers

If a taxpayer has received correspondence regarding EITC certification, offer to review the information with the customer. If the 

taxpayer has received a determination letter, please complete the 

return, relative to the EITC, as directed. Please note if the customer’s situation has altered since receiving a determination letter 

the qualifying rules still apply. The customer interview is a critical 

part of completing a correct return.
Lesson 9 9-9

WAGE EARNER

Exercise 1

Determine if the taxpayers in this exercise can claim the earned 

income credit. If they cannot, explain why.

A. Sharon has an eligible foster child, Eric. Eric is 12 years 

old and began living with Sharon in August 2003. Sharon’s 

earned income and her adjusted gross income are $14,275. Can 

Sharon claim the earned income credit? 

_________________________________________________________

B. Doug and Donna are married and live together. Their combined earned income is $22,222. Doug reports adjusted gross

income of $10,728 on his separate tax return, and Donna 

reports adjusted gross income of $11,514 on her separate 

return. Sam, their four-year-old son, lives with Doug and 

Donna. Can Doug and/or Donna claim the earned income 

credit?

C. Randy and Cara were married and lived together until August 

when they divorced. Randy and Cara have two children, 

Jimmy, age seven, and Anna, age five. The children lived with 

both of their parents until August, then they lived with their 

mother. Randy’s earned income and adjusted gross income are 

$19,251. Cara’s earned income is $14,751, and her adjusted

gross income is $15,362. Can Randy and/or Cara claim the 

earned income credit?

D. Benjamin, age 26, lives alone, is single, and earns $8,250. 

His adjusted gross income is $8,950. Can Benjamin claim the 

earned income credit?

E. Melanie is 18 years old and married. Melanie’s husband is 

overseas, and she lives with her mother, Susan. Susan’s earned 

income is $18,431, and her adjusted gross income is $18,453. 

Susan cannot claim Melanie as a dependent. Can Susan claim 

the earned income credit?

F. Circle the items that are considered earned income for earned 

income credit purposes. 

1. Wages

2. Housing allowance for a member of the clergy

3. Social security benefits

4. Interest income

5. Unemployment compensation

6. Tip income

7. Dividend income

8. Military subsistence allowances
9-10 Lesson 9

WAGE EARNER

THE EARNED INCOME CREDIT WORKSHEET AND SCHEDULE EIC

The earned income credit is computed on the Earned Income Credit 

(EIC) Worksheet. Before completing the EIC Worksheet, you must

complete the steps in the EIC instructions line 63 of Form 1040; 

line 41 of Form 1040A; or line 8 of Form 1040EZ.

Completing the steps will help you determine whether or not the 

taxpayer is eligible to take the credit. If the taxpayer can claim the 

earned income credit, complete the EIC Worksheet. If the taxpayer 

is not eligible to claim the credit but appears to be based on income 

limitations, write “No” next to line 8 of 1040EZ; line 41 of 1040A; or 

line 63 of 1040. The steps and the EIC Worksheets are included 

in the 1040, 1040A, and 1040EZ instructions.

There are two versions (A and B) of the EIC Worksheet for Form 

1040 filers. If the taxpayer was self-employed or reported incomeand expenses on Schedule C or C-EZ as a statutory employee, he 

or she must use the EIC Worksheet B to figure his or her credit 

amount. Complete the EIC Worksheet to determine the amount 

of the earned income credit the taxpayer can claim. The EIC 

Worksheet should not be attached to the return; the taxpayer 

should keep it with his or her tax records.

Using the Earned Income Credit Table

The Earned Income Credit (EIC) Table is used to determine the 

amount of the credit. The tables are found in the instructions for 

Forms 1040EZ, 1040A, or 1040.

When using the earned income credit table to determine the credit, 

read down the columns labeled At least . . . But less than and find 

the line that includes the amount you are instructed to look up 

from the EIC Worksheet. Read across to the column that includes 

the number of qualifying children of the taxpayer and filing status. Enter the earned income credit from that column on the EIC 

Worksheet.

Example 5

Roger’s filing status is head of household and he has two qualifying children. The amount shown on lines 1 and 3 of his Form 1040A 

EIC Worksheet is $19,300.

Roger’s earned income credit from the EIC Table is $3,026.
Lesson 9 9-11

WAGE EARNER

Exercise 2

A. Alex and Cheryl have two qualifying children. Their filing status is married filing jointly. The amount shown on lines 1 and 

3 of their EIC Worksheet is $19,866. 

What is the earned income credit from the EIC Table? 

B. Roxanne is divorced. She lives with her infant daughter. 

The amount shown on lines 1 and 3 of her EIC Worksheet is 

$17,750. 

What is the earned income credit from the EIC Table? 

Completing Schedule EIC

Qualifying Child Information

Schedule EIC, Earned Income Credit, contains only information 

about qualifying children. Only taxpayers who have a qualifying 

child must fill out the schedule and attach it to Form 1040A or 

Form 1040.

Example 6

Ronald Evans (SSN 000-00-9840) is single. His son, Harry (SSN 

000-00-9849), was born in 1981. Harry lived with Ronald during 

all of 2003. Harry is a full-time student. Harry is not married and 

is a qualifying child of his father. He is not a qualifying child of his 

mother. However, Harry’s mother claims him as a dependent on her 

tax return.

Exhibit 1 shows the Schedule EIC.

POTENTIAL

PITFALLS

Errors are easily made 

when using the earned 

income credit table. To 

ensure that you have 

entered the correct 

amount on the tax 

form, look up the credit 

twice—once before you 

enter the credit on the 

form and once after you 

have entered it on the 

form.
9-12 Lesson 9

WAGE EARNER

Exhibit 1 Ronald Evan’s Schedule EIC

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074

SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a

RONALD EVANS 000 00 9840

HARRY EVANS

000 00 9849

✘

SON

12
Lesson 9 9-13

WAGE EARNER

Exercise 3

Sam U. and Robin O. Bell are married and file a joint return. 

Sam’s social security number is 000-00-4797 and Robin’s is 000-

00-4798. They have a child, Jennifer S. Bell (SSN 000-00-1987) 

who was born in 1996. Jennifer lived with her parents for the 

entire year. Form 1040A, line 7 shows that the Bells had wages of 

$21,211, line 8a shows $39 of taxable interest income, and line 21 

shows the Bells’ adjusted gross income of $21,250.

Complete the EIC Worksheet and Schedule EIC.

POTENTIAL

PITFALLS

Remember that the 

amount of the earned 

income credit depends 

on the taxpayer’s 

income, number of 

qualifying children, and 

fi ling status. Be sure to 

use the correct column 

from the EIC Table.
9-14 Lesson 9

WAGE EARNER

Complete this worksheet

Exhibit 2 EIC Wooksheet

Draft as of

08/27/2003

Line 41—

Step 2 Investment Income Earned Income Credit (EIC)

1. Add the amounts from Form 1040A:

What is the EIC? Line 8a

The EIC is a credit for certain people who work. The credit may Line 8b +

give you a refund even if you do not owe any tax. Line 9a +

Line 10a +

To Take the EIC: Investment Income =

• Follow the steps below.

• Complete the worksheet that applies to you or let the IRS 2. Is your investment income more than $2,600? figure the credit for you. Yes. No. STOP Continue

 • If you have a qualifying child, complete and attached

Schedule EIC. You cannot take the

credit.

If you take the EIC even though you are not eligible 3. Did a child live with you in 2003? and it is determined that your error is due to reckless Yes. Go to Step 3 on No. Go to Step 4 on or intentional disregard of the EIC rules, you will not CAUTION

!

page 40. page 40. be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC,

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties.

Step 1 All Filers

1. If, in 2003:

• 2 children lived with you, is the amount on Form 1040A,

line 22, less than $33,692 ($34,692 if married filing

jointly)?

• 1 child lived with you, is the amount on Form 1040A, line

22, less than $29,666 ($30,666 if married filing jointly)?

• No children live with you, is the amount on Form 1040A,

line 22, less than $11,230 ($12,230 if married filing

jointly)?

Yes. Continue No.



STOP

You cannot take the credit.

2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 42)?

Yes. Continue No.



STOP

You cannot take the credit.

Put “No” to the left of the

entry space for line 41.

3. Is you filing status married filing separately?

Yes. No. STOP Continue

You cannot take the 

credit.

4. Were you a nonresident alien for any part of 2003?

Yes. See Nonresident No. Go to Step 2.

aliens on page 42.

(Continued on page 40)

- 39 - Need more information or forms? See page 7.
Lesson 9 9-15

WAGE EARNER

Complete this worksheet

Exhibit 3 Eligibility Questions, page 1

Draft as of

08/27/2003

3. Does the child meet the conditions to be a qualifying child

Step 3 Qualifying Child of any other person (other than your spouse if filing a joint

return) for 2003?

Yes. See Qualifying No. This child is your A qualifying child is a child who is your... Child of More Than qualifying child. The child

One Person on page must have a valid social

42. security number as defined

on page 42 unless the child Son, daughter, adopted child, stepchild, or a descendant was born and died in 2003. of any of them (for example, your grandchild) Skip Step 4; go to Step 5 or on page 41. Brother, sister, stepbrother, stepsister, or a descendant of

any of them (for example, your niece or nephew) whom

you cared for as you would your own child Step 4 Filers Without a Qualifying Child or

Foster child (any child placed with you by an authorized 1. Look at the qualifying child conditions in Step 3. Could

you, or your spouse if filing a joint return, be a qualifying placement agency whom you cared for as you would your child of another person in 2003? own child)

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

AND

for line 41.

was at the end of 2003...

Under age 19 2. Can you, or your spouse if filing a joint return, be claimed

as a dependent on someone else’s 2003 tax return?

or Yes. No. STOP Continue

Under age 24 and a student (see page 42) You cannot take the 

credit. or

Any age and permanently and totally disabled (see page 42) 3. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Continue No.



STOP

You cannot take the credit.

AND

who... 4. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Lived with you in the United States for more than half the military stationed outside the United States, see page 42 of 2003. If the child did not live with you for the before you answer. required time, see Exception to “Time Lived With You” Yes. Go to Step 5 on No. STOP Condition on page 41. page 41. You cannot take the credit.

Note. Put “No” to the left of the If the child was married, see page 42. entry space for line 41.

1. Look at the qualifying child conditions above. Could you, or

your spouse if filing a joint return, be a qualifying child of

another person in 2003?

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

for line 41.

2. Do you have at least one child who meets the above

conditions to be your qualifying child?

Yes. Go to question No. Skip question 3; go to

3. Step 4, question 2.

(Continued on page 41)

Need more information or forms? See page 7. - 40 -
9-16 Lesson 9

WAGE EARNER

Complete this worksheet

Exhibit 4 Eligibility Questions, page 2

Draft as of

08/27/2003

Definitions and Special Rules Step 5 Earned Income (listed in alphabetical order)

1. Figure earned income: Adopted Child. An adopted child is always treated as your own

child. An adopted child includes a child placed with you by an Form 1040, line 7 authorized placement agency for legal adoption even if the

Subtract, if included on line 7, any: adoption is not final. An authorized placement agency includes

any person or court authorized by state law to place children for • Taxable scholarship or fellowship legal adoption. grant not reported on a Form W-2.

• Amount paid to an inmate in a penal Credit Figured by the IRS. To have the IRS figure the credit for institution for work (put “PRI” and the you: amount subtracted to the left of the

1. Put “EIC”to the left of the entry space for line 41 of Form entry space for line 7 of Form 1040A. 1040A). 2. If you have a qualifying child, complete and attach • Amount received as a pension or – Schedule EIC. If your EIC for a year after 1996 was reduced or

annuity from a nonqualified deferred disallowed, see Form 8862, Who Must File, below.

compensation plan or a

nongovernmental section 457 plan

(put “DFC” and the amount subtracted Exception to “Time Lived With You” Condition. A child is

to the left of the entry space for line 7 } considered to have lived with you for all of 2003 if the child was

of Form 1040A). This amount may be born or died in 2003 and your home was this child’s home for

the entire time he or she was alive in 2003. Temporary absences, shown in box 11 of your Form W-2. such as for school, vacation, medical care, or detention in a If you received such an amount but juvenile facility, count as time lived at home. If your child is box 11 is blank, contact your presumed to have been kidnapped by someone who is not a employer for the amount received as a family member, see Pub. 596 to find out if that child is a pension or annuity. qualifying child for the EIC. To get Pub. 596, see page 7. If you

were in the military stationed outside the United States, see Earned Income = Members of the Military on page 42.

2. If you have:

• 2 or more qualifying children, is your earned income less Form 8862, Who Must File. You must file Form 8862 if your

than $33,692 ($34,692 if married filing jointly)? EIC for a year after 1996 was reduced or disallowed for any

reason other than a math or clerical error. But you do not have • 1 qualifying child, is your earned income less than to file Form 8862 if either of the following applies. $29,666 ($30,666 if married filing jointly)?

• No qualifying children, is your earned income less than • After your EIC was reduced or disallowed in an earlier year

$11,230 ($12,230 if married filing jointly)? (a) you filed Form 8862 (or other documents) and your EIC was

then allowed and (b) your EIC has not been reduced or Yes. Go to Step 6. No. STOP disallowed again for any reason other than a math or clerical

You cannot take the credit. error.

• You are taking the EIC without a qualifying child and the

only reason your EIC was reduced or disallowed in the earlier Step 6 How To Figure the Credit year was because it was determined that a child listed on

Schedule EIC was not your qualifying child.

1. Do you want the IRS to figure the credit for you?

Yes. See Credit No. Go to the worksheet Also, do not file Form 8862 or take the credit if it was

Figured by the IRS on page 43. determined that your error was due to reckless or intentional

below. disregard of the EIC rules or fraud.

(Continued on page 42)

- 41 - Need more information or forms? See page 7.
Lesson 9 9-17

WAGE EARNER

Complete this worksheet

Exhibit 5 Eligibility Questions, page 3

Draft as of

08/27/2003

Earned Income Credit (EIC) Worksheet—Line 41

1040A

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

1 Enter your earned income from Step 5 on

page 43.

Look up the amount on line 1 above in the EIC Table on pages 46–51

to find the credit. Be sure you use the correct column for your filing

status and the number of children you have. Enter the credit here.

Enter the amount from Form 1040A, line 22.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

If you have:

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on

pages 46–51 to find the credit. Be sure you use the correct

column for your filing status and the number of children

you have. Enter the credit here.

Enter this amount on

Form 1040A, line 41.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Put “No” to the left of the entry space for line 41.

● No qualifying children, is the amount on line 3 less than $6,250 ($7,250

if married filing jointly)?

● 1 or more qualifying children, is the amount on line 3 less than $13,750

($14,750 if married filing jointly)?

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

Reminder—

If you have a qualifying child, complete and attach

Schedule EIC.

If your EIC for a year after 1996 was reduced or disallowed, see

page 43 to find out if you must file Form 8862 to take the credit

for 2003.

  

EIC

1040A

- 43 - Need more information or forms? See page 7.
9-18 Lesson 9

WAGE EARNER

Complete this Form

Proof as of

July 21, 2003

(subject to change)

Single or

Married filing

separately,

$4,750

30

22 Enter the amount from line 21 (adjusted gross income). 22

Total boxes

checked 

Check You were born before January 2, 1939, Blind

if:

23a

Spouse was born before January 2, 1939, Blind 23a

b

23b

If you are married filing separately and your spouse itemizes

deductions, see page 34 and check here 

Tax,

credits,

and

payments

24 24

25 Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-. 25

26 Multiply $3,050 by the total number of exemptions claimed on line 6d. 26

Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.

This is your taxable income. 

27

27

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration

of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.



Enter your standard deduction (see left margin).

Form 1040A (2003)

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b

c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



41 Earned income credit (EIC). 41

Page 2

Form 1040A (2003)

If you have

a qualifying

child, attach

Schedule

EIC.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

● People who

checked any

box on line

23a or 23b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

34 34

Printed on recycled paper

Child tax credit (see page 38).

Type:

Exhibit 6 
Lesson 9 9-19

WAGE EARNER

Complete this Form

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074

SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a

Exhibit 7 
9-20 Lesson 9

WAGE EARNER

 ADVANCE EARNED INCOME CREDIT PAYMENTS

An employee who expects to qualify for the earned income credit 

(EIC) and to have at least one qualifying child for 2004 can choose 

to get a portion of the credit in advance throughout the year (based 

on one qualifying child) by giving a filled out Form W-5, Earned

Income Credit Advance Payment Certificate, to his or her employer. 

Taxpayers receive only a portion of the credit through advance payments, so the eligibility questions and the EIC Worksheet must be 

completed when the tax return is prepared to determine the full 

amount of the credit the taxpayer is entitled to receive.

If the employee chooses to receive the EIC in advance, the employer 

will include advance payments of the credit in the employee’s regular paychecks during the year. Employees who receive advance 

earned income credit payments must file a tax return even if they 

are not otherwise required to file. 

Advance earned income credit payments are reported in box 9 of 

Form W-2. Enter this amount on Form 1040A, line 37, or Form 

1040, line 58.

Exercise 4

Kyle B. Evans is a single parent. He claims his daughter, Julie, 

as a dependent on his tax return. Kyle’s social security number is 

000-00-2442. Julie was born in November 2001. Her social security number is 000-00-4104. Kyle’s earned income was $18,751, 

and his total income and adjusted gross income were $19,223. He 

received $550 in advance earned income credit payments.

A. Complete Kyle’s eligibility questions and EIC Worksheet.

B. What entries would you make on Schedule EIC?
Lesson 9 9-21

WAGE EARNER

Complete this worksheet

Draft as of

08/27/2003

Line 41—

Step 2 Investment Income Earned Income Credit (EIC)

1. Add the amounts from Form 1040A:

What is the EIC? Line 8a

The EIC is a credit for certain people who work. The credit may Line 8b +

give you a refund even if you do not owe any tax. Line 9a +

Line 10a +

To Take the EIC: Investment Income =

• Follow the steps below.

• Complete the worksheet that applies to you or let the IRS 2. Is your investment income more than $2,600? figure the credit for you. Yes. No. STOP Continue

 • If you have a qualifying child, complete and attached

Schedule EIC. You cannot take the

credit.

If you take the EIC even though you are not eligible 3. Did a child live with you in 2003? and it is determined that your error is due to reckless Yes. Go to Step 3 on No. Go to Step 4 on or intentional disregard of the EIC rules, you will not CAUTION

!

page 40. page 40. be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC,

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties.

Step 1 All Filers

1. If, in 2003:

• 2 children lived with you, is the amount on Form 1040A,

line 22, less than $33,692 ($34,692 if married filing

jointly)?

• 1 child lived with you, is the amount on Form 1040A, line

22, less than $29,666 ($30,666 if married filing jointly)?

• No children live with you, is the amount on Form 1040A,

line 22, less than $11,230 ($12,230 if married filing

jointly)?

Yes. Continue No.



STOP

You cannot take the credit.

2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 42)?

Yes. Continue No.



STOP

You cannot take the credit.

Put “No” to the left of the

entry space for line 41.

3. Is you filing status married filing separately?

Yes. No. STOP Continue

You cannot take the 

credit.

4. Were you a nonresident alien for any part of 2003?

Yes. See Nonresident No. Go to Step 2.

aliens on page 42.

(Continued on page 40)

- 39 - Need more information or forms? See page 7.

Exhibit 8 Eligibility Questions, page 1
9-22 Lesson 9

WAGE EARNER

Complete this worksheet

Exhibit 9 Eligibility Questions, page 2

Draft as of

08/27/2003

3. Does the child meet the conditions to be a qualifying child

Step 3 Qualifying Child of any other person (other than your spouse if filing a joint

return) for 2003?

Yes. See Qualifying No. This child is your A qualifying child is a child who is your... Child of More Than qualifying child. The child

One Person on page must have a valid social

42. security number as defined

on page 42 unless the child Son, daughter, adopted child, stepchild, or a descendant was born and died in 2003. of any of them (for example, your grandchild) Skip Step 4; go to Step 5 or on page 41. Brother, sister, stepbrother, stepsister, or a descendant of

any of them (for example, your niece or nephew) whom

you cared for as you would your own child Step 4 Filers Without a Qualifying Child or

Foster child (any child placed with you by an authorized 1. Look at the qualifying child conditions in Step 3. Could

you, or your spouse if filing a joint return, be a qualifying placement agency whom you cared for as you would your child of another person in 2003? own child)

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

AND

for line 41.

was at the end of 2003...

Under age 19 2. Can you, or your spouse if filing a joint return, be claimed

as a dependent on someone else’s 2003 tax return?

or Yes. No. STOP Continue

Under age 24 and a student (see page 42) You cannot take the 

credit. or

Any age and permanently and totally disabled (see page 42) 3. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Continue No.



STOP

You cannot take the credit.

AND

who... 4. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Lived with you in the United States for more than half the military stationed outside the United States, see page 42 of 2003. If the child did not live with you for the before you answer. required time, see Exception to “Time Lived With You” Yes. Go to Step 5 on No. STOP Condition on page 41. page 41. You cannot take the credit.

Note. Put “No” to the left of the If the child was married, see page 42. entry space for line 41.

1. Look at the qualifying child conditions above. Could you, or

your spouse if filing a joint return, be a qualifying child of

another person in 2003?

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

for line 41.

2. Do you have at least one child who meets the above

conditions to be your qualifying child?

Yes. Go to question No. Skip question 3; go to

3. Step 4, question 2.

(Continued on page 41)

Need more information or forms? See page 7. - 40 -
Lesson 9 9-23

WAGE EARNER

Complete this worksheet

Draft as of

08/27/2003

Form 1040A—Line 41

Definitions and Special Rules Step 5 Earned Income (listed in alphabetical order)

1. Figure earned income: Adopted Child. An adopted child is always treated as your own

child. An adopted child includes a child placed with you by an Form 1040, line 7 authorized placement agency for legal adoption even if the

Subtract, if included on line 7, any: adoption is not final. An authorized placement agency includes

any person or court authorized by state law to place children for • Taxable scholarship or fellowship legal adoption. grant not reported on a Form W-2.

• Amount paid to an inmate in a penal Credit Figured by the IRS. To have the IRS figure the credit for institution for work (put “PRI” and the you: amount subtracted to the left of the

1. Put “EIC”to the left of the entry space for line 41 of Form entry space for line 7 of Form 1040A. 1040A). 2. If you have a qualifying child, complete and attach • Amount received as a pension or – Schedule EIC. If your EIC for a year after 1996 was reduced or

annuity from a nonqualified deferred disallowed, see Form 8862, Who Must File, below.

compensation plan or a

nongovernmental section 457 plan

(put “DFC” and the amount subtracted Exception to “Time Lived With You” Condition. A child is

to the left of the entry space for line 7 } considered to have lived with you for all of 2003 if the child was

of Form 1040A). This amount may be born or died in 2003 and your home was this child’s home for

the entire time he or she was alive in 2003. Temporary absences, shown in box 11 of your Form W-2. such as for school, vacation, medical care, or detention in a If you received such an amount but juvenile facility, count as time lived at home. If your child is box 11 is blank, contact your presumed to have been kidnapped by someone who is not a employer for the amount received as a family member, see Pub. 596 to find out if that child is a pension or annuity. qualifying child for the EIC. To get Pub. 596, see page 7. If you

were in the military stationed outside the United States, see Earned Income = Members of the Military on page 42.

2. If you have:

• 2 or more qualifying children, is your earned income less Form 8862, Who Must File. You must file Form 8862 if your

than $33,692 ($34,692 if married filing jointly)? EIC for a year after 1996 was reduced or disallowed for any

reason other than a math or clerical error. But you do not have • 1 qualifying child, is your earned income less than to file Form 8862 if either of the following applies. $29,666 ($30,666 if married filing jointly)?

• No qualifying children, is your earned income less than • After your EIC was reduced or disallowed in an earlier year

$11,230 ($12,230 if married filing jointly)? (a) you filed Form 8862 (or other documents) and your EIC was

then allowed and (b) your EIC has not been reduced or Yes. Go to Step 6. No. STOP disallowed again for any reason other than a math or clerical

You cannot take the credit. error.

• You are taking the EIC without a qualifying child and the

only reason your EIC was reduced or disallowed in the earlier Step 6 How To Figure the Credit year was because it was determined that a child listed on

Schedule EIC was not your qualifying child.

1. Do you want the IRS to figure the credit for you?

Yes. See Credit No. Go to the worksheet Also, do not file Form 8862 or take the credit if it was

Figured by the IRS on page 43. determined that your error was due to reckless or intentional

below. disregard of the EIC rules or fraud.

(Continued on page 42)

- 41 - Need more information or forms? See page 7.

Exhibit 10 EIC Eligibility Questions, page 2
9-24 Lesson 9

WAGE EARNER

Complete this Form

Draft as of

08/27/2003

Earned Income Credit (EIC) Worksheet—Line 41

1040A

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

1 Enter your earned income from Step 5 on

page 43.

Look up the amount on line 1 above in the EIC Table on pages 46–51

to find the credit. Be sure you use the correct column for your filing

status and the number of children you have. Enter the credit here.

Enter the amount from Form 1040A, line 22.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

If you have:

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on

pages 46–51 to find the credit. Be sure you use the correct

column for your filing status and the number of children

you have. Enter the credit here.

Enter this amount on

Form 1040A, line 41.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Put “No” to the left of the entry space for line 41.

● No qualifying children, is the amount on line 3 less than $6,250 ($7,250

if married filing jointly)?

● 1 or more qualifying children, is the amount on line 3 less than $13,750

($14,750 if married filing jointly)?

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

Reminder—

If you have a qualifying child, complete and attach

Schedule EIC.

If your EIC for a year after 1996 was reduced or disallowed, see

page 43 to find out if you must file Form 8862 to take the credit

for 2003.

  

EIC

1040A

- 43 - Need more information or forms? See page 7.

Exhibit 11 EIC Worksheet
Lesson 9 9-25

WAGE EARNER

Complete this Form

Exhibit 12 

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074

SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a
9-26 Lesson 9

WAGE EARNER

  SUMMING UP THIS LESSON  

 The earned income credit can be claimed on Form 1040EZ, 

Form 1040A or Form 1040.
Lesson 9 9-27

WAGE EARNER

 EARNED INCOME CREDIT

ANSWERS TO EXERCISES Lesson 9

Exercise 1

(A) No; to be a qualifying child, the child must live with the taxpayer more than half of the year.

(B) Neither Donna nor Doug can claim the credit; in order to claim 

the earned income credit, married taxpayers living together 

must file a joint return.

(C) Jimmy and Anna are qualifying children of both Randy and 

Cara. Randy and Cara can choose which of them will claim 

the credit based on each child. One can claim the credit on 

the basis of two children, or each can claim the credit on the 

basis of one child. If both claim the credit on the basis of the 

same child or both children, Cara will be entitled to the credit 

because each child lived with her for the longer period of time 

during the year.

(D) Yes. He is between 25 and 65; his earned income is less than 

$11,230; he cannot be claimed as a dependent and he is not a 

qualifying child of another person.

(E) No; to be a qualifying child, a married child must generally be 

eligible to be claimed as a dependent by the taxpayer.

(F) Numbers 1 and 6 should be circled.

Exercise 2

(A) $3,120

(B) $1,900
9-28 Lesson 9

WAGE EARNER

 EARNED INCOME CREDIT

Lesson 9 ANSWERS TO EXERCISES

Draft as of

08/27/2003

Earned Income Credit (EIC) Worksheet—Line 41

1040A

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

1 Enter your earned income from Step 5 on

page 43.

Look up the amount on line 1 above in the EIC Table on pages 46–51

to find the credit. Be sure you use the correct column for your filing

status and the number of children you have. Enter the credit here.

Enter the amount from Form 1040A, line 22.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

If you have:

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on

pages 46–51 to find the credit. Be sure you use the correct

column for your filing status and the number of children

you have. Enter the credit here.

Enter this amount on

Form 1040A, line 41.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Put “No” to the left of the entry space for line 41.

● No qualifying children, is the amount on line 3 less than $6,250 ($7,250

if married filing jointly)?

● 1 or more qualifying children, is the amount on line 3 less than $13,750

($14,750 if married filing jointly)?

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

Reminder—

If you have a qualifying child, complete and attach

Schedule EIC.

If your EIC for a year after 1996 was reduced or disallowed, see

page 43 to find out if you must file Form 8862 to take the credit

for 2003.

  

EIC

1040A

Exercise 3 Bell’s EIC Worksheet

21,211

1,509

21,250

$1,501

$1,501

x

x
Lesson 9 9-29

WAGE EARNER

 EARNED INCOME CREDIT

ANSWERS TO EXERCISES Lesson 9

Draft as of

08/27/2003

Line 41—

Step 2 Investment Income Earned Income Credit (EIC)

1. Add the amounts from Form 1040A:

What is the EIC? Line 8a

The EIC is a credit for certain people who work. The credit may Line 8b +

give you a refund even if you do not owe any tax. Line 9a +

Line 10a +

To Take the EIC: Investment Income =

• Follow the steps below.

• Complete the worksheet that applies to you or let the IRS 2. Is your investment income more than $2,600? figure the credit for you. Yes. No. STOP Continue

 • If you have a qualifying child, complete and attached

Schedule EIC. You cannot take the

credit.

If you take the EIC even though you are not eligible 3. Did a child live with you in 2003? and it is determined that your error is due to reckless Yes. Go to Step 3 on No. Go to Step 4 on or intentional disregard of the EIC rules, you will not CAUTION

!

page 40. page 40. be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC,

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties.

Step 1 All Filers

1. If, in 2003:

• 2 children lived with you, is the amount on Form 1040A,

line 22, less than $33,692 ($34,692 if married filing

jointly)?

• 1 child lived with you, is the amount on Form 1040A, line

22, less than $29,666 ($30,666 if married filing jointly)?

• No children live with you, is the amount on Form 1040A,

line 22, less than $11,230 ($12,230 if married filing

jointly)?

Yes. Continue No.



STOP

You cannot take the credit.

2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 42)?

Yes. Continue No.



STOP

You cannot take the credit.

Put “No” to the left of the

entry space for line 41.

3. Is you filing status married filing separately?

Yes. No. STOP Continue

You cannot take the 

credit.

4. Were you a nonresident alien for any part of 2003?

Yes. See Nonresident No. Go to Step 2.

aliens on page 42.

x

x

x

x

$39

0

0

0

$39

x

x

Exercise 3 Bell’s Eligibility Questions, page 1
9-30 Lesson 9

WAGE EARNER

 EARNED INCOME CREDIT

Lesson 9 ANSWERS TO EXERCISES

Draft as of

08/27/2003

Form 1040A—Line 41

3. Does the child meet the conditions to be a qualifying child

Step 3 Qualifying Child of any other person (other than your spouse if filing a joint

return) for 2003?

Yes. See Qualifying No. This child is your A qualifying child is a child who is your... Child of More Than qualifying child. The child

One Person on page must have a valid social

42. security number as defined

on page 42 unless the child Son, daughter, adopted child, stepchild, or a descendant was born and died in 2003. of any of them (for example, your grandchild) Skip Step 4; go to Step 5 or on page 41. Brother, sister, stepbrother, stepsister, or a descendant of

any of them (for example, your niece or nephew) whom

you cared for as you would your own child Step 4 Filers Without a Qualifying Child or

Foster child (any child placed with you by an authorized 1. Look at the qualifying child conditions in Step 3. Could

you, or your spouse if filing a joint return, be a qualifying placement agency whom you cared for as you would your child of another person in 2003? own child)

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

AND

for line 41.

was at the end of 2003...

Under age 19 2. Can you, or your spouse if filing a joint return, be claimed

as a dependent on someone else’s 2003 tax return?

or Yes. No. STOP Continue

Under age 24 and a student (see page 42) You cannot take the 

credit. or

Any age and permanently and totally disabled (see page 42) 3. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Continue No.



STOP

You cannot take the credit.

AND

who... 4. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Lived with you in the United States for more than half the military stationed outside the United States, see page 42 of 2003. If the child did not live with you for the before you answer. required time, see Exception to “Time Lived With You” Yes. Go to Step 5 on No. STOP Condition on page 41. page 41. You cannot take the credit.

Note. Put “No” to the left of the If the child was married, see page 42. entry space for line 41.

1. Look at the qualifying child conditions above. Could you, or

your spouse if filing a joint return, be a qualifying child of

another person in 2003?

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

for line 41.

2. Do you have at least one child who meets the above

conditions to be your qualifying child?

Yes. Go to question No. Skip question 3; go to

3. Step 4, question 2.

Exercise 3 Bell’s Eligibility Questions, page 2

x

x

x
Lesson 9 9-31

WAGE EARNER

 EARNED INCOME CREDIT

ANSWERS TO EXERCISES Lesson 9

Draft as of

08/27/2003

Form 1040A—Line 41

Definitions and Special Rules Step 5 Earned Income (listed in alphabetical order)

1. Figure earned income: Adopted Child. An adopted child is always treated as your own

child. An adopted child includes a child placed with you by an Form 1040, line 7 authorized placement agency for legal adoption even if the

Subtract, if included on line 7, any: adoption is not final. An authorized placement agency includes

any person or court authorized by state law to place children for • Taxable scholarship or fellowship legal adoption. grant not reported on a Form W-2.

• Amount paid to an inmate in a penal Credit Figured by the IRS. To have the IRS figure the credit for institution for work (put “PRI” and the you: amount subtracted to the left of the

1. Put “EIC”to the left of the entry space for line 41 of Form entry space for line 7 of Form 1040A. 1040A). 2. If you have a qualifying child, complete and attach • Amount received as a pension or – Schedule EIC. If your EIC for a year after 1996 was reduced or

annuity from a nonqualified deferred disallowed, see Form 8862, Who Must File, below.

compensation plan or a

nongovernmental section 457 plan

(put “DFC” and the amount subtracted Exception to “Time Lived With You” Condition. A child is

to the left of the entry space for line 7 } considered to have lived with you for all of 2003 if the child was

of Form 1040A). This amount may be born or died in 2003 and your home was this child’s home for

the entire time he or she was alive in 2003. Temporary absences, shown in box 11 of your Form W-2. such as for school, vacation, medical care, or detention in a If you received such an amount but juvenile facility, count as time lived at home. If your child is box 11 is blank, contact your presumed to have been kidnapped by someone who is not a employer for the amount received as a family member, see Pub. 596 to find out if that child is a pension or annuity. qualifying child for the EIC. To get Pub. 596, see page 7. If you

were in the military stationed outside the United States, see Earned Income = Members of the Military on page 42.

2. If you have:

• 2 or more qualifying children, is your earned income less Form 8862, Who Must File. You must file Form 8862 if your

than $33,692 ($34,692 if married filing jointly)? EIC for a year after 1996 was reduced or disallowed for any

reason other than a math or clerical error. But you do not have • 1 qualifying child, is your earned income less than to file Form 8862 if either of the following applies. $29,666 ($30,666 if married filing jointly)?

• No qualifying children, is your earned income less than • After your EIC was reduced or disallowed in an earlier year

$11,230 ($12,230 if married filing jointly)? (a) you filed Form 8862 (or other documents) and your EIC was

then allowed and (b) your EIC has not been reduced or Yes. Go to Step 6. No. STOP disallowed again for any reason other than a math or clerical

You cannot take the credit. error.

• You are taking the EIC without a qualifying child and the

only reason your EIC was reduced or disallowed in the earlier Step 6 How To Figure the Credit year was because it was determined that a child listed on

Schedule EIC was not your qualifying child.

1. Do you want the IRS to figure the credit for you?

Yes. See Credit No. Go to the worksheet Also, do not file Form 8862 or take the credit if it was

Figured by the IRS on page 43. determined that your error was due to reckless or intentional

below. disregard of the EIC rules or fraud.

(Continued on page 42)

Exercise 3 Bell’s Eligibility Questions, page 3 

21,211

0

21,211

x

x
9-32 Lesson 9

WAGE EARNER

 EARNED INCOME CREDIT

Lesson 9 ANSWERS TO EXERCISES

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074

SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a

Exercise 3 Bell’s Schedule EIC, page 1

Sam U. and Robin O. Bell 000 00 4797

Jennifer Bell

000 00 1987

Daughter

12
Lesson 9 9-33

WAGE EARNER

 EARNED INCOME CREDIT

ANSWERS TO EXERCISES Lesson 9

Proof as of

July 21, 2003

ubject to change)

Single or

Married filing

separately,

$4,750

30

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

41 Earned income credit (EIC). 41

If you have

a qualifying

child, attach

Schedule

EIC.

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

claimed as a

dependent,

see page 34.

● All others:

34 34

Child tax credit (see page 38).

0 00

0 00

0 00

1,501 00

1,501 00

Exercise 3 Bell’s Schedule EIC, page 2

Exercise 4

(A) See Kyle’s completed steps and the EIC worksheet.

(B) See Kyle’s Schedule EIC.
9-34 Lesson 9

WAGE EARNER

 EARNED INCOME CREDIT

Lesson 9 ANSWERS TO EXERCISES

Exercise 4(D) Kyle’s EIC Eligibility Questions, page 1

Draft as of

08/27/2003

Form 1040A—Line 41

Line 41—

Step 2 Investment Income Earned Income Credit (EIC)

1. Add the amounts from Form 1040A:

What is the EIC? Line 8a

The EIC is a credit for certain people who work. The credit may Line 8b +

give you a refund even if you do not owe any tax. Line 9a +

Line 10a +

To Take the EIC: Investment Income =

• Follow the steps below.

• Complete the worksheet that applies to you or let the IRS 2. Is your investment income more than $2,600? figure the credit for you. Yes. No. STOP Continue

 • If you have a qualifying child, complete and attached

Schedule EIC. You cannot take the

credit.

If you take the EIC even though you are not eligible 3. Did a child live with you in 2003? and it is determined that your error is due to reckless Yes. Go to Step 3 on No. Go to Step 4 on or intentional disregard of the EIC rules, you will not CAUTION

!

page 40. page 40. be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC,

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties.

Step 1 All Filers

1. If, in 2003:

• 2 children lived with you, is the amount on Form 1040A,

line 22, less than $33,692 ($34,692 if married filing

jointly)?

• 1 child lived with you, is the amount on Form 1040A, line

22, less than $29,666 ($30,666 if married filing jointly)?

• No children live with you, is the amount on Form 1040A,

line 22, less than $11,230 ($12,230 if married filing

jointly)?

Yes. Continue No.



STOP

You cannot take the credit.

2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 42)?

Yes. Continue No.



STOP

You cannot take the credit.

Put “No” to the left of the

entry space for line 41.

3. Is you filing status married filing separately?

Yes. No. STOP Continue

You cannot take the 

credit.

4. Were you a nonresident alien for any part of 2003?

Yes. See Nonresident No. Go to Step 2.

aliens on page 42.

x

x

x

0

0

0

0

0

x

x

x
Lesson 9 9-35

WAGE EARNER

 EARNED INCOME CREDIT

ANSWERS TO EXERCISES Lesson 9

Draft as of

08/27/2003

Form 1040A—Line 41

3. Does the child meet the conditions to be a qualifying child

Step 3 Qualifying Child of any other person (other than your spouse if filing a joint

return) for 2003?

Yes. See Qualifying No. This child is your A qualifying child is a child who is your... Child of More Than qualifying child. The child

One Person on page must have a valid social

42. security number as defined

on page 42 unless the child Son, daughter, adopted child, stepchild, or a descendant was born and died in 2003. of any of them (for example, your grandchild) Skip Step 4; go to Step 5 or on page 41. Brother, sister, stepbrother, stepsister, or a descendant of

any of them (for example, your niece or nephew) whom

you cared for as you would your own child Step 4 Filers Without a Qualifying Child or

Foster child (any child placed with you by an authorized 1. Look at the qualifying child conditions in Step 3. Could

you, or your spouse if filing a joint return, be a qualifying placement agency whom you cared for as you would your child of another person in 2003? own child)

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

AND

for line 41.

was at the end of 2003...

Under age 19 2. Can you, or your spouse if filing a joint return, be claimed

as a dependent on someone else’s 2003 tax return?

or Yes. No. STOP Continue

Under age 24 and a student (see page 42) You cannot take the 

credit. or

Any age and permanently and totally disabled (see page 42) 3. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Continue No.



STOP

You cannot take the credit.

AND

who... 4. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Lived with you in the United States for more than half the military stationed outside the United States, see page 42 of 2003. If the child did not live with you for the before you answer. required time, see Exception to “Time Lived With You” Yes. Go to Step 5 on No. STOP Condition on page 41. page 41. You cannot take the credit.

Note. Put “No” to the left of the If the child was married, see page 42. entry space for line 41.

1. Look at the qualifying child conditions above. Could you, or

your spouse if filing a joint return, be a qualifying child of

another person in 2003?

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

for line 41.

2. Do you have at least one child who meets the above

conditions to be your qualifying child?

Yes. Go to question No. Skip question 3; go to

3. Step 4, question 2.

Exercise 4(D) Kyle’s EIC Eligibility Questions, page 2

x

x

x
9-36 Lesson 9

WAGE EARNER

 EARNED INCOME CREDIT

Lesson 9 ANSWERS TO EXERCISES

Draft as of

08/27/2003

Form 1040A—Line 41

Definitions and Special Rules Step 5 Earned Income (listed in alphabetical order)

1. Figure earned income: Adopted Child. An adopted child is always treated as your own

child. An adopted child includes a child placed with you by an Form 1040, line 7 authorized placement agency for legal adoption even if the

Subtract, if included on line 7, any: adoption is not final. An authorized placement agency includes

any person or court authorized by state law to place children for • Taxable scholarship or fellowship legal adoption. grant not reported on a Form W-2.

• Amount paid to an inmate in a penal Credit Figured by the IRS. To have the IRS figure the credit for institution for work (put “PRI” and the you: amount subtracted to the left of the

1. Put “EIC”to the left of the entry space for line 41 of Form entry space for line 7 of Form 1040A. 1040A). 2. If you have a qualifying child, complete and attach • Amount received as a pension or – Schedule EIC. If your EIC for a year after 1996 was reduced or

annuity from a nonqualified deferred disallowed, see Form 8862, Who Must File, below.

compensation plan or a

nongovernmental section 457 plan

(put “DFC” and the amount subtracted Exception to “Time Lived With You” Condition. A child is

to the left of the entry space for line 7 } considered to have lived with you for all of 2003 if the child was

of Form 1040A). This amount may be born or died in 2003 and your home was this child’s home for

the entire time he or she was alive in 2003. Temporary absences, shown in box 11 of your Form W-2. such as for school, vacation, medical care, or detention in a If you received such an amount but juvenile facility, count as time lived at home. If your child is box 11 is blank, contact your presumed to have been kidnapped by someone who is not a employer for the amount received as a family member, see Pub. 596 to find out if that child is a pension or annuity. qualifying child for the EIC. To get Pub. 596, see page 7. If you

were in the military stationed outside the United States, see Earned Income = Members of the Military on page 42.

2. If you have:

• 2 or more qualifying children, is your earned income less Form 8862, Who Must File. You must file Form 8862 if your

than $33,692 ($34,692 if married filing jointly)? EIC for a year after 1996 was reduced or disallowed for any

reason other than a math or clerical error. But you do not have • 1 qualifying child, is your earned income less than to file Form 8862 if either of the following applies. $29,666 ($30,666 if married filing jointly)?

• No qualifying children, is your earned income less than • After your EIC was reduced or disallowed in an earlier year

$11,230 ($12,230 if married filing jointly)? (a) you filed Form 8862 (or other documents) and your EIC was

then allowed and (b) your EIC has not been reduced or Yes. Go to Step 6. No. STOP disallowed again for any reason other than a math or clerical

You cannot take the credit. error.

• You are taking the EIC without a qualifying child and the

only reason your EIC was reduced or disallowed in the earlier Step 6 How To Figure the Credit year was because it was determined that a child listed on

Schedule EIC was not your qualifying child.

1. Do you want the IRS to figure the credit for you?

Yes. See Credit No. Go to the worksheet Also, do not file Form 8862 or take the credit if it was

Figured by the IRS on page 43. determined that your error was due to reckless or intentional

below. disregard of the EIC rules or fraud.

(Continued on page 42)

Exercise 4(D) Kyle’s EIC Eligibility Questions, page 3

18,751

0

18,751

x

x
Lesson 9 9-37

WAGE EARNER

 EARNED INCOME CREDIT

ANSWERS TO EXERCISES Lesson 9

Draft as of

08/27/2003

Earned Income Credit (EIC) Worksheet—Line 41

1040A

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

1 Enter your earned income from Step 5 on

page 43.

Look up the amount on line 1 above in the EIC Table on pages 46–51

to find the credit. Be sure you use the correct column for your filing

status and the number of children you have. Enter the credit here.

Enter the amount from Form 1040A, line 22.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

If you have:

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on

pages 46–51 to find the credit. Be sure you use the correct

column for your filing status and the number of children

you have. Enter the credit here.

Enter this amount on

Form 1040A, line 41.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Put “No” to the left of the entry space for line 41.

● No qualifying children, is the amount on line 3 less than $6,250 ($7,250

if married filing jointly)?

● 1 or more qualifying children, is the amount on line 3 less than $13,750

($14,750 if married filing jointly)?

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

Reminder—

If you have a qualifying child, complete and attach

Schedule EIC.

If your EIC for a year after 1996 was reduced or disallowed, see

page 43 to find out if you must file Form 8862 to take the credit

for 2003.

  

EIC

1040A

Exercise 4(D) Kyle’s EIC Worksheet

x

x

18,751

1,740

19,223

1,668

1,668
9-38 Lesson 9

WAGE EARNER

 EARNED INCOME CREDIT

Lesson 9 ANSWERS TO EXERCISES

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074 SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a

Exercise 4(D) Evan’s Schedule EIC

Kyle B. Evans 000 00 2442

Julie Evans

000 00 4104

Daughter

12
Lesson 10 10-1

WAGE EARNER

CHILD TAX CREDIT Lesson 10

INTRODUCTION AND OBJECTIVES

In this lesson you will learn about the child tax 

credit. This credit is unique because it can be both 

nonrefundable and refundable. This lesson will 

discuss who qualifies for the credit and how to 

calculate the credit.

After completing this lesson you should be able to:

■ Explain the advance child tax credit and determine who received the advance payment.

■ Calculate the child tax credit using the child tax 

credit worksheet.

■ Calculate the additional child tax credit by using 

form 8812.

ADVANCE CHILD TAX CREDIT PAYMENTS

The Jobs and Growth Tax Relief Reconciliation Act 

of 2003 raised the Child Tax Credit to a maximum of 

$1,000 per child from $600 per child, beginning in 2003. 

The Act also provided for immediate tax relief by directing the Treasury to send this increase to taxpayers last 

summer. Eligible taxpayers could receive up to $400 for 

each child claimed on their 2002 returns as an advance 

payment of their 2003 Child Tax Credit.

The IRS used 2002 tax year data to determine who was 

issued the advance payment. Generally:

■ Taxpayers must have claimed the Child Tax Credit 

on the 2002 tax return.

■ Taxpayers must have used Form 1040 or Form 

1040A, or filed electronically.

■ The child must have been born after 1986.

There were no actions required of the Taxpayers to 

receive the advance payment. The IRS automatically 

sent notices to eligible taxpayers. The IRS notice was 

followed a few days later by the advance payment 

check. Both the notice and the check were mailed to 

the address listed on the taxpayer’s 2002 tax return. 

Anyone who had moved since the filing of the 2002 

return should have notified the U.S. Postal Service of 

the new address, and the notice and check were forwarded. 

ALERT

Beginning in 2003, 

the Child Tax Credit 

increased to $1,000 per 

qualifying child.
10-2 Lesson 10

WAGE EARNER

The advance payment checks were mailed July 25th, August 1st, 

and August 8th to taxpayers who filed their returns by April 15th. 

The checks were issued based on the last two digits of the Social 

Security number listed first on the 2002 tax return. Taxpayers 

whose last two digits are the lowest received their checks first. 

Taxpayers who received filing extensions still got the advance payment checks if they were eligible. They were mailed between four 

to six weeks after the IRS received their 2002 tax return.

If the taxpayer received the advance Child Tax Credit payment, he 

or she must include the amount received on the Child Tax Credit 

Worksheet when calculating the 2003 Child Tax Credit.

The IRS established a new service at www.irs.gov: Where’s My 

Advance Child Tax Credit? This new service provides on-line 

advance child tax credit payment information. The information 

includes the amount of a taxpayer’s advance payment, the check 

mailing date, and any offsets to outstanding liabilities. 

Since the taxpayers must figure their advance payments into their 

calculations for their 2003 child tax credit, Where’s My Advance 

Child Tax Credit? information will be available through April 15, 

2004. 

 CHILD TAX CREDIT

A taxpayer can claim a child tax credit for each of the taxpayer’s 

qualifying children. The maximum child tax credit is $1000 per 

child for 2003. The credit can be claimed on either Form 1040 or 

1040A.

Qualifying child

To qualify, the child must be:

■ Under age 17 at the end of 2003,

■ A citizen or resident of the United States,

■ The taxpayer’s dependent, and

■ The taxpayer’s:

Son or daughter,

Stepson or stepdaughter, adopted child,

Grandchild, or

Eligible foster child

The taxpayer must provide the name and identification number 

(usually a social security number) of each qualifying child on his or 

her tax return.

Limits on credit

The amount of a taxpayer’s child tax credit depends on the 

taxpayer’s modified adjusted gross income (modified AGI) and the 

taxpayer’s filing status.

ALERT

Beginning in 2003, 

the Child Tax Credit 

increased to $1,000 per 

child.
Lesson 10 10-3

WAGE EARNER

Modified AGI

The credit begins to phase out if the taxpayer’s modified AGI is 

above a certain amount (Table 1). For most taxpayers, modified 

AGI is generally the same as AGI. For 2003, AGI is shown on line 

21 of Form 1040A and on line 34 of Form 1040.

Table 1: Child Tax Credit

Threshold Modified AGI Amounts for

Claiming Child Tax Credit

 Filing Status Amount

Married filing jointly $110,000

Qualifying widow(er) 75,000

Head of household 75,000

Single 75,000

Married filing separately 55,000

Before you can figure a taxpayer’s credit amount for the year, you 

must have the taxpayer answer certain questions (Exhibit 1) to see 

if you must use the worksheet in Publication 972, Child Tax Credit.

These questions are in the tax form instructions. If you do not need 

to use Publication 972, you can use the shorter Child Tax Credit 

Worksheet in the form instructions.

Example 1

Bill and Mary Allen have two dependent children under age 17. 

The children are qualifying children for purposes of claiming the 

child tax credit. Bill and Mary have modified AGI of $34,000. They 

received an $800 advance child tax credit payment last summer. 

Their tax on line 43 for 2003 is $4,503. Bill and Mary need to 

answer questions to determine if they must use Publication 972 

(Exhibit 1). The completed Child Tax Credit Worksheet (Exhibit 

2) shows that their credit is $1,200, after considering the advance 

child tax credit payment. Their modified AGI is less than the 

phaseout amount for their filing status ($110,000).
10-4 Lesson 10

WAGE EARNER

Exhibit 1 Bill and Mary Allen’s Child Tax Credit

Draft as of

08/27/2003

Form 1040—Line 49

Line 49—Child Tax Credit

Questions Who Must Use Pub. 972 Pub.

972

What Is the Child Tax Credit?

This credit is for people who have a qualifying child as defined 1. Are you excluding income from Puerto Rico or are you

below. It is in addition to the credit for child and dependent care filing any of the following forms?

expenses on Form 1040, line 45, and the earned income credit on • Form 2555 or 2555-EZ (relating to foreign earned income) Form 1040, line 63. • Form 4563 (exclusion of income for residents of

American Samoa)

Three Steps To Take the Child Tax Credit! No. Continue Yes.



STOP

Step 1. Make sure you have a qualifying child for the child You must use Pub. 972 to

figure your credit. tax credit. See Qualifying Child for Child Tax

Credit below.

Step 2. Make sure you checked the box in column (4) of 2. Is the amount on Form 1040, line 35, more than the amount

shown below for your filing status? line 6c on Form 1040 for each qualifying child.

Step 3. Answer the questions on this page to see if you • Married filing jointly – $110,000

may use the worksheet on page 39 to figure your • Single, head of household, or qualifying widow(er) –

credit or if you must use Pub. 972, Child Tax $75,000

Credit. If you need Pub. 972, see page 9. • Married filing separately – $55,000

No. Continue Yes.



STOP Qualifying Child for Child Tax Credit You must use Pub. 972 to

A qualifying child for purposes of the child tax credit is a child figure your credit. who:

• Is claimed as your dependent on line 6c, and 3. Are you claiming any of the following credits? • Was under age 17 at the end of 2003, and • Adoption credit, Form 8839 (see the instructions for Form • Is your (a) son, daughter, adopted child, stepchild, or a descen- 1040, line 50, on page 40) dant of any of them (for example, your grandchild); (b) brother, • Mortgage interest credit, Form 8396 (see the instructions sister, stepbrother, stepsister, or a descendant of any of them (for for Form 1040, line 51, on page 40) example, your niece or nephew), whom you cared for as you would

your own child; or (c) foster child (any child placed with you by an • District of Columbia first-time homebuyer credit, Form

8859 authorized placement agency whom you cared for as you would

your own child), and No. Use the Yes. You must use Pub.

• Is a U.S. citizen or resident alien. worksheet on page 39 972 to figure your child tax

to figure your child credit. You will also need Note. The above requirements are not the same as the requirements tax credit. the form(s) listed above for to be a qualifying child for the earned income credit. any credit(s) you are

claiming.

An adopted child is always treated as your own child. An

adopted child includes a child placed with you by an authorized

placement agency for legal adoption even if the adoption is not

final. An authorized placement agency includes any person or court

authorized by state law to place children for legal adoption.

A grandchild is any descendant of your son, daughter, adopted

child, or stepchild and includes your great-grandchild,

great-great-grandchild, etc.

Need more information or forms? See page 7. - 38 -

x

x

x
Lesson 10 10-5

WAGE EARNER

Exhibit 2 Bill and Mary Allen’s Child Tax Credit Worksheet

Draft as of

08/27/2003

Form 1040—Line 49

Child Tax Credit Worksheet—Line 49 Keep for Your Records

Before you begin:  If you received (before offset) an advance payment of the child tax credit and you filed a joint

return for 2002, you and your spouse are each considered to have received one-half of the

payment.

• To be a qualifying child for the child tax credit, the child must be under age 17 at the end of 2003 and meet the other

 requirements listed on page 38.

• Do not use this worksheet if you answered “Yes” to question 1, 2, or 3 on page 38. Instead, use Pub. 972.

1. Number of qualifying children: X $1,000. Enter the result. 1

2. Enter the amount, if any, of your advance child tax credit (before offset). 2

 3. Is line 1 less than or equal to line 2?

 Yes. STOP You cannot take this credit. If line 2 is more than line 1, you do not have to pay back the

difference.

 No. Subtract line 2 from line 1. 3

4. Enter the amount from Form 1040, line 43. 4

5. Enter the total of the amounts from Form 1040, lines 44 through 48. 5

6. Are the amounts on lines 4 and 5 the same?

 Yes. STOP You cannot take this credit because there is no tax to reduce

However, you may be able to take the additional child tax credit. See the TIP below.

 No. Subtract line 5 from line 4. 6

7. Is the amount on line 3 more than the amount on line 6?

 Yes. Enter the amount from line 6. Also, you may be able to take the

additional child tax credit. See the TIP below.

 No. Enter the amount from line 3. } This is your child 7

 tax credit. Enter this amount on

Form 1040, line 49.

You may be able to take the additional child tax credit on Form 1040, line 65, if you answered “Yes” on

line 6 or line 7 above.

• First, complete your Form 1040 through line 64.

TIP

• Then, use Form 8812 to figure any additional child tax credit.

x

x

x

2 $2,000

$800

$1,200

$4,503

$0

$4,503

$1,200
10-6 Lesson 10

WAGE EARNER

ADDITIONAL CHILD TAX CREDIT

The child tax credit is a nonrefundable credit that gives eligible 

taxpayers $1000 for each qualifying child. If a taxpayer’s tax liability is less than the allowable nonrefundable child tax credit, the 

taxpayer may be eligible to claim the refundable additional

child tax credit.

The additional child tax credit was expanded to include all taxpayers who have earned income, regardless of the number of qualifying children. This extended the refundable part of the child tax 

credit to families who have less than three qualified children.

Before figuring additional child tax credit, figure the taxpayer’s:

■ Unused nonrefundable child tax credit amount,

■ Total Social Security and Medicare taxes withheld (Form W-2, 

Wage and Tax Statement, boxes 4 and 6),

■ Earned income credit amount,

■ Total taxable earned income (back of Form 8812), and

■ For 1040 filers, one-half of self-employment tax paid, Form 1040, 

line 29.

The taxpayer will need to seek the assistance of a paid professional 

tax preparer if he or she has:

■ Excess social security and RRTA tax withheld (more than one 

employer and gross income in excess of $84,900) or

■ Social Security and Medicare tax on unreported tip income.

Taxpayers must use Form 8812, Additional Child Tax Credit, to 

claim the additional child tax credit. This credit is based on 10% of 

the taxpayer’s taxable earned income in excess of $10,500.

Form 8812 explains step-by-step how to compute the additional

child tax credit. The form allows a taxpayer who can use both rules 

to claim the larger additional child tax credit. That is, taxpayers 

with three or more children can continue to claim a refundable 

additional tax credit, under the rules that applied in prior years, 

if that amount is greater than the refundable credit based on the 

taxpayer’s earned income in excess of $10,500.

Example 2

Maureen Langston is filing Form 1040. Her filing status is head 

of household for 2003. She has five dependent children, all of 

whom are qualifying children for purposes of the child tax credit. 

Maureen received a $2,000 advance child tax credit payment check 

in August 2003. Maureen’s earned income (and adjusted gross

income) is $26,375, her tax is $149, Social Security/Medicare taxes 

are $2,018, and the earned income credit is $1,433. Based on this 

information, Maureen’s child tax credit is $149 (Exhibit 4) and her 

additional child tax credit is $1,588. Exhibits 5 and 6 illustrate how 

Maureen’s additional child tax credit was figured.

POTENTIAL

PITFALLS

When fi guring the 

additional child tax 

credit, you must use the 

back of Form 8812 to 

determine taxable earned 

income (line 4).
Lesson 10 10-7

WAGE EARNER

Exhibit 3 Maureen Langston’s Child Tax Credit Worksheet

Draft as of

08/27/2003

Form 1040—Line 49

Line 49—Child Tax Credit

Questions Who Must Use Pub. 972 Pub.

972

What Is the Child Tax Credit?

This credit is for people who have a qualifying child as defined 1. Are you excluding income from Puerto Rico or are you

below. It is in addition to the credit for child and dependent care filing any of the following forms?

expenses on Form 1040, line 45, and the earned income credit on • Form 2555 or 2555-EZ (relating to foreign earned income) Form 1040, line 63. • Form 4563 (exclusion of income for residents of

American Samoa) Three Steps To Take the Child Tax Credit! No. Continue Yes.



STOP

Step 1. Make sure you have a qualifying child for the child You must use Pub. 972 to

figure your credit. tax credit. See Qualifying Child for Child Tax

Credit below.

Step 2. Make sure you checked the box in column (4) of 2. Is the amount on Form 1040, line 35, more than the amount

shown below for your filing status? line 6c on Form 1040 for each qualifying child.

Step 3. Answer the questions on this page to see if you • Married filing jointly – $110,000

may use the worksheet on page 39 to figure your • Single, head of household, or qualifying widow(er) –

credit or if you must use Pub. 972, Child Tax $75,000

Credit. If you need Pub. 972, see page 9. • Married filing separately – $55,000

No. Continue Yes.



STOP Qualifying Child for Child Tax Credit You must use Pub. 972 to

A qualifying child for purposes of the child tax credit is a child figure your credit. who:

• Is claimed as your dependent on line 6c, and 3. Are you claiming any of the following credits? • Was under age 17 at the end of 2003, and • Adoption credit, Form 8839 (see the instructions for Form • Is your (a) son, daughter, adopted child, stepchild, or a descen- 1040, line 50, on page 40) dant of any of them (for example, your grandchild); (b) brother, • Mortgage interest credit, Form 8396 (see the instructions sister, stepbrother, stepsister, or a descendant of any of them (for for Form 1040, line 51, on page 40) example, your niece or nephew), whom you cared for as you would

your own child; or (c) foster child (any child placed with you by an • District of Columbia first-time homebuyer credit, Form

8859 authorized placement agency whom you cared for as you would

your own child), and No. Use the Yes. You must use Pub.

• Is a U.S. citizen or resident alien. worksheet on page 39 972 to figure your child tax

to figure your child credit. You will also need Note. The above requirements are not the same as the requirements tax credit. the form(s) listed above for to be a qualifying child for the earned income credit. any credit(s) you are

claiming.

An adopted child is always treated as your own child. An

adopted child includes a child placed with you by an authorized

placement agency for legal adoption even if the adoption is not

final. An authorized placement agency includes any person or court

authorized by state law to place children for legal adoption.

A grandchild is any descendant of your son, daughter, adopted

child, or stepchild and includes your great-grandchild,

great-great-grandchild, etc.

Need more information or forms? See page 7. - 38 -

x

x

x
10-8 Lesson 10

WAGE EARNER

Exhibit 4 Maureen Langston’s Child Tax Credit Worksheet 

Draft as of

08/27/2003

Form 1040—Line 49

Child Tax Credit Worksheet—Line 49 Keep for Your Records

Before you begin:  If you received (before offset) an advance payment of the child tax credit and you filed a joint

return for 2002, you and your spouse are each considered to have received one-half of the

payment.

• To be a qualifying child for the child tax credit, the child must be under age 17 at the end of 2003 and meet the other

 requirements listed on page 38.

• Do not use this worksheet if you answered “Yes” to question 1, 2, or 3 on page 38. Instead, use Pub. 972.

1. Number of qualifying children: X $1,000. Enter the result. 1

2. Enter the amount, if any, of your advance child tax credit (before offset). 2

 3. Is line 1 less than or equal to line 2?

 Yes. STOP You cannot take this credit. If line 2 is more than line 1, you do not have to pay back the

difference.

 No. Subtract line 2 from line 1. 3

4. Enter the amount from Form 1040, line 43. 4

5. Enter the total of the amounts from Form 1040, lines 44 through 48. 5

6. Are the amounts on lines 4 and 5 the same?

 Yes. STOP You cannot take this credit because there is no tax to reduce

However, you may be able to take the additional child tax credit. See the TIP below.

 No. Subtract line 5 from line 4. 6

7. Is the amount on line 3 more than the amount on line 6?

 Yes. Enter the amount from line 6. Also, you may be able to take the

additional child tax credit. See the TIP below.

 No. Enter the amount from line 3. } This is your child 7

 tax credit. Enter this amount on

Form 1040, line 49.

You may be able to take the additional child tax credit on Form 1040, line 65, if you answered “Yes” on

line 6 or line 7 above.

• First, complete your Form 1040 through line 64.

TIP

• Then, use Form 8812 to figure any additional child tax credit.

x

x

5 $5,000

$2,000

$3,000

$149

$0

$149

$149

x
Lesson 10 10-9

WAGE EARNER

Draft as of

7/14/2003

OMB No. 1545-1620 8812 Additional Child Tax Credit Form

Complete and attach to Form 1040 or Form 1040A. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 47

Name(s) shown on return Your social security number

For Paperwork Reduction Act Notice, see back of form. Cat. No. 10644E Form 8812 (2003)

3

2

4

6

Enter the total of the withheld social security and Medicare taxes from Form(s)

W-2, boxes 4 and 6. If married filing jointly, include your spouse’s amounts

with yours. If you worked for a railroad, see the instructions on back

Add lines 7 and 8

1

Enter the total of the amounts from Form 1040, lines

28 and 56, plus any uncollected social security and

Medicare or tier 1 RRTA taxes included on line 60.

Enter -0-.

Enter the total of the amounts from Form 1040, lines

63 and 64.

Enter the total of the amount from Form 1040A, line

41, plus any excess social security and tier 1 RRTA

taxes withheld that you entered to the left of line 43

(see the instructions on back).

Enter the amount from line 3 of your Child Tax Credit Worksheet on page 40 of the Form 1040 instructions

or page 39 of the Form 1040A instructions. If you used Pub. 972, enter the amount from line 10 of the

worksheet on page 3 of the publication

Enter the amount from Form 1040, line 49, or Form 1040A, line 33

Subtract line 2 from line 1. If zero, stop; you cannot take this credit

8

9



6

 1040A filers:

1040 filers:

1040 filers:

1040A filers:

1

2

13

1040

1040A

. . . . . . . . . .

Enter this amount on

Form 1040, line 65, or

Form 1040A, line 42.





8812

1040

1040A

. . . . . . . . . .

3

Enter your total taxable earned income. See the instructions on back

5 Is the amount on line 4 more than $10,500?

No.

Yes. Subtract $10,500 from the amount on line 4. Enter the result

Leave line 5 blank and enter -0- on line 6.

4

5

Multiply the amount on line 5 by 10% (.10) and enter the result

7

Next. Do you have three or more qualifying children?

No. If line 6 is zero, stop; you cannot take this credit. Otherwise, skip Part II and enter the

smaller of line 3 or line 6 on line 13.

Yes.

7

8

9

10

10

11 Subtract line 10 from line 9. If zero or less, enter -0- 11

12 Enter the larger of line 6 or line 11 here 12

Next, enter the smaller of line 3 or line 12 on line 13.

13 This is your additional child tax credit

Part III

Part I

Part II

All Filers

Certain Filers Who Have Three or More Qualifying Children

Your Additional Child Tax Credit

If line 6 is equal to or more than line 3, skip Part II and enter the amount from line 3 on

line 13. Otherwise, go to line 7.

2003

Maureen Langston 000 00 9999

$3,000

$149

$2,851

$26,375

$15,875

$1,588

x

x

$2,018

$0

$2,018

$1,433

$585

$1,588

$1,588

Exhibit 5 Maureen Langston’s Form 8812, page 1
10-10 Lesson 10

WAGE EARNER

Draft as of

7/02/2003

Form 8812 (2003) Page 2

Instructions

Purpose of Form

Use Form 8812 to figure your additional child tax credit.

Taxable Earned Income

Paperwork Reduction Act Notice. We ask for the information on

this form to carry out the Internal Revenue laws of the United

States. You are required to give us the information. We need it to

ensure that you are complying with these laws and to allow us to

figure and collect the right amount of tax.

You are not required to provide the information requested on a

form that is subject to the Paperwork Reduction Act unless the

form displays a valid OMB control number. Books or records

relating to a form or its instructions must be retained as long as

their contents may become material in the administration of any

Internal Revenue law. Generally, tax returns and return information

are confidential, as required by Internal Revenue Code section

6103.

The time needed to complete and file this form will vary

depending on individual circumstances. The estimated average time

is: Recordkeeping, 6 min.; Learning about the law or the form,

5 min.; Preparing the form, 28 min.; Copying, assembling, and

sending the form to the IRS, 20 min.

If you have comments concerning the accuracy of these time

estimates or suggestions for making this form simpler, we would

be happy to hear from you. See the Instructions for Form 1040 or

Form 1040A.

The additional child tax credit may give you a refund

even if you do not owe any tax.

Railroad Employees

If you worked for a railroad, include the following taxes in the

total on Form 8812, line 7.

● Tier 1 tax withheld from your pay. This tax should be shown in

box 14 of your W-2 form(s) and identified as “Tier 1 tax.”

● If you were an employee representative, 50% of the total tier 1

tax and tier 1 Medicare tax you paid for 2003.

Any refund you receive as a result of taking the additional child

tax credit will not be used to determine if you are eligible for the

following programs, or how much you can receive from them.

● Temporary Assistance for Needy Families (TANF).

● Medicaid and supplemental security income (SSI).

● Food stamps and low-income housing.

Effect of Credit on Welfare Benefits

First, complete the Child Tax Credit Worksheet that applies to you.

See the instructions for Form 1040, line 49, or Form 1040A, line

33. If you meet the condition given in the TIP at the end of your

Child Tax Credit Worksheet, use Form 8812 to see if you can take

the additional child tax credit.

Who Should Use Form 8812

2. Are you claiming the earned income credit (EIC) on Form

1040, line 63, or Form 1040A, line 41?

Yes. Use the following chart to find the amount to enter on

Form 8812, line 4.

IF you are

filing Form... AND you completed...

THEN enter on Form

8812, line 4, the amount

from...

1040A

1040

Step 5 on page 43 of your

1040A instructions

Worksheet B on page 48 of

your 1040 instructions

Step 5 on page 45 of your

1040 instructions (but not

Worksheet B)

Step 5, Earned Income

Worksheet B, line 4b.*

Step 5, Earned Income

No. 1040 filers: Go to question 3.

1040A filers: Skip question 3 and go to question 4.

Yes. Use Pub. 972 to figure the amount to enter on

Form 8812, line 4.

4. Does the amount on line 7 of Form 1040 or Form 1040A

include any of the following amounts?

● Taxable scholarship or fellowship grants not reported on a W-2

form.

● Amounts paid to an inmate in a penal institution for work (put

“PRI” and the amount paid in the space next to line 7 of Form

1040 or 1040A).

No. Enter the amount from line 7 of Form 1040 or Form

1040A on Form 8812, line 4.

Yes. Subtract the total of those amounts from the amount on

line 7 of Form 1040 or Form 1040A. (If an amount is

included in more than one of the above categories,

include it only once in figuring the total amount to

subtract.) Enter the result on Form 8812, line 4.

1040A Filers

If you, or your spouse if filing a joint return, had more than one

employer for 2003 and total wages of over $87,000, figure any

excess social security and tier 1 railroad retirement (RRTA) taxes

withheld. See the instructions for Form 1040A, line 43. Include any

excess on Form 8812, line 10.

* If you were a member of the clergy, subtract the following from the amount on line

4b: (a) the rental value of a home or the nontaxable portion of an allowance for a

home furnished to you (including payments for utilities) and (b) the value of meals

and lodging provided to you, your spouse, and your dependents for your employer’s

convenience.

● Amounts received as a pension or annuity from a nonqualified

deferred compensation plan or a nongovernmental section 457 plan

(put “DFC” and the amount received in the space next to line 7 of

Form 1040 or 1040A). This amount may be reported in box 11 of

your W-2 form. If you received such an amount but box 11 is

blank, contact your employer for the amount received as a pension

or annuity.

● Amounts from Form 2555, line 41, or Form 2555-EZ,

line 18.

1. Did you, or your spouse if filing a joint return, have net

earnings from self-employment and use either optional method to

figure those net earnings?

No. Go to question 2.

Yes. Use Pub. 972 to figure the amount to enter on

Form 8812, line 4.

3. Were you, or your spouse if filing a joint return,

self-employed, or are you filing Schedule SE because you were a

member of the clergy or you had church employee income, or are

you filing Schedule C or C-EZ as a statutory employee?

No. Go to question 4.

Exhibit 6 Maureen Langston’s Form 8812, page 2 

x

x

x

x
Lesson 10 10-11

WAGE EARNER

Exercise 1

Emily and Victor (SSN-000-00-4410) Howard are married taxpayers with four children. They file married filing jointly for 2003 

on Form 1040A. All of their children are qualifying for purposes 

of the child tax credit. The Howards received a $1,600 advance 

child tax credit payment in August 2003. Their adjusted gross

income is $31,467, of which $18,467 is taxable earned income 

and $13,000 is unemployment compensation. The Howards’ taxable income is $3,667, Social Security/Medicare taxes are $1,413, 

and the earned income credit is $569. They have no other credits entered in lines 29-32. Based on the facts given, figure the 

Howards:

A. Child tax credit

B. Additional child tax credit.

Exhibit 7 Complete this Form. 08/

Line 33—Child Tax Credit

What Is the Child Tax Credit? An adopted child is always treated as your own child. An

adopted child includes a child placed with you by an authorized This credit is for people who have a qualifying child as defined placement agency for legal adoption even if the adoption is not below. It is in addition to the credit for child and dependent care final. An authorized placement agency includes any person or expenses on Form 1040A, line 29, and the earned income credit court authorized by state law to place children for legal adoption. on Form 1040A, line 41.

A grandchild is any descendant of your son, daughter,

Three Steps To Take the Child Tax Credit! adopted child, or stepchild and includes your great-grandchild,

great-great-grandchild, etc.

Step 1. Make sure you have a qualifying child for the child

tax credit. See Qualifying Child for Child Tax

Credit below.

Step 2. Make sure you checked the box in column (4) of Questions Who Must Use Pub. 972

line 6c on Form 1040A for each qualifying child.

Pub.

972

Step 3. Answer the questions on this page to see if you

may use the worksheet on page 37 to figure your 1. Is the amount on Form 1040A, line 22, more than the

credit or if you must use Pub. 972, Child Tax amount shown below for your filing status?

Credit. If you need Pub. 972, see page 7. • Married filing jointly – $110,000

Qualifying Child for Child Tax Credit. A qualifying child for • Single, head of household, or qualifying widow(er) –

purposes of the child tax credit is a child who: $75,000

• Is claimed as your dependent on line 6c, and • Married filing separately – $55,000

• Was under age 17 at the end of 2003, and

No. Continue Yes.



STOP • Is your (a) son, daughter, adopted child, stepchild, or a

descendant of any of them (for example, your grandchild); (b) You must use Pub. 972 to

brother, sister, stepbrother, stepsister, or a descendant of any of figure your credit. them (for example, your niece or nephew), whom you cared for

as you would your own child; or (c) a foster child (any child 2. Are you claiming the adoption credit on Form 8839 (see the placed with you by an authorized placement agency whom you instructions for Form 1040A, line 34, on page 38)? cared for as you would your own child), and

• Is a U.S. citizen or resident alien. No. Use the Yes. You must use Pub.

worksheet on page 37 972 to figure your child tax

Note. The above requirements are not the same as the to figure your child credit. You will also need

requirements to be a qualifying child for the earned income tax credit. Form 8839.

credit.
10-12 Lesson 10

WAGE EARNER

Exhibit 8 Complete this Form.

Draft as of

08/27/2003

Form 1040A—Line 33

Child Tax Credit Worksheet—Line 33

1040A

Yes. STOP

Keep for Your Records

● To be a qualifying child for the child tax credit, the child must be under age 17 at the end of 2003 and meet the other

requirements listed on page 38.

● Do not use this worksheet if you answered “ Yes” to question 1 or 2 on page 38. Instead, use Pub. 972.

1.

4.

5.

6.

7.

1

4

Number of qualifying children: $1,000.

Enter the result.



Enter the amount from Form 1040A, line 28.

Add the amounts from Form 1040A, lines 29

through 32.

Are the amounts on lines 4 and 5 the same?

You cannot take this credit because there is no tax

to reduce. However, you may be able to take the

additional child tax credit. See the below. TIP

No. Subtract line 5 from line 4.

Is the amount on line 3 more than the amount on line 6?

Yes. Enter the amount from line 6.

Also, you may be able to take the

additional child tax credit. See the

TIP below.

No. Enter the amount from line 3.

This is your child tax

credit.

Enter this amount on

Form 1040A, line 33.

You may be able to take the additional child tax credit

on Form 1040A, line 42, if you answered “Yes” on line 6

or line 7 above.

● First, complete your Form 1040A through line 41.

● Then, use Form 8812 to figure any additional child tax

credit.

5

6

 7



Before you begin: If you received (before offset) an advance payment of the child tax credit and you

filed a joint return for 2002, you and your spouse are each considered to have

received one-half of the payment.



If you received Notice 1319, have it available. The notice shows the amount of your advance payment (before offset). If

you do not have Notice 1319, you can check the amount of your advance payment (before offset) on the IRS website at

www.irs.gov. You will need to enter your SSN, your 2002 filing status, and the total number of exemptions you claimed

on line 6d of your 2002 Form 1040 or Form 1040A.

2. Enter the amount, if any, of your advance child tax 2

credit (before offset).

3. Is line 1 less than or equal to line 2?

Yes. STOP

You cannot take this credit. If line 2 is more than

line 1, you do not have to pay back the difference.

No. Subtract line 2 from line 1.

3

- 37 - Need more information or forms? See page 7.
Lesson 10 10-13

WAGE EARNER

Draft as of

7/14/2003

OMB No. 1545-1620 8812 Additional Child Tax Credit Form

Complete and attach to Form 1040 or Form 1040A. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 47

Name(s) shown on return Your social security number

For Paperwork Reduction Act Notice, see back of form. Cat. No. 10644E Form 8812 (2003)

3

2

4

6

Enter the total of the withheld social security and Medicare taxes from Form(s)

W-2, boxes 4 and 6. If married filing jointly, include your spouse’s amounts

with yours. If you worked for a railroad, see the instructions on back

Add lines 7 and 8

1

Enter the total of the amounts from Form 1040, lines

28 and 56, plus any uncollected social security and

Medicare or tier 1 RRTA taxes included on line 60.

Enter -0-.

Enter the total of the amounts from Form 1040, lines

63 and 64.

Enter the total of the amount from Form 1040A, line

41, plus any excess social security and tier 1 RRTA

taxes withheld that you entered to the left of line 43

(see the instructions on back).

Enter the amount from line 3 of your Child Tax Credit Worksheet on page 40 of the Form 1040 instructions

or page 39 of the Form 1040A instructions. If you used Pub. 972, enter the amount from line 10 of the

worksheet on page 3 of the publication

Enter the amount from Form 1040, line 49, or Form 1040A, line 33

Subtract line 2 from line 1. If zero, stop; you cannot take this credit

8

9



6

 1040A filers:

1040 filers:

1040 filers:

1040A filers:

1

2

13

1040

1040A

. . . . . . . . . .

Enter this amount on

Form 1040, line 65, or

Form 1040A, line 42.





8812

1040

1040A

. . . . . . . . . .

3

Enter your total taxable earned income. See the instructions on back

5 Is the amount on line 4 more than $10,500?

No.

Yes. Subtract $10,500 from the amount on line 4. Enter the result

Leave line 5 blank and enter -0- on line 6.

4

5

Multiply the amount on line 5 by 10% (.10) and enter the result

7

Next. Do you have three or more qualifying children?

No. If line 6 is zero, stop; you cannot take this credit. Otherwise, skip Part II and enter the

smaller of line 3 or line 6 on line 13.

Yes.

7

8

9

10

10

11 Subtract line 10 from line 9. If zero or less, enter -0- 11

12 Enter the larger of line 6 or line 11 here 12

Next, enter the smaller of line 3 or line 12 on line 13.

13 This is your additional child tax credit

Part III

Part I

Part II

All Filers

Certain Filers Who Have Three or More Qualifying Children

Your Additional Child Tax Credit

If line 6 is equal to or more than line 3, skip Part II and enter the amount from line 3 on

line 13. Otherwise, go to line 7.

2003

Exhibit 9 Complete this Form.
10-14 Lesson 10

WAGE EARNER

Exhibit 10 Complete this Form.

Draft as of

7/02/2003

Form 8812 (2003) Page 2

Instructions

Purpose of Form

Use Form 8812 to figure your additional child tax credit.

Taxable Earned Income

Paperwork Reduction Act Notice. We ask for the information on

this form to carry out the Internal Revenue laws of the United

States. You are required to give us the information. We need it to

ensure that you are complying with these laws and to allow us to

figure and collect the right amount of tax.

You are not required to provide the information requested on a

form that is subject to the Paperwork Reduction Act unless the

form displays a valid OMB control number. Books or records

relating to a form or its instructions must be retained as long as

their contents may become material in the administration of any

Internal Revenue law. Generally, tax returns and return information

are confidential, as required by Internal Revenue Code section

6103.

The time needed to complete and file this form will vary

depending on individual circumstances. The estimated average time

is: Recordkeeping, 6 min.; Learning about the law or the form,

5 min.; Preparing the form, 28 min.; Copying, assembling, and

sending the form to the IRS, 20 min.

If you have comments concerning the accuracy of these time

estimates or suggestions for making this form simpler, we would

be happy to hear from you. See the Instructions for Form 1040 or

Form 1040A.

The additional child tax credit may give you a refund

even if you do not owe any tax.

Railroad Employees

If you worked for a railroad, include the following taxes in the

total on Form 8812, line 7.

● Tier 1 tax withheld from your pay. This tax should be shown in

box 14 of your W-2 form(s) and identified as “Tier 1 tax.”

● If you were an employee representative, 50% of the total tier 1

tax and tier 1 Medicare tax you paid for 2003.

Any refund you receive as a result of taking the additional child

tax credit will not be used to determine if you are eligible for the

following programs, or how much you can receive from them.

● Temporary Assistance for Needy Families (TANF).

● Medicaid and supplemental security income (SSI).

● Food stamps and low-income housing.

Effect of Credit on Welfare Benefits

First, complete the Child Tax Credit Worksheet that applies to you.

See the instructions for Form 1040, line 49, or Form 1040A, line

33. If you meet the condition given in the TIP at the end of your

Child Tax Credit Worksheet, use Form 8812 to see if you can take

the additional child tax credit.

Who Should Use Form 8812

2. Are you claiming the earned income credit (EIC) on Form

1040, line 63, or Form 1040A, line 41?

Yes. Use the following chart to find the amount to enter on

Form 8812, line 4.

IF you are

filing Form... AND you completed...

THEN enter on Form

8812, line 4, the amount

from...

1040A

1040

Step 5 on page 43 of your

1040A instructions

Worksheet B on page 48 of

your 1040 instructions

Step 5 on page 45 of your

1040 instructions (but not

Worksheet B)

Step 5, Earned Income

Worksheet B, line 4b.*

Step 5, Earned Income

No. 1040 filers: Go to question 3.

1040A filers: Skip question 3 and go to question 4.

Yes. Use Pub. 972 to figure the amount to enter on

Form 8812, line 4.

4. Does the amount on line 7 of Form 1040 or Form 1040A

include any of the following amounts?

● Taxable scholarship or fellowship grants not reported on a W-2

form.

● Amounts paid to an inmate in a penal institution for work (put

“PRI” and the amount paid in the space next to line 7 of Form

1040 or 1040A).

No. Enter the amount from line 7 of Form 1040 or Form

1040A on Form 8812, line 4.

Yes. Subtract the total of those amounts from the amount on

line 7 of Form 1040 or Form 1040A. (If an amount is

included in more than one of the above categories,

include it only once in figuring the total amount to

subtract.) Enter the result on Form 8812, line 4.

1040A Filers

If you, or your spouse if filing a joint return, had more than one

employer for 2003 and total wages of over $87,000, figure any

excess social security and tier 1 railroad retirement (RRTA) taxes

withheld. See the instructions for Form 1040A, line 43. Include any

excess on Form 8812, line 10.

* If you were a member of the clergy, subtract the following from the amount on line

4b: (a) the rental value of a home or the nontaxable portion of an allowance for a

home furnished to you (including payments for utilities) and (b) the value of meals

and lodging provided to you, your spouse, and your dependents for your employer’s

convenience.

● Amounts received as a pension or annuity from a nonqualified

deferred compensation plan or a nongovernmental section 457 plan

(put “DFC” and the amount received in the space next to line 7 of

Form 1040 or 1040A). This amount may be reported in box 11 of

your W-2 form. If you received such an amount but box 11 is

blank, contact your employer for the amount received as a pension

or annuity.

● Amounts from Form 2555, line 41, or Form 2555-EZ,

line 18.

1. Did you, or your spouse if filing a joint return, have net

earnings from self-employment and use either optional method to

figure those net earnings?

No. Go to question 2.

Yes. Use Pub. 972 to figure the amount to enter on

Form 8812, line 4.

3. Were you, or your spouse if filing a joint return,

self-employed, or are you filing Schedule SE because you were a

member of the clergy or you had church employee income, or are

you filing Schedule C or C-EZ as a statutory employee?

No. Go to question 4.
Lesson 10 10-15

WAGE EARNER

 CHILD TAX CREDIT ANSWERS TO EXERCISES Lesson 10

Line 33—Child Tax Credit

What Is the Child Tax Credit?

This credit is for people who have a qualifying child as defined

in the instructions for line 6c, column (4), that begin on page

25. It is in addition to the credit for child and dependent care

Three Steps To Take the Child Tax Credit!

Step 1. Make sure you have a qualifying child for the child

tax credit. See the instructions for line 6c,

column (4), that begin on page 25.

Step 2. Make sure you checked the box in column (4) of

line 6c on Form 1040A for each qualifying child.

Step 3. Answer the questions on this page to see if you may

use the worksheet on page 39 to figure your credit or

if you must use Pub. 972, Child Tax Credit. If you

need Pub. 972, see page 9.

Who Must Use Pub. 972

1. Is the amount on Form 1040A, line 22, more than the

amount shown below for your filing status?

● Married filing jointly – $110,000

● Single, head of household, or qualifying widow(er) –

$75,000

● Married filing separately – $55,000

2. Are you claiming the adoption credit on Form 8839 (see the

instructions for Form 1040A, line 34, on page 40)?

No. Use the

worksheet on

page 39 to figure

your child tax credit.

Yes. You must use

Pub. 972 to figure your

child tax credit. You will

also need Form 8839.

No. Continue Yes.

You must use Pub. 972 to

figure your credit.



STOP

Questions Pub.

972

expenses on Form 1040A, line 33, and the earned income credit

on Form 1040A, line 50.

0

x

x

x
10-16 Lesson 10

WAGE EARNER

Exercise 1(A) The Howard’s Child Tax Worksheet. 

Draft as of

08/27/2003

Form 1040A—Line 33

Child Tax Credit Worksheet—Line 33

1040A

Yes. STOP

Keep for Your Records

● To be a qualifying child for the child tax credit, the child must be under age 17 at the end of 2003 and meet the other

requirements listed on page 38.

● Do not use this worksheet if you answered “ Yes” to question 1 or 2 on page 38. Instead, use Pub. 972.

1.

4.

5.

6.

7.

1

4

Number of qualifying children: $1,000.

Enter the result.



Enter the amount from Form 1040A, line 28.

Add the amounts from Form 1040A, lines 29

through 32.

Are the amounts on lines 4 and 5 the same?

You cannot take this credit because there is no tax

to reduce. However, you may be able to take the

additional child tax credit. See the below. TIP

No. Subtract line 5 from line 4.

Is the amount on line 3 more than the amount on line 6?

Yes. Enter the amount from line 6.

Also, you may be able to take the

additional child tax credit. See the

TIP below.

No. Enter the amount from line 3.

This is your child tax

credit.

Enter this amount on

Form 1040A, line 33.

You may be able to take the additional child tax credit

on Form 1040A, line 42, if you answered “Yes” on line 6

or line 7 above.

● First, complete your Form 1040A through line 41.

● Then, use Form 8812 to figure any additional child tax

credit.

5

6

 7



Before you begin: If you received (before offset) an advance payment of the child tax credit and you

filed a joint return for 2002, you and your spouse are each considered to have

received one-half of the payment.



If you received Notice 1319, have it available. The notice shows the amount of your advance payment (before offset). If

you do not have Notice 1319, you can check the amount of your advance payment (before offset) on the IRS website at

www.irs.gov. You will need to enter your SSN, your 2002 filing status, and the total number of exemptions you claimed

on line 6d of your 2002 Form 1040 or Form 1040A.

2. Enter the amount, if any, of your advance child tax 2

credit (before offset).

3. Is line 1 less than or equal to line 2?

Yes. STOP

You cannot take this credit. If line 2 is more than

line 1, you do not have to pay back the difference.

No. Subtract line 2 from line 1.

3 x

4 $4,000

$1,600

x

x

$2,400

$368

$0

$368

$368

Lesson 10 CHILD TAX CREDIT ANSWERS TO EXERCISES
Lesson 10 10-17

WAGE EARNER

LESSON 10 CHILD TAX CREDIT ANWERS TO EXERCISES

Draft as of

7/14/2003

OMB No. 1545-1620 8812 Additional Child Tax Credit Form

Complete and attach to Form 1040 or Form 1040A. Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 47

Name(s) shown on return Your social security number

For Paperwork Reduction Act Notice, see back of form. Cat. No. 10644E Form 8812 (2003)

3

2

4

6

Enter the total of the withheld social security and Medicare taxes from Form(s)

W-2, boxes 4 and 6. If married filing jointly, include your spouse’s amounts

with yours. If you worked for a railroad, see the instructions on back

Add lines 7 and 8

1

Enter the total of the amounts from Form 1040, lines

28 and 56, plus any uncollected social security and

Medicare or tier 1 RRTA taxes included on line 60.

Enter -0-.

Enter the total of the amounts from Form 1040, lines

63 and 64.

Enter the total of the amount from Form 1040A, line

41, plus any excess social security and tier 1 RRTA

taxes withheld that you entered to the left of line 43

(see the instructions on back).

Enter the amount from line 3 of your Child Tax Credit Worksheet on page 40 of the Form 1040 instructions

or page 39 of the Form 1040A instructions. If you used Pub. 972, enter the amount from line 10 of the

worksheet on page 3 of the publication

Enter the amount from Form 1040, line 49, or Form 1040A, line 33

Subtract line 2 from line 1. If zero, stop; you cannot take this credit

8

9



6

 1040A filers:

1040 filers:

1040 filers:

1040A filers:

1

2

13

1040

1040A

. . . . . . . . . .

Enter this amount on

Form 1040, line 65, or

Form 1040A, line 42.





8812

1040

1040A

. . . . . . . . . .

3

Enter your total taxable earned income. See the instructions on back

5 Is the amount on line 4 more than $10,500?

No.

Yes. Subtract $10,500 from the amount on line 4. Enter the result

Leave line 5 blank and enter -0- on line 6.

4

5

Multiply the amount on line 5 by 10% (.10) and enter the result

7

Next. Do you have three or more qualifying children?

No. If line 6 is zero, stop; you cannot take this credit. Otherwise, skip Part II and enter the

smaller of line 3 or line 6 on line 13.

Yes.

7

8

9

10

10

11 Subtract line 10 from line 9. If zero or less, enter -0- 11

12 Enter the larger of line 6 or line 11 here 12

Next, enter the smaller of line 3 or line 12 on line 13.

13 This is your additional child tax credit

Part III

Part I

Part II

All Filers

Certain Filers Who Have Three or More Qualifying Children

Your Additional Child Tax Credit

If line 6 is equal to or more than line 3, skip Part II and enter the amount from line 3 on

line 13. Otherwise, go to line 7.

2003

Emily and Victor Howard 000 00 4410

$2,400

$368

$2,032

$18,467

$7,967

$797

x

x

$1,413

$0

$1,413

$569

$844

$844

$844

Exercise 1(B) The Howard’s Additional Child Tax Credit

 CHILD TAX CREDIT ANSWERS TO EXERCISES Lesson 10
10-18 Lesson 10

WAGE EARNER

STUDENT NOTES
Comprehensive

Problems CW-1

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

1

Control number

Retirement

plan Third-partysick pay Statutoryemployee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

INTRODUCTION

In this section, you will complete tax returns for several common wage earner scenarios often encountered at volunteer assistance sites. This will be valuable practice as you prepare to help 

taxpayers. Although answers to each of the problems are shown 

at the end of this section, you should try to complete the blank 

forms for each problem before referring to its answers.

After completing this section, you will be able to:

■ accurately complete a basic tax return.

PROBLEM 1

John Marshall, a sophomore in college, wants help with preparing 

his tax return. He tells you he is 19 years old (born May 28, 1984). 

Although he lives in the dorm at college, his parents can claim him 

as a dependent on their tax return. He does not wish to contribute to the presidential campaign fund. If he receives a refund he 

would like it direct deposited into his checking account (account 

number xxxxxxxxxxxxx, routing number xxxxxxxxx). John does 

not want to name a third party designee. His address and SSN are 

correct on his Form W-2 and Form 1099-INT.

$94.00

$39.00

$2,694.00

$2,694.00

$2,694.00

xxx-xx-xxxx $2,694.00 $52.00

Norfolk Trading Company

819 Ferris St.

Your City, State, Zip Code

John Marshall

878 Hudson Ave

Your City, State, Zip Code

xxx-xx-xxxx

xxx-xx-xxxx

3456781
CW-2 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0112 Payer’s RTN (optional)

Interest Income

PAYER’S Federal identification number RECIPIENT’S identification number 1 Interest income not included in box 3

$

Early withdrawal penalty Interest on U.S. Savings

Bonds and Treas. obligations

RECIPIENT’S name 2 3

$ $

Street address (including apt. no.) 4 Federal income tax withheld

$

Foreign country or U.S.

possession

City, state, and ZIP code 6 Foreign tax paid 7

Account number (optional)

$

Form 1099-INT Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-INT

5 Investment expenses

$

2003 First Bank

2940 N. Second St.

Your City, State, Zip Code

xx-xxxxxxx xxx-xx-xxxx

John Marshall

878 Hudson Ave.

Your City, State, Zip Code

50.00
Comprehensive

Problems CW-3

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Complete this form Form 1040EZ, front

Proof as of

July 21, 2003

(subject to change)

Do you, or your spouse if a joint return, want $3 to go to this fund? 

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

Department of the Treasury—Internal Revenue Service

Form Income Tax Return for Single and 1040EZ Joint Filers With No Dependents 2003 OMB No. 1545-0675

Note. Checking “Yes” will not change your tax or reduce your refund.

Presidential

Election

Campaign

(page 14)

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.

Attach your Form(s) W-2.

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check

Yes or No.

Yes. No.

5

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.

This is your taxable income. 

6

6

Payments

and tax

Earned income credit (EIC).

7 7

Tax. Use the amount on line 6 above to find your tax in the tax table on pages

25–29 of the booklet. Then, enter the tax from the table on this line.

10

10

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24.

Income

Cat. No. 11329W



4 4

12

12

Add lines 7 and 8. These are your total payments. 

8 8

9 9

Federal income tax withheld from box 2 of your Form(s) W-2.

Unemployment compensation and Alaska Permanent Fund dividends

(see page 16).

3

3

Amount

you owe

b Routing number

Account number

c Type: Checking

Enter amount from

worksheet on back.

If single, enter $7,800.

If married filing jointly, enter $15,600.

See back for explanation.

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

(99)

Yes No Yes No

You Spouse

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Your first name and initial Last name Your social security number

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see page 14. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.

Important! 



Label

(See page 14.)

Use the IRS

label.

Otherwise,

please print

or type.



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 
CW-4 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Proof as of

July 21, 2003

(subject to change)

Form 1040EZ (2003)

● You (and your spouse if married filing jointly) were born after January 1, 1939, and were not

blind at the end of 2003.

Use ● Your filing status is single or married filing jointly.

this

form if

● Your taxable income (line 6) is less than $50,000.

● You do not claim any dependents.

● You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment

compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over

$1,500. But if you earned tips, including allocated tips, that are not included in box 5 and box 7

of your W-2, you may not be able to use Form 1040EZ (see page 15). If you are planning to use

Form 1040EZ for a child who received Alaska Permanent Fund dividends, see page 16.

If you are not sure about your filing status, see page 13. If you have questions about dependents, use

TeleTax topic 354 (see page 8). If you cannot use this form, use TeleTax topic 352 (see page 8).

Filling in

your

return

If you received a scholarship or fellowship grant or tax-exempt interest income, such as on

municipal bonds, see the booklet before filling in the form. Also, see the booklet if you received a

Form 1099-INT showing Federal income tax withheld or if Federal income tax was withheld from

your unemployment compensation or Alaska Permanent Fund dividends.

Remember, you must report all wages, salaries, and tips even if you do not get a Form W-2 from

your employer. You must also report all your taxable interest, including interest from banks, savings

and loans, credit unions, etc., even if you do not get a Form 1099-INT.

Use this worksheet to figure the amount to enter on line 5 if someone can claim you (or your

spouse if married filing jointly) as a dependent, even if that person chooses not to do so. To find

out if someone can claim you as a dependent, use TeleTax topic 354 (see page 8).

Worksheet

for

dependents

who

checked

“Yes” on

line 5

A .

A . Amount, if any, from line 1 on front

B . Minimum standard deduction B . 750.00

C. Enter the larger of line A or line B here C.

D.

D. Maximum standard deduction. If single, enter $4,750; if married

filing jointly, enter $9,500

E . Enter the smaller of line C or line D here. This is your standard

deduction E .

Mailing

return

Mail your return by April 15, 2004. Use the envelope that came with your booklet. If you do not

have that envelope or if you moved during the year, see the back cover for the address to use.

● You did not receive any advance earned income credit payments.

F. Exemption amount.

G . Add lines E and F. Enter the total here and on line 5 on the front

If you checked “No” on line 5 because no one can claim you (or your spouse if married filing

jointly) as a dependent, enter on line 5 the amount shown below that applies to you.

● Single, enter $7,800. This is the total of your standard deduction ($4,750) and your exemption

($3,050).

● Married filing jointly, enter $15,600. This is the total of your standard deduction ($9,500), your

exemption ($3,050), and your spouse’s exemption ($3,050).

F.

G .

● If single, enter -0-.

● If married filing jointly and—

—only one of you can be claimed as a dependent, enter $3,050.

For tips on how

to avoid common

mistakes, see

page 23.

Printed on recycled paper

—both you and your spouse can be claimed as dependents, enter -0-.

● You do not claim a deduction for educator expenses, the student loan interest deduction, or the

tuition and fees deduction.

+ 250.00 Enter total 

(keep a copy for

your records)

Form 1040EZ (2003)

Page 2

● You do not claim an education credit, the retirement savings contributions credit, or the health

insurance credit for eligible recipients.

Complete this form Form 1040EZ, page 2
Comprehensive

Problems CW-5

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

PROBLEM 2

Melody York is 34 years old (born August 31, 1969) and single. 

Melody was laid off from her job as a clerk in September and 

received unemployment compensation for the remainder of the 

year. She would like to contribute to the Presidential campaign 

fund. If she receives a refund, she would like it direct deposited 

into her savings account (account number xxxxxxxxxxx; routing 

transit number xxxxxxxxx). Melody does not want to name a third 

party designee. Her address and SSN are correct as shown on her 

Form W-2 and Form 1099-G.

$6,923.12

$6,923.12

$6,923.12

xxx-xx-xxxx $6,923.12 $68.36

Miller Industries

975 Parks Blvd

Your City, State, Zip Code

Melody York

17 North 9th Avenue

Your City, State, Zip Code

xxx-xx-xxxx

xxx-xx-xxxx

258963

x

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

$261.00

$429.00

$100.00
CW-6 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0120 1 Unemployment compensation

Certain

Government

Payments

$

State or local income tax

refunds, credits, or offsets 2

$

PAYER’S Federal identification number RECIPIENT’S identification number 3 Box 2 amount is for tax year 4 Federal income tax withheld

$

RECIPIENT’S name 6 Taxable grants

$

Street address (including apt. no.) 7 Agriculture payments

$

City, state, and ZIP code

Account number (optional)

Form 1099-G Department of the Treasury - Internal Revenue Service

Copy B

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

For Recipient

Form 1099-G

5

8 Box 2 is trade or

business income 

2003 Department of Employment Security

4010 West Third St.

Your City, State, Zipcode

3,240.00

xx-xxxxxxx xxx-xx-xxxx 0.00

Melody York

17th North 9th Avenue

Your City, State, Zip Code
Comprehensive

Problems CW-7

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Complete this form Form 1040EZ, front

Proof as of

July 21, 2003

(subject to change)

Do you, or your spouse if a joint return, want $3 to go to this fund? 

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

Department of the Treasury—Internal Revenue Service

Form Income Tax Return for Single and 1040EZ Joint Filers With No Dependents 2003 OMB No. 1545-0675

Note. Checking “Yes” will not change your tax or reduce your refund.

Presidential

Election

Campaign

(page 14)

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.

Attach your Form(s) W-2.

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check

Yes or No.

Yes. No.

5

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.

This is your taxable income. 

6

6

Payments

and tax

Earned income credit (EIC).

7 7

Tax. Use the amount on line 6 above to find your tax in the tax table on pages

25–29 of the booklet. Then, enter the tax from the table on this line.

10

10

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24.

Income

Cat. No. 11329W



4 4

12

12

Add lines 7 and 8. These are your total payments. 

8 8

9 9

Federal income tax withheld from box 2 of your Form(s) W-2.

Unemployment compensation and Alaska Permanent Fund dividends

(see page 16).

3

3

Amount

you owe

b Routing number

Account number

c Type: Checking

Enter amount from

worksheet on back.

If single, enter $7,800.

If married filing jointly, enter $15,600.

See back for explanation.

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

(99)

Yes No Yes No

You Spouse

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Your first name and initial Last name Your social security number

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see page 14. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.

Important! 



Label

(See page 14.)

Use the IRS

label.

Otherwise,

please print

or type.



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 
CW-8 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Proof as of

July 21, 2003

(subject to change)

Form 1040EZ (2003)

● You (and your spouse if married filing jointly) were born after January 1, 1939, and were not

blind at the end of 2003.

Use ● Your filing status is single or married filing jointly.

this

form if

● Your taxable income (line 6) is less than $50,000.

● You do not claim any dependents.

● You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment

compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over

$1,500. But if you earned tips, including allocated tips, that are not included in box 5 and box 7

of your W-2, you may not be able to use Form 1040EZ (see page 15). If you are planning to use

Form 1040EZ for a child who received Alaska Permanent Fund dividends, see page 16.

If you are not sure about your filing status, see page 13. If you have questions about dependents, use

TeleTax topic 354 (see page 8). If you cannot use this form, use TeleTax topic 352 (see page 8).

Filling in

your

return

If you received a scholarship or fellowship grant or tax-exempt interest income, such as on

municipal bonds, see the booklet before filling in the form. Also, see the booklet if you received a

Form 1099-INT showing Federal income tax withheld or if Federal income tax was withheld from

your unemployment compensation or Alaska Permanent Fund dividends.

Remember, you must report all wages, salaries, and tips even if you do not get a Form W-2 from

your employer. You must also report all your taxable interest, including interest from banks, savings

and loans, credit unions, etc., even if you do not get a Form 1099-INT.

Use this worksheet to figure the amount to enter on line 5 if someone can claim you (or your

spouse if married filing jointly) as a dependent, even if that person chooses not to do so. To find

out if someone can claim you as a dependent, use TeleTax topic 354 (see page 8).

Worksheet

for

dependents

who

checked

“Yes” on

line 5

A .

A . Amount, if any, from line 1 on front

B . Minimum standard deduction B . 750.00

C. Enter the larger of line A or line B here C.

D.

D. Maximum standard deduction. If single, enter $4,750; if married

filing jointly, enter $9,500

E . Enter the smaller of line C or line D here. This is your standard

deduction E .

Mailing

return

Mail your return by April 15, 2004. Use the envelope that came with your booklet. If you do not

have that envelope or if you moved during the year, see the back cover for the address to use.

● You did not receive any advance earned income credit payments.

F. Exemption amount.

G . Add lines E and F. Enter the total here and on line 5 on the front

If you checked “No” on line 5 because no one can claim you (or your spouse if married filing

jointly) as a dependent, enter on line 5 the amount shown below that applies to you.

● Single, enter $7,800. This is the total of your standard deduction ($4,750) and your exemption

($3,050).

● Married filing jointly, enter $15,600. This is the total of your standard deduction ($9,500), your

exemption ($3,050), and your spouse’s exemption ($3,050).

F.

G .

● If single, enter -0-.

● If married filing jointly and—

—only one of you can be claimed as a dependent, enter $3,050.

For tips on how

to avoid common

mistakes, see

page 23.

Printed on recycled paper

—both you and your spouse can be claimed as dependents, enter -0-.

● You do not claim a deduction for educator expenses, the student loan interest deduction, or the

tuition and fees deduction.

+ 250.00 Enter total 

(keep a copy for

your records)

Form 1040EZ (2003)

Page 2

● You do not claim an education credit, the retirement savings contributions credit, or the health

insurance credit for eligible recipients.

Complete this form Form 1040EZ, page 2
Comprehensive

Problems CW-9

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

 Form 1040EZ, Earned Income Credit Worksheet, page 1

Draft as of

08/27/2003

Form 1040EZ—Line 8

Line 8 5. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Earned Income Credit (EIC) the military stationed outside the United States, see page 18

before you answer.

What Is the EIC? Yes. Continue No.



STOP

The EIC is a credit for certain people who work. The credit may You cannot take the credit. give you a refund even if you do not owe any tax. Enter “No” in the space to

If you have a qualifying child (see the next column the left of line 8.

on this page), you may be able to take the credit, but

you must use Schedule EIC and Form 1040A or 1040 6. Look at the qualifying child conditions below. Could you, or

TIP

to do so. For details, see Pub. 596. your spouse if filing a joint return, be a qualifying child of

another person in 2003? To Take the EIC:

• Follow the steps below. No. Go to Step 2



Yes. STOP

• Complete the worksheet on page 19 or let the IRS figure on page 18. You cannot take the the credit for you. credit. Enter “No” in

If you take the EIC even though you are not eligible the space to the left of and it is determined that your error is due to reckless line 8.

or intentional disregard of the EIC rules, you will not CAUTION

!

be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC, A qualifying child is a child who is your—

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties. Son, daughter, adopted child, stepchild, or a descendant of

any of them (for example, your grandchild)

Step 1 All Filers or

1. Is the amount on Form 1040EZ, line 4, less than $11,230 Brother, sister, stepbrother, stepsister, or a descendent of any ($12,230 if married filing jointly)? of them (for example, your niece or nephew) whom you Yes. Continue No.



STOP cared for as

You cannot take the credit. your own child

or 2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 18)? Foster child (any child placed with you by an authorized

placement agency whom you cared for as your own child) Yes. Continue No.



STOP

You cannot take the credit.

Enter “No” in the space to

AND

the left of line 8.

was at the end of 2003...

3. Can you, or your spouse if filing a joint return, be claimed Under age 19 as a dependent on someone else’s 2003 tax return? or Yes. No. STOP Continue

 under age 24 and a student You cannot take the

credit. or

any age and permanently and totally disabled 4. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Go to question No. STOP

AND

5. You cannot take the credit.

who...

Either lived with you in the United States for more than half

of 2003 or was born or died in 2003 and your home was the

child’s home for the entire time he or she was alive in 2003.

Note. Special rules apply if the child was married or also

meets the conditions to be a qualifying child of another

person (other than your spouse if filing a joint return). For

details, use TeleTax topic 601 (see page 8) or see Pub. 596.

- 15 - Need more information or forms? See page 7.
CW-10 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Draft as of

08/27/2003

Form 1040EZ—Line 8

Definitions and Special Rules Step 2 Earned Income (listed in alphabetical order)

1. Figure earned income: Credit Figured by the IRS To have the IRS figure the credit for

you:

Form 1040EZ, line 1 1. Enter “EIC” in the space to the left of line 8 on Form

1040EZ. Subtract, if included in line 1, any: 2. If your EIC for a year after 1996 was reduced or • Taxable scholarship or fellowship disallowed, see Form 8862, Who Must File, below.

grant not reported on a Form W-2

Form 8862, Who Must File. You must file Form 8862 if your • Amount paid to an inmate in a penal EIC for a year after 1996 was reduced or disallowed for any institution for work (enter “PRI” in reason other than a math or clerical error. But you do not have the space to the left of line 1 on to file Form 8862 if either of the following applies. Form 1040EZ) • After your EIC was reduced or disallowed in an earlier year

• Amount received as a pension or – (a) you filed Form 8862 (or other documents) and your EIC was

annuity from a nonqualified deferred then allowed and (b) your EIC has not been reduced or

compensation plan or a disallowed again for any reason other than a math or clerical

error. nongoverntmental section 457 plan

(enter “DFC” and the amount • The only reason your EIC was reduced or disallowed in the

earlier year was because it was determined that a child listed on subtracted in the space to the left of Schedule EIC was not your qualifying child. line 1 on Form 1040EZ). This

amount may be shown in box 11 of} Also, do not file Form 8862 or take the credit if it was

determined that your error was due to reckless or intentional your Form W-2. If you received disregard of the EIC rules or fraud. such an amount but box 11 is blank,

contact your employer for the Members of the Military. If you were on extended active duty amount received as a pension or outside the United States, your home is considered to be in the annuity. United States during that duty period. Extended active duty is

military duty ordered for an indefinite period or for a period of

Earned Income = more than 90 days. Once you begin serving extended active

duty, you are considered to be on extended active duty even if

you serve fewer than 90 days.

2. Is your earned income less than $11,230 ($12,230 if married Social Security Number (SSN). For purposes of taking the EIC, filing jointly)? a valid SSN is a number issued by the Social Security

Yes. Go to Step 3. No. Administration unless “Not Valid for Employment” is printed on STOP

the social security card and the number was issued solely to You cannot take the credit. apply for or receive a Federally funded benefit.

To find out how to get an SSN, see page 14. If you will not

have an SSN by April 15, 2004, see What if You Cannot File on Step 3 How To Figure the Credit Time? on page 11.

1. Do you want the IRS to figure the credit for you? Welfare Benefits, Effect of Credit on. Any refund you receive as

Yes. See Credit No. Go to the worksheet a result of taking the EIC will not be used to determine if you

Figured by the IRS on on page 19. are eligible for the following programs or how much you can

this page. receive from them. But if the refund you receive because of the

EIC is not spent within a certain period of time, it may count as

an asset (or resource) and affect your eligibility.

• Temporary Assistance for Needy Families (TANF).

• Medicaid and supplemental security income (SSI).

• Food stamps and low-income housing.

(Continued on page 19)

Need more information or forms? See page 7. - 16 -

 Form 1040EZ, Earned Income Credit Worksheet, page 2
Comprehensive

Problems CW-11

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Draft as of

08/27/2003

Form 1040EZ—Line 8

Earned Income Credit (EIC) Worksheet—Line 8

1040EZ

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

Enter your earned income from Step 2 on page 18. 1

Look up the amount on line 1 above in the EIC Table on page 20 to

find the credit. Be sure you use the correct column for your filing

status. Enter the credit here.

Enter the amount from Form 1040EZ, line 4.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

Is the amount on line 3 less than $6,250 ($7,250 if married filing jointly)?

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on page 20

to find the credit. Be sure you use the correct column for

your filing status. Enter the credit here.

Enter this amount on

Form 1040EZ, line 8.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Enter “No” in the space to the left of line 8.

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

If your EIC for a year after 1996 was reduced or disallowed, see

page 18 to find out if you must file Form 8862 to take the credit

for 2003.



- 17 - Need more information or forms? See page 7.

 Form 1040EZ, Earned Income Credit Worksheet, page 3
CW-12 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

PROBLEM 3

Marvin Simmons is 55 (born on December 4, 1948. His grandson, 

Eric (SSN xxx-xx-xxxx; born on March 10, 1993), has lived with 

him for the last two years. Marvin pays the total cost of keeping 

up a home for himself and his grandson and provides all the support for Eric. Eric is a qualifying child for EIC purposes.

Marvin paid $978 in child care expenses to allow him to work. The 

provider information is as follows:

Joy Day Care

9192 East Huron St.

Your City, State, Zip Code

EIN: xx-xxxxxxx

He does not want to contribute to the presidential election fund 

and if he is due a refund, he would like a direct deposit to his 

checking account (account xxxxxxxxxxxxxx; routing transit number xxxxxxxxx). His address and SSN are correct on his Form W-2. 

Marvin received the $400 advance child tax credit payment. He 

does not want to designate a third party. Marvin is a mechanic.

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

Endicott Motors

473 Endicott Lane

Your City, State, Zip Code

3495127

xxx-xx-xxxx

xxx-xx-xxxx

$24,952.00

$24,952.00

$24,952.00

$24,952.00

$600.00

Marvin Simmons

9701 Austin Rd

Your City, State, Zip Code

$875.00

$1,964.00

$1,547.00

$362.00
Comprehensive

Problems CW-13

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Complete this form Form 1040A, front

Proof as of

July 21, 2003

(subject to change)

Form Department of the Treasury—Internal Revenue Service

1040A 2003 U.S. Individual Income Tax Return

OMB No. 1545-0085

Your social security number

Your first name and initial Last name Label L

A

B

E

L

H

E

R

E

(See page 21.)

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the

IRS label. Home address (number and street). If you have a P.O. box, see page 22. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 22.

Filing

status

No. of boxes

checked on

6a and 6b

Yourself. If your parent (or someone else) can claim you as a

dependent on his or her tax return, do not check box 6a. Exemptions 6a

b Spouse No. of children

on 6c who: (4) if qualifying

child for child

tax credit (see

page 25)

(2) Dependent’s social

security number

c ● lived with

you

● did not live

with you due

to divorce or

separation

(see page 26)

If more than six

dependents,

see page 24.

Dependents

on 6c not

entered above

d

Add numbers

on lines Total number of exemptions claimed. above

7 Wages, salaries, tips, etc. Attach Form(s) W-2. 7

8a Taxable interest. Attach Schedule 1 if required. 8a

b Tax-exempt interest. Do not include on line 8a. 8b

Attach

Form(s) W-2

here. Also

attach

Form(s)

1099-R if tax

was withheld.

9a Ordinary dividends. Attach Schedule 1 if required. 9a

IRA

distributions.

11a Taxable amount

(see page 27).

11b

Enclose, but do

not attach, any

payment.

11a 11b

Taxable amount

(see page 28).

12a Pensions and 12b

annuities. 12a 12b

13 Unemployment compensation and Alaska Permanent Fund dividends. 13

14a Taxable amount

(see page 30).

Social security

benefits.

14b

14a 14b

15 Add lines 7 through 14b (far right column). This is your total income.  15

17 IRA deduction (see page 30). 17

Student loan interest deduction (see page 33).

Income

18

Add lines 16 through 19. These are your total adjustments. 20

Subtract line 20 from line 15. This is your adjusted gross income. 

18

21

Dependents:



Check only

one box.

If you did not

get a W-2, see

page 27.

Form 1040A (2003)

IRS Use Only—Do not write or staple in this space.

(3) Dependent’s

relationship to

(1) First name Last name you

20

21

Adjusted

gross 

income

Important! 

Cat. No. 11327A

Otherwise,

please print

or type.

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 57.

(99)

10a Capital gain distributions (see page 27). 10a

Presidential

Election Campaign

(See page 22.)  Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund?  No Yes

You Spouse

19 Tuition and fees deduction (see page 33). 19

1 Single

2 Married filing jointly (even if only one had income)

3

Qualifying widow(er) with dependent child (See page 24.) Married filing separately. Enter spouse’s SSN above and

full name here. 

Head of household (with qualifying person). (See page 23.)

If the qualifying person is a child but not your dependent,

enter this child’s name here. 

4

5

16 Educator expenses (see page 30). 16

b Qualified dividends (see page XX). 9b

b Post-May 5 capital gain distributions (see page 27). 10b
CW-14 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Complete this form Form 1040A, page 2

Proof as of

July 21, 2003

(subject to change)

Single or

Married filing

separately,

$4,750

30

22 Enter the amount from line 21 (adjusted gross income). 22

Total boxes

checked 

Check You were born before January 2, 1939, Blind

if:

23a

Spouse was born before January 2, 1939, Blind 23a

b

23b

If you are married filing separately and your spouse itemizes

deductions, see page 34 and check here 

Tax,

credits,

and

payments

24 24

25 Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-. 25

26 Multiply $3,050 by the total number of exemptions claimed on line 6d. 26

Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.

This is your taxable income. 

27

27

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration

of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.



Enter your standard deduction (see left margin).

Form 1040A (2003)

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b

c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



41 Earned income credit (EIC). 41

Page 2

Form 1040A (2003)

If you have

a qualifying

child, attach

Schedule

EIC.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

● People who

checked any

box on line

23a or 23b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

34 34

Printed on recycled paper

Child tax credit (see page 38).

Type:
Comprehensive

Problems CW-15

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Complete this form Schedule 2, page 1

Proof as of

July 21, 2003

(subject to change)

(99)

(d) Amount paid

(see instructions)

(c) Identifying

number (SSN or EIN)

(b) Address (number, street, apt. no., Part I city, state, and ZIP code)(a) Care provider’s

1 name

Persons or

organizations

who provided

the care

You must

complete this

part.

(If you need more space, use the bottom of page 2.)

2 Part II

Credit for child

and dependent

care expenses

Add the amounts in column (c) of line 2. Do not enter more than

$3,000 for one qualifying person or $6,000 for two or more persons.

If you completed Part III, enter the amount from line 26.

3

3

4 4

5

5

6 6

7

Enter your earned income.

8

8

If married filing jointly, enter your spouse’s earned income (if your

spouse was a student or was disabled, see the instructions); all

others, enter the amount from line 4.

9

9

Enter on line 8 the decimal amount shown below that applies to the

amount on line 7.

Decimal

amount is

If line 7 is:

But not

Over over

$0—15,000 .35 $29,000—31,000 .27

15,000—17,000 .34 31,000—33,000 .26

17,000—19,000 .33 33,000—35,000 .25

19,000—21,000 .32 35,000—37,000 .24

21,000—23,000 .31 37,000—39,000 .23

23,000—25,000 .30

 .

Multiply line 6 by the decimal amount on line 8. If you paid 2002

expenses in 2003, see the instructions.

For Paperwork Reduction Act Notice, see Form 1040A instructions. Schedule 2 (Form 1040A) 2003

Before you begin: You need to understand the following terms. See Definitions on page 1 of the separate instructions.

Cat. No. 10749I

Schedule 2 Department of the Treasury—Internal Revenue Service

Child and Dependent Care

Expenses for Form 1040A Filers (Form 1040A) 2003 OMB No. 1545-0085

Name(s) shown on Form 1040A Your social security number

Decimal

amount is

If line 7 is:

But not

Over over

Enter the amount from Form 1040A, line 22.

Enter the smallest of line 3, 4, or 5.

7

Did you receive

dependent care benefits? Yes

No Complete only Part II below.

Complete Part III on the back next.





Caution. If the care was provided in your home, you may owe employment taxes. If you do, you

must use Form 1040. See Schedule H and its instructions for details.

Information about your qualifying person(s). If you have more than two qualifying persons, see

the instructions.

(a) Qualifying person’s name (b) Qualifying person’s social

security number

(c) Qualified expenses

you incurred and paid

in 2003 for the person

listed in column (a) First Last

● Dependent Care Benefits ● Qualifying Person(s) ● Qualified Expenses ● Earned Income

10 Enter the amount from Form 1040A, line 28. 10

11

11

Credit for child and dependent care expenses. Enter the smaller

of line 9 or line 10 here and on Form 1040A, line 29.

25,000—27,000

27,000—29,000

.29

.28

39,000—41,000

41,000—43,000

43,000—No limit

.22

.21

.20
CW-16 Comprehensive

Problems

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 WAGE EARNER COMPREHENSIVE PROBLEMS

Draft as of

08/27/2003

Child Tax Credit Worksheet—Line 33

1040A

Yes. STOP

Keep for Your Records

● To be a qualifying child for the child tax credit, the child must be under age 17 at the end of 2003 and meet the other

requirements listed on page 38.

● Do not use this worksheet if you answered “ Yes” to question 1 or 2 on page 38. Instead, use Pub. 972.

1.

4.

5.

6.

7.

1

4

Number of qualifying children: $1,000.

Enter the result.



Enter the amount from Form 1040A, line 28.

Add the amounts from Form 1040A, lines 29

through 32.

Are the amounts on lines 4 and 5 the same?

You cannot take this credit because there is no tax

to reduce. However, you may be able to take the

additional child tax credit. See the below. TIP

No. Subtract line 5 from line 4.

Is the amount on line 3 more than the amount on line 6?

Yes. Enter the amount from line 6.

Also, you may be able to take the

additional child tax credit. See the

TIP below.

No. Enter the amount from line 3.

This is your child tax

credit.

Enter this amount on

Form 1040A, line 33.

You may be able to take the additional child tax credit

on Form 1040A, line 42, if you answered “Yes” on line 6

or line 7 above.

● First, complete your Form 1040A through line 41.

● Then, use Form 8812 to figure any additional child tax

credit.

5

6

 7



Before you begin: If you received (before offset) an advance payment of the child tax credit and you

filed a joint return for 2002, you and your spouse are each considered to have

received one-half of the payment.



If you received Notice 1319, have it available. The notice shows the amount of your advance payment (before offset). If

you do not have Notice 1319, you can check the amount of your advance payment (before offset) on the IRS website at

www.irs.gov. You will need to enter your SSN, your 2002 filing status, and the total number of exemptions you claimed

on line 6d of your 2002 Form 1040 or Form 1040A.

2. Enter the amount, if any, of your advance child tax 2

credit (before offset).

3. Is line 1 less than or equal to line 2?

Yes. STOP

You cannot take this credit. If line 2 is more than

line 1, you do not have to pay back the difference.

No. Subtract line 2 from line 1.

3

 Form 1040A Child Tax Credit Worksheet
Comprehensive

Problems CW-17

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Draft as of

08/27/2003

Line 41—

Step 2 Investment Income Earned Income Credit (EIC)

1. Add the amounts from Form 1040A:

What is the EIC? Line 8a

The EIC is a credit for certain people who work. The credit may Line 8b +

give you a refund even if you do not owe any tax. Line 9a +

Line 10a +

To Take the EIC: Investment Income =

• Follow the steps below.

• Complete the worksheet that applies to you or let the IRS 2. Is your investment income more than $2,600? figure the credit for you. Yes. No. STOP Continue

 • If you have a qualifying child, complete and attached

Schedule EIC. You cannot take the

credit.

If you take the EIC even though you are not eligible 3. Did a child live with you in 2003? and it is determined that your error is due to reckless Yes. Go to Step 3 on No. Go to Step 4 on or intentional disregard of the EIC rules, you will not CAUTION

!

page 40. page 40. be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC,

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties.

Step 1 All Filers

1. If, in 2003:

• 2 children lived with you, is the amount on Form 1040A,

line 22, less than $33,692 ($34,692 if married filing

jointly)?

• 1 child lived with you, is the amount on Form 1040A, line

22, less than $29,666 ($30,666 if married filing jointly)?

• No children live with you, is the amount on Form 1040A,

line 22, less than $11,230 ($12,230 if married filing

jointly)?

Yes. Continue No.



STOP

You cannot take the credit.

2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 42)?

Yes. Continue No.



STOP

You cannot take the credit.

Put “No” to the left of the

entry space for line 41.

3. Is you filing status married filing separately?

Yes. No. STOP Continue

You cannot take the 

credit.

4. Were you a nonresident alien for any part of 2003?

Yes. See Nonresident No. Go to Step 2.

aliens on page 42.

 Form 1040A EIC Worksheet, Page 1
CW-18 Comprehensive

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Draft as of

08/27/2003

3. Does the child meet the conditions to be a qualifying child

Step 3 Qualifying Child of any other person (other than your spouse if filing a joint

return) for 2003?

Yes. See Qualifying No. This child is your A qualifying child is a child who is your... Child of More Than qualifying child. The child

One Person on page must have a valid social

42. security number as defined

on page 42 unless the child Son, daughter, adopted child, stepchild, or a descendant was born and died in 2003. of any of them (for example, your grandchild) Skip Step 4; go to Step 5 or on page 41. Brother, sister, stepbrother, stepsister, or a descendant of

any of them (for example, your niece or nephew) whom

you cared for as you would your own child Step 4 Filers Without a Qualifying Child or

Foster child (any child placed with you by an authorized 1. Look at the qualifying child conditions in Step 3. Could

you, or your spouse if filing a joint return, be a qualifying placement agency whom you cared for as you would your child of another person in 2003? own child)

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

AND

for line 41.

was at the end of 2003...

Under age 19 2. Can you, or your spouse if filing a joint return, be claimed

as a dependent on someone else’s 2003 tax return?

or Yes. No. STOP Continue

Under age 24 and a student (see page 42) You cannot take the 

credit. or

Any age and permanently and totally disabled (see page 42) 3. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Continue No.



STOP

You cannot take the credit.

AND

who... 4. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Lived with you in the United States for more than half the military stationed outside the United States, see page 42 of 2003. If the child did not live with you for the before you answer. required time, see Exception to “Time Lived With You” Yes. Go to Step 5 on No. STOP Condition on page 41. page 41. You cannot take the credit.

Note. Put “No” to the left of the If the child was married, see page 42. entry space for line 41.

1. Look at the qualifying child conditions above. Could you, or

your spouse if filing a joint return, be a qualifying child of

another person in 2003?

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

for line 41.

2. Do you have at least one child who meets the above

conditions to be your qualifying child?

Yes. Go to question No. Skip question 3; go to

3. Step 4, question 2.

 Form 1040A EIC Worksheet, Page 2
Comprehensive

Problems CW-19

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Draft as of

08/27/2003

Definitions and Special Rules Step 5 Earned Income (listed in alphabetical order)

1. Figure earned income: Adopted Child. An adopted child is always treated as your own

child. An adopted child includes a child placed with you by an Form 1040, line 7 authorized placement agency for legal adoption even if the

Subtract, if included on line 7, any: adoption is not final. An authorized placement agency includes

any person or court authorized by state law to place children for • Taxable scholarship or fellowship legal adoption. grant not reported on a Form W-2.

• Amount paid to an inmate in a penal Credit Figured by the IRS. To have the IRS figure the credit for institution for work (put “PRI” and the you: amount subtracted to the left of the

1. Put “EIC”to the left of the entry space for line 41 of Form entry space for line 7 of Form 1040A. 1040A). 2. If you have a qualifying child, complete and attach • Amount received as a pension or – Schedule EIC. If your EIC for a year after 1996 was reduced or

annuity from a nonqualified deferred disallowed, see Form 8862, Who Must File, below.

compensation plan or a

nongovernmental section 457 plan

(put “DFC” and the amount subtracted Exception to “Time Lived With You” Condition. A child is

to the left of the entry space for line 7 } considered to have lived with you for all of 2003 if the child was

of Form 1040A). This amount may be born or died in 2003 and your home was this child’s home for

the entire time he or she was alive in 2003. Temporary absences, shown in box 11 of your Form W-2. such as for school, vacation, medical care, or detention in a If you received such an amount but juvenile facility, count as time lived at home. If your child is box 11 is blank, contact your presumed to have been kidnapped by someone who is not a employer for the amount received as a family member, see Pub. 596 to find out if that child is a pension or annuity. qualifying child for the EIC. To get Pub. 596, see page 7. If you

were in the military stationed outside the United States, see Earned Income = Members of the Military on page 42.

2. If you have:

• 2 or more qualifying children, is your earned income less Form 8862, Who Must File. You must file Form 8862 if your

than $33,692 ($34,692 if married filing jointly)? EIC for a year after 1996 was reduced or disallowed for any

reason other than a math or clerical error. But you do not have • 1 qualifying child, is your earned income less than to file Form 8862 if either of the following applies. $29,666 ($30,666 if married filing jointly)?

• No qualifying children, is your earned income less than • After your EIC was reduced or disallowed in an earlier year

$11,230 ($12,230 if married filing jointly)? (a) you filed Form 8862 (or other documents) and your EIC was

then allowed and (b) your EIC has not been reduced or Yes. Go to Step 6. No. STOP disallowed again for any reason other than a math or clerical

You cannot take the credit. error.

• You are taking the EIC without a qualifying child and the

only reason your EIC was reduced or disallowed in the earlier Step 6 How To Figure the Credit year was because it was determined that a child listed on

Schedule EIC was not your qualifying child.

1. Do you want the IRS to figure the credit for you?

Yes. See Credit No. Go to the worksheet Also, do not file Form 8862 or take the credit if it was

Figured by the IRS on page 43. determined that your error was due to reckless or intentional

below. disregard of the EIC rules or fraud.

 Form 1040A EIC Worksheet, Page 3
CW-20 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Draft as of

08/27/2003

Earned Income Credit (EIC) Worksheet—Line 41

1040A

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

1 Enter your earned income from Step 5 on

page 43.

Look up the amount on line 1 above in the EIC Table on pages 46–51

to find the credit. Be sure you use the correct column for your filing

status and the number of children you have. Enter the credit here.

Enter the amount from Form 1040A, line 22.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

If you have:

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on

pages 46–51 to find the credit. Be sure you use the correct

column for your filing status and the number of children

you have. Enter the credit here.

Enter this amount on

Form 1040A, line 41.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Put “No” to the left of the entry space for line 41.

● No qualifying children, is the amount on line 3 less than $6,250 ($7,250

if married filing jointly)?

● 1 or more qualifying children, is the amount on line 3 less than $13,750

($14,750 if married filing jointly)?

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

Reminder—

If you have a qualifying child, complete and attach

Schedule EIC.

If your EIC for a year after 1996 was reduced or disallowed, see

page 43 to find out if you must file Form 8862 to take the credit

for 2003.

  

EIC

1040A

 Form 1040A EIC Worksheet
Comprehensive

Problems CW-21

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074

SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a

 Schedule EIC
CW-22 Comprehensive

Problems

WAGE EARNER

 WAGE EARNER COMPREHENSIVE PROBLEMS

Proof as of

July 21, 2003

(subject to change)

Do you, or your spouse if a joint return, want $3 to go to this fund? 

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

Department of the Treasury—Internal Revenue Service

Form Income Tax Return for Single and 1040EZ Joint Filers With No Dependents 2003 OMB No. 1545-0675

Note. Checking “Yes” will not change your tax or reduce your refund.

Presidential

Election

Campaign

(page 14)

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.

Attach your Form(s) W-2.

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check

Yes or No.

Yes. No.

5

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.

This is your taxable income. 

6

6

Payments

and tax

Earned income credit (EIC).

7 7

Tax. Use the amount on line 6 above to find your tax in the tax table on pages

25–29 of the booklet. Then, enter the tax from the table on this line.

10

10

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24.

Income

Cat. No. 11329W



4 4

12

12

Add lines 7 and 8. These are your total payments. 

8 8

9 9

Federal income tax withheld from box 2 of your Form(s) W-2.

Unemployment compensation and Alaska Permanent Fund dividends

(see page 16).

3

3

Amount

you owe

b Routing number

Account number

c Type: Checking

Enter amount from

worksheet on back.

If single, enter $7,800.

If married filing jointly, enter $15,600.

See back for explanation.

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

(99)

Yes No Yes No

You Spouse

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Your first name and initial Last name Your social security number

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see page 14. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.

Important! 



Label

(See page 14.)

Use the IRS

label.

Otherwise,

please print

or type.



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 

✘

xxxxxxxx

0.00

94.00

94.00

0.00

94.00

John

878 Hudson Ave

Your City, State, Zip Code

Marshall xxx xx xxxx

✘

2,694.00

50.00

2,744.00

2,944.00

✘

x x xxxxx x x ✘

xxxxx

Comprehensive Problem 1 

Pxx-xx-xxxx

clerk
Comprehensive

Problems CW-23

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Comprehensive Problem 1 

Proof as of

July 21, 2003

(subject to change)

Form 1040EZ (2003)

● You (and your spouse if married filing jointly) were born after January 1, 1939, and were not

blind at the end of 2003.

Use ● Your filing status is single or married filing jointly.

this

form if

● Your taxable income (line 6) is less than $50,000.

● You do not claim any dependents.

● You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment

compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over

$1,500. But if you earned tips, including allocated tips, that are not included in box 5 and box 7

of your W-2, you may not be able to use Form 1040EZ (see page 15). If you are planning to use

Form 1040EZ for a child who received Alaska Permanent Fund dividends, see page 16.

If you are not sure about your filing status, see page 13. If you have questions about dependents, use

TeleTax topic 354 (see page 8). If you cannot use this form, use TeleTax topic 352 (see page 8).

Filling in

your

return

If you received a scholarship or fellowship grant or tax-exempt interest income, such as on

municipal bonds, see the booklet before filling in the form. Also, see the booklet if you received a

Form 1099-INT showing Federal income tax withheld or if Federal income tax was withheld from

your unemployment compensation or Alaska Permanent Fund dividends.

Remember, you must report all wages, salaries, and tips even if you do not get a Form W-2 from

your employer. You must also report all your taxable interest, including interest from banks, savings

and loans, credit unions, etc., even if you do not get a Form 1099-INT.

Use this worksheet to figure the amount to enter on line 5 if someone can claim you (or your

spouse if married filing jointly) as a dependent, even if that person chooses not to do so. To find

out if someone can claim you as a dependent, use TeleTax topic 354 (see page 8).

Worksheet

for

dependents

who

checked

“Yes” on

line 5

A .

A . Amount, if any, from line 1 on front

B . Minimum standard deduction B . 750.00

C. Enter the larger of line A or line B here C.

D.

D. Maximum standard deduction. If single, enter $4,750; if married

filing jointly, enter $9,500

E . Enter the smaller of line C or line D here. This is your standard

deduction E .

Mailing

return

Mail your return by April 15, 2004. Use the envelope that came with your booklet. If you do not

have that envelope or if you moved during the year, see the back cover for the address to use.

● You did not receive any advance earned income credit payments.

F. Exemption amount.

G . Add lines E and F. Enter the total here and on line 5 on the front

If you checked “No” on line 5 because no one can claim you (or your spouse if married filing

jointly) as a dependent, enter on line 5 the amount shown below that applies to you.

● Single, enter $7,800. This is the total of your standard deduction ($4,750) and your exemption

($3,050).

● Married filing jointly, enter $15,600. This is the total of your standard deduction ($9,500), your

exemption ($3,050), and your spouse’s exemption ($3,050).

F.

G .

● If single, enter -0-.

● If married filing jointly and—

—only one of you can be claimed as a dependent, enter $3,050.

For tips on how

to avoid common

mistakes, see

page 23.

Printed on recycled paper

—both you and your spouse can be claimed as dependents, enter -0-.

● You do not claim a deduction for educator expenses, the student loan interest deduction, or the

tuition and fees deduction.

+ 250.00 Enter total 

(keep a copy for

your records)

Form 1040EZ (2003)

Page 2

● You do not claim an education credit, the retirement savings contributions credit, or the health

insurance credit for eligible recipients.

2694

2944

2944

4750

2944

0

2944
CW-24 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Pxx-xx-xxxx

Proof as of

July 21, 2003

(subject to change)

Do you, or your spouse if a joint return, want $3 to go to this fund? 

Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ.

Department of the Treasury—Internal Revenue Service

Form Income Tax Return for Single and 1040EZ Joint Filers With No Dependents 2003 OMB No. 1545-0675

Note. Checking “Yes” will not change your tax or reduce your refund.

Presidential

Election

Campaign

(page 14)

Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W-2.

Attach your Form(s) W-2.

1

1

Attach

Form(s) W-2

here.

Enclose, but

do not attach,

any payment.

2 2

Add lines 1, 2, and 3. This is your adjusted gross income.

5 Can your parents (or someone else) claim you on their return? Note. You

must check

Yes or No.

Yes. No.

5

Subtract line 5 from line 4. If line 5 is larger than line 4, enter -0-.

This is your taxable income. 

6

6

Payments

and tax

Earned income credit (EIC).

7 7

Tax. Use the amount on line 6 above to find your tax in the tax table on pages

25–29 of the booklet. Then, enter the tax from the table on this line.

10

10

Refund

11a 11a

If line 10 is larger than line 9, subtract line 9 from line 10. This is

the amount you owe. For details on how to pay, see page 22. 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 24.

Income

Cat. No. 11329W



4 4

12

12

Add lines 7 and 8. These are your total payments. 

8 8

9 9

Federal income tax withheld from box 2 of your Form(s) W-2.

Unemployment compensation and Alaska Permanent Fund dividends

(see page 16).

3

3

Amount

you owe

b Routing number

Account number

c Type: Checking

Enter amount from

worksheet on back.

If single, enter $7,800.

If married filing jointly, enter $15,600.

See back for explanation.

Have it directly

deposited! See

page 21 and fill

in 11b, 11c,

and 11d.

 d



Form 1040EZ (2003)

(99)

Yes No Yes No

You Spouse

Savings

Under penalties of perjury, I declare that I have examined this return, and to the best of my knowledge and belief, it is true, correct, and

accurately lists all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based

on all information of which the preparer has any knowledge.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 13.

Daytime phone number

( )

Spouse’s occupation

( )

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 22)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

Your first name and initial Last name Your social security number

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see page 14. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 14.

Important! 



Label

(See page 14.)

Use the IRS

label.

Otherwise,

please print

or type.



If line 9 is larger than line 10, subtract line 10 from line 9. This is your refund. 

✘

xxxxxxxx

2,363.00

261.00

342.00

236.00

106.00

Melody

17 North 9th Avenue

Your City, State, Zip Code

York xxx xx xxxx

6,923.00

10,163.00

7,800.00

x x xxxxx x x

xxx

Comprehensive Problem 2 

3,240.00

81.00

✘

✘
Comprehensive

Problems CW-25

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Form 1040EZ—Line 8

Line 8 5. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Earned Income Credit (EIC) the military stationed outside the United States, see page 18

before you answer.

What Is the EIC? Yes. Continue No.



STOP

The EIC is a credit for certain people who work. The credit may You cannot take the credit. give you a refund even if you do not owe any tax. Enter “No” in the space to

If you have a qualifying child (see the next column the left of line 8.

on this page), you may be able to take the credit, but

you must use Schedule EIC and Form 1040A or 1040 6. Look at the qualifying child conditions below. Could you, or

TIP

to do so. For details, see Pub. 596. your spouse if filing a joint return, be a qualifying child of

another person in 2003? To Take the EIC:

• Follow the steps below. No. Go to Step 2



Yes. STOP

• Complete the worksheet on page 19 or let the IRS figure on page 18. You cannot take the the credit for you. credit. Enter “No” in

If you take the EIC even though you are not eligible the space to the left of and it is determined that your error is due to reckless line 8.

or intentional disregard of the EIC rules, you will not CAUTION

!

be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC, A qualifying child is a child who is your—

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties. Son, daughter, adopted child, stepchild, or a descendant of

any of them (for example, your grandchild)

Step 1 All Filers or

1. Is the amount on Form 1040EZ, line 4, less than $11,230 Brother, sister, stepbrother, stepsister, or a descendent of any ($12,230 if married filing jointly)? of them (for example, your niece or nephew) whom you Yes. Continue No.



STOP cared for as

You cannot take the credit. your own child

or 2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 18)? Foster child (any child placed with you by an authorized

placement agency whom you cared for as your own child) Yes. Continue No.



STOP

You cannot take the credit.

Enter “No” in the space to

AND

the left of line 8.

was at the end of 2003...

3. Can you, or your spouse if filing a joint return, be claimed Under age 19 as a dependent on someone else’s 2003 tax return? or Yes. No. STOP Continue

 under age 24 and a student You cannot take the

credit. or

any age and permanently and totally disabled 4. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Go to question No. STOP

AND

5. You cannot take the credit.

who...

Either lived with you in the United States for more than half

of 2003 or was born or died in 2003 and your home was the

child’s home for the entire time he or she was alive in 2003.

Note. Special rules apply if the child was married or also

meets the conditions to be a qualifying child of another

person (other than your spouse if filing a joint return). For

details, use TeleTax topic 601 (see page 8) or see Pub. 596.

x

x

x

x

x

x

 Form 1040EZ, Earned Income Credit Worksheet, line 8, page 1
CW-26 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

 Form 1040EZ, Earned Income Credit Worksheet, line 8, page 2

Draft as of

08/27/2003

Form 1040EZ—Line 8

Definitions and Special Rules Step 2 Earned Income (listed in alphabetical order)

1. Figure earned income: Credit Figured by the IRS To have the IRS figure the credit for

you:

Form 1040EZ, line 1 1. Enter “EIC” in the space to the left of line 8 on Form

1040EZ. Subtract, if included in line 1, any: 2. If your EIC for a year after 1996 was reduced or • Taxable scholarship or fellowship disallowed, see Form 8862, Who Must File, below.

grant not reported on a Form W-2

Form 8862, Who Must File. You must file Form 8862 if your • Amount paid to an inmate in a penal EIC for a year after 1996 was reduced or disallowed for any institution for work (enter “PRI” in reason other than a math or clerical error. But you do not have the space to the left of line 1 on to file Form 8862 if either of the following applies. Form 1040EZ) • After your EIC was reduced or disallowed in an earlier year • Amount received as a pension or – (a) you filed Form 8862 (or other documents) and your EIC was

annuity from a nonqualified deferred then allowed and (b) your EIC has not been reduced or

compensation plan or a disallowed again for any reason other than a math or clerical

error. nongoverntmental section 457 plan

(enter “DFC” and the amount • The only reason your EIC was reduced or disallowed in the

earlier year was because it was determined that a child listed on subtracted in the space to the left of Schedule EIC was not your qualifying child. line 1 on Form 1040EZ). This

amount may be shown in box 11 of} Also, do not file Form 8862 or take the credit if it was

determined that your error was due to reckless or intentional your Form W-2. If you received disregard of the EIC rules or fraud. such an amount but box 11 is blank,

contact your employer for the Members of the Military. If you were on extended active duty amount received as a pension or outside the United States, your home is considered to be in the annuity. United States during that duty period. Extended active duty is

military duty ordered for an indefinite period or for a period of

Earned Income = more than 90 days. Once you begin serving extended active

duty, you are considered to be on extended active duty even if

you serve fewer than 90 days.

2. Is your earned income less than $11,230 ($12,230 if married Social Security Number (SSN). For purposes of taking the EIC, filing jointly)? a valid SSN is a number issued by the Social Security

Yes. Go to Step 3. No. Administration unless “Not Valid for Employment” is printed on STOP

the social security card and the number was issued solely to You cannot take the credit. apply for or receive a Federally funded benefit.

To find out how to get an SSN, see page 14. If you will not

have an SSN by April 15, 2004, see What if You Cannot File on Step 3 How To Figure the Credit Time? on page 11.

1. Do you want the IRS to figure the credit for you? Welfare Benefits, Effect of Credit on. Any refund you receive as

Yes. See Credit No. Go to the worksheet a result of taking the EIC will not be used to determine if you

Figured by the IRS on on page 19. are eligible for the following programs or how much you can

this page. receive from them. But if the refund you receive because of the

EIC is not spent within a certain period of time, it may count as

an asset (or resource) and affect your eligibility.

• Temporary Assistance for Needy Families (TANF).

• Medicaid and supplemental security income (SSI).

• Food stamps and low-income housing.

6,923

0

6,923

x

x
Comprehensive

Problems CW-27

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Form 1040EZ—Line 8

Earned Income Credit (EIC) Worksheet—Line 8

1040EZ

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

Enter your earned income from Step 2 on page 18. 1

Look up the amount on line 1 above in the EIC Table on page 20 to

find the credit. Be sure you use the correct column for your filing

status. Enter the credit here.

Enter the amount from Form 1040EZ, line 4.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

Is the amount on line 3 less than $6,250 ($7,250 if married filing jointly)?

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on page 20

to find the credit. Be sure you use the correct column for

your filing status. Enter the credit here.

Enter this amount on

Form 1040EZ, line 8.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Enter “No” in the space to the left of line 8.

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

If your EIC for a year after 1996 was reduced or disallowed, see

page 18 to find out if you must file Form 8862 to take the credit

for 2003.



 Form 1040EZ, Earned Income Credit Worksheet, line 8, page 3

6,923

329

10,163

81

81

x

x
CW-28 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

6/30/2003

Form Department of the Treasury—Internal Revenue Service

1040A 2003 U.S. Individual Income Tax Return

OMB No. 1545-0085

Your social security number

Your first name and initial Last name Label L

A

B

E

L

H

E

R

E

(See page 21.)

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the

IRS label. Home address (number and street). If you have a P.O. box, see page 22. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 22.

Filing

status

No. of boxes

checked on

6a and 6b

Yourself. If your parent (or someone else) can claim you as a

dependent on his or her tax return, do not check box 6a. Exemptions 6a

b Spouse No. of children

on 6c who: (4) if qualifying

child for child

tax credit (see

page 25)

(2) Dependent’s social

security number

c ● lived with

you

● did not live

with you due

to divorce or

separation

(see page 26)

If more than six

dependents,

see page 24.

Dependents

on 6c not

entered above

d

Add numbers

on lines Total number of exemptions claimed. above

7 Wages, salaries, tips, etc. Attach Form(s) W-2. 7

8a Taxable interest. Attach Schedule 1 if required. 8a

b Tax-exempt interest. Do not include on line 8a. 8b

Attach

Form(s) W-2

here. Also

attach

Form(s)

1099-R if tax

was withheld.

9a Ordinary dividends. Attach Schedule 1 if required. 9a

IRA

distributions.

11a Taxable amount

(see page 27).

11b

Enclose, but do

not attach, any

payment.

11a 11b

Taxable amount

(see page 28).

12a Pensions and 12b

annuities. 12a 12b

13 Unemployment compensation and Alaska Permanent Fund dividends. 13

14a Taxable amount

(see page 30).

Social security

benefits.

14b

14a 14b

15 Add lines 7 through 14b (far right column). This is your total income.  15

17 IRA deduction (see page 30). 17

Student loan interest deduction (see page 33).

Income

18

Add lines 16 through 19. These are your total adjustments. 20

Subtract line 20 from line 15. This is your adjusted gross income. 

18

21

Dependents:



Check only

one box.

If you did not

get a W-2, see

page 27.

Form 1040A (2003)

IRS Use Only—Do not write or staple in this space.

(3) Dependent’s

relationship to

(1) First name Last name you

20

21

Adjusted

gross 

income

Important! 

Cat. No. 11327A

Otherwise,

please print

or type.

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 57.

(99)

10a Capital gain distributions (see page 27). 10a

Presidential

Election Campaign

(See page 22.)  Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund?  No Yes

You Spouse

19 Tuition and fees deduction (see page 33). 19

1 Single

2 Married filing jointly (even if only one had income)

3

Qualifying widow(er) with dependent child (See page 24.) Married filing separately. Enter spouse’s SSN above and

full name here. 

Head of household (with qualifying person). (See page 23.)

If the qualifying person is a child but not your dependent,

enter this child’s name here. 

4

5

16 Educator expenses (see page 30). 16

b Qualified dividends (see page XX). 9b

b Post-May 5 capital gain distributions (see page 27). 10b

Marvin Simmons

9701 Austin Rd

Your City, State, Zip Code

xxx xx xxxx

✘

✘

✘

1

1

Eric Simmons xxx xx xxxx Grandson ✔

2

24,952.00

24,952.00

0.00

24,952.00

Comprehensive Problem 3
Comprehensive

Problems CW-29

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

6/30/2003

Single or

Married filing

separately,

$4,750

30

22 Enter the amount from line 21 (adjusted gross income). 22

Total boxes

checked 

Check You were born before January 2, 1939, Blind

if:

23a

Spouse was born before January 2, 1939, Blind 23a

b

23b

If you are married filing separately and your spouse itemizes

deductions, see page 34 and check here 

Tax,

credits,

and

payments

24 24

25 Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-. 25

26 Multiply $3,050 by the total number of exemptions claimed on line 6d. 26

Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.

This is your taxable income. 

27

27

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.



Enter your standard deduction (see left margin).

Form 1040A (2003)

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b

c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



41 Earned income credit (EIC). 41

Page 2

Form 1040A (2003)

If you have

a qualifying

child, attach

Schedule

EIC.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

● People who

checked any

box on line

23a or 23b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

34 34

Child tax credit (see page 38).

Type:

/ /

/ /

/ /

24,952.00

7,000.00

17,952.00

6,100.00

11,852.00

1,281.00

293.00

600.00

893.00

600.00

600.00

1,964.00

750.00

2,714.00

2,114.00

x x x x x x x x x ✔

x x x x xxx x x x x x x x

✔

1,726.00

Pxx-xx-xxxx

Comprehensive Problem 3

388 00

988

1,726

mechanic
CW-30 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Proof as of

July 21, 2003

(subject to change)

(99)

(d) Amount paid

(see instructions)

(c) Identifying

number (SSN or EIN)

(b) Address (number, street, apt. no., Part I city, state, and ZIP code)(a) Care provider’s

1 name

Persons or

organizations

who provided

the care

You must

complete this

part.

(If you need more space, use the bottom of page 2.)

2 Part II

Credit for child

and dependent

care expenses

Add the amounts in column (c) of line 2. Do not enter more than

$3,000 for one qualifying person or $6,000 for two or more persons.

If you completed Part III, enter the amount from line 26.

3

3

4 4

5

5

6 6

7

Enter your earned income.

8

8

If married filing jointly, enter your spouse’s earned income (if your

spouse was a student or was disabled, see the instructions); all

others, enter the amount from line 4.

9

9

Enter on line 8 the decimal amount shown below that applies to the

amount on line 7.

Decimal

amount is

If line 7 is:

But not

Over over

$0—15,000 .35 $29,000—31,000 .27

15,000—17,000 .34 31,000—33,000 .26

17,000—19,000 .33 33,000—35,000 .25

19,000—21,000 .32 35,000—37,000 .24

21,000—23,000 .31 37,000—39,000 .23

23,000—25,000 .30

 .

Multiply line 6 by the decimal amount on line 8. If you paid 2002

expenses in 2003, see the instructions.

For Paperwork Reduction Act Notice, see Form 1040A instructions. Schedule 2 (Form 1040A) 2003

Before you begin: You need to understand the following terms. See Definitions on page 1 of the separate instructions.

Cat. No. 10749I

Schedule 2 Department of the Treasury—Internal Revenue Service

Child and Dependent Care

Expenses for Form 1040A Filers (Form 1040A) 2003 OMB No. 1545-0085

Name(s) shown on Form 1040A Your social security number

Decimal

amount is

If line 7 is:

But not

Over over

Enter the amount from Form 1040A, line 22.

Enter the smallest of line 3, 4, or 5.

7

Did you receive

dependent care benefits? Yes

No Complete only Part II below.

Complete Part III on the back next.





Caution. If the care was provided in your home, you may owe employment taxes. If you do, you

must use Form 1040. See Schedule H and its instructions for details.

Information about your qualifying person(s). If you have more than two qualifying persons, see

the instructions.

(a) Qualifying person’s name (b) Qualifying person’s social

security number

(c) Qualified expenses

you incurred and paid

in 2003 for the person

listed in column (a) First Last

● Dependent Care Benefits ● Qualifying Person(s) ● Qualified Expenses ● Earned Income

10 Enter the amount from Form 1040A, line 28. 10

11

11

Credit for child and dependent care expenses. Enter the smaller

of line 9 or line 10 here and on Form 1040A, line 29.

25,000—27,000

27,000—29,000

.29

.28

39,000—41,000

41,000—43,000

43,000—No limit

.22

.21

.20

Marvin Simmons

Joy Day Care

9192 East Huron

Your City, State, Zip Code xx-xxxxxxx 978

xxx xx xxxx

Eric Simmons xxx xx xxxx 978

978

24,952

24,952

978

30

293

1,281

293

Comprehensive Problems

24,952
Comprehensive

Problems CW-31

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Child Tax Credit Worksheet—Line 33

1040A

Yes. STOP

Keep for Your Records

● To be a qualifying child for the child tax credit, the child must be under age 17 at the end of 2003 and meet the other

requirements listed on page 38.

● Do not use this worksheet if you answered “ Yes” to question 1 or 2 on page 38. Instead, use Pub. 972.

1.

4.

5.

6.

7.

1

4

Number of qualifying children: $1,000.

Enter the result.



Enter the amount from Form 1040A, line 28.

Add the amounts from Form 1040A, lines 29

through 32.

Are the amounts on lines 4 and 5 the same?

You cannot take this credit because there is no tax

to reduce. However, you may be able to take the

additional child tax credit. See the below. TIP

No. Subtract line 5 from line 4.

Is the amount on line 3 more than the amount on line 6?

Yes. Enter the amount from line 6.

Also, you may be able to take the

additional child tax credit. See the

TIP below.

No. Enter the amount from line 3.

This is your child tax

credit.

Enter this amount on

Form 1040A, line 33.

You may be able to take the additional child tax credit

on Form 1040A, line 42, if you answered “Yes” on line 6

or line 7 above.

● First, complete your Form 1040A through line 41.

● Then, use Form 8812 to figure any additional child tax

credit.

5

6

 7



Before you begin: If you received (before offset) an advance payment of the child tax credit and you

filed a joint return for 2002, you and your spouse are each considered to have

received one-half of the payment.



If you received Notice 1319, have it available. The notice shows the amount of your advance payment (before offset). If

you do not have Notice 1319, you can check the amount of your advance payment (before offset) on the IRS website at

www.irs.gov. You will need to enter your SSN, your 2002 filing status, and the total number of exemptions you claimed

on line 6d of your 2002 Form 1040 or Form 1040A.

2. Enter the amount, if any, of your advance child tax 2

credit (before offset).

3. Is line 1 less than or equal to line 2?

Yes. STOP

You cannot take this credit. If line 2 is more than

line 1, you do not have to pay back the difference.

No. Subtract line 2 from line 1.

3

 Form 1040A, Child Tax Credit Worksheet, line 33

1 1000

400

600

1281

293

x

x 988

600

x
CW-32 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Line 41—

Step 2 Investment Income Earned Income Credit (EIC)

1. Add the amounts from Form 1040A:

What is the EIC? Line 8a

The EIC is a credit for certain people who work. The credit may Line 8b +

give you a refund even if you do not owe any tax. Line 9a +

Line 10a +

To Take the EIC: Investment Income =

• Follow the steps below.

• Complete the worksheet that applies to you or let the IRS 2. Is your investment income more than $2,600? figure the credit for you. Yes. No. STOP Continue

 • If you have a qualifying child, complete and attached

Schedule EIC. You cannot take the

credit.

If you take the EIC even though you are not eligible 3. Did a child live with you in 2003? and it is determined that your error is due to reckless Yes. Go to Step 3 on No. Go to Step 4 on or intentional disregard of the EIC rules, you will not CAUTION

!

page 40. page 40. be allowed to take the credit for 2 years even if you

are otherwise eligible to do so. If you fraudulently take the EIC,

you will not be allowed to take the credit for 10 years. You may

also have to pay penalties.

Step 1 All Filers

1. If, in 2003:

• 2 children lived with you, is the amount on Form 1040A,

line 22, less than $33,692 ($34,692 if married filing

jointly)?

• 1 child lived with you, is the amount on Form 1040A, line

22, less than $29,666 ($30,666 if married filing jointly)?

• No children live with you, is the amount on Form 1040A,

line 22, less than $11,230 ($12,230 if married filing

jointly)?

Yes. Continue No.



STOP

You cannot take the credit.

2. Do you, and your spouse if filing a joint return, have a

social security number that allows you to work or is valid

for EIC purposes (see page 42)?

Yes. Continue No.



STOP

You cannot take the credit.

Put “No” to the left of the

entry space for line 41.

3. Is you filing status married filing separately?

Yes. No. STOP Continue

You cannot take the 

credit.

4. Were you a nonresident alien for any part of 2003?

Yes. See Nonresident No. Go to Step 2.

aliens on page 42.

 Form 1040A, Earned Income Credit Worksheet, line 41, page 1

x

x

x

x

x

x

0
Comprehensive

Problems CW-33

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Form 1040A—Line 41

3. Does the child meet the conditions to be a qualifying child

Step 3 Qualifying Child of any other person (other than your spouse if filing a joint

return) for 2003?

Yes. See Qualifying No. This child is your A qualifying child is a child who is your... Child of More Than qualifying child. The child

One Person on page must have a valid social

42. security number as defined

on page 42 unless the child Son, daughter, adopted child, stepchild, or a descendant was born and died in 2003. of any of them (for example, your grandchild) Skip Step 4; go to Step 5 or on page 41. Brother, sister, stepbrother, stepsister, or a descendant of

any of them (for example, your niece or nephew) whom

you cared for as you would your own child Step 4 Filers Without a Qualifying Child or

Foster child (any child placed with you by an authorized 1. Look at the qualifying child conditions in Step 3. Could

you, or your spouse if filing a joint return, be a qualifying placement agency whom you cared for as you would your child of another person in 2003? own child)

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

AND

for line 41.

was at the end of 2003...

Under age 19 2. Can you, or your spouse if filing a joint return, be claimed

as a dependent on someone else’s 2003 tax return?

or Yes. No. STOP Continue

Under age 24 and a student (see page 42) You cannot take the 

credit. or

Any age and permanently and totally disabled (see page 42) 3. Were you, or your spouse if filing a joint return, at least age

25 but under age 65 at the end of 2003?

Yes. Continue No.



STOP

You cannot take the credit.

AND

who... 4. Was your home, and your spouse’s if filing a joint return, in

the United States for more than half of 2003? Members of Lived with you in the United States for more than half the military stationed outside the United States, see page 42 of 2003. If the child did not live with you for the before you answer. required time, see Exception to “Time Lived With You” Yes. Go to Step 5 on No. STOP Condition on page 41. page 41. You cannot take the credit.

Note. Put “No” to the left of the If the child was married, see page 42. entry space for line 41.

1. Look at the qualifying child conditions above. Could you, or

your spouse if filing a joint return, be a qualifying child of

another person in 2003?

Yes. No. STOP Continue

You cannot take the 

credit. Put “No” to the

left of the entry space

for line 41.

2. Do you have at least one child who meets the above

conditions to be your qualifying child?

Yes. Go to question No. Skip question 3; go to

3. Step 4, question 2.

 Form 1040A, Earned Income Credit Worksheet, line 41, page 2

x

x

x
CW-34 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Definitions and Special Rules Step 5 Earned Income (listed in alphabetical order)

1. Figure earned income: Adopted Child. An adopted child is always treated as your own

child. An adopted child includes a child placed with you by an Form 1040, line 7 authorized placement agency for legal adoption even if the

Subtract, if included on line 7, any: adoption is not final. An authorized placement agency includes

any person or court authorized by state law to place children for • Taxable scholarship or fellowship legal adoption. grant not reported on a Form W-2.

• Amount paid to an inmate in a penal Credit Figured by the IRS. To have the IRS figure the credit for institution for work (put “PRI” and the you: amount subtracted to the left of the

1. Put “EIC”to the left of the entry space for line 41 of Form entry space for line 7 of Form 1040A. 1040A). 2. If you have a qualifying child, complete and attach • Amount received as a pension or – Schedule EIC. If your EIC for a year after 1996 was reduced or

annuity from a nonqualified deferred disallowed, see Form 8862, Who Must File, below.

compensation plan or a

nongovernmental section 457 plan

(put “DFC” and the amount subtracted Exception to “Time Lived With You” Condition. A child is

to the left of the entry space for line 7 } considered to have lived with you for all of 2003 if the child was

of Form 1040A). This amount may be born or died in 2003 and your home was this child’s home for

the entire time he or she was alive in 2003. Temporary absences, shown in box 11 of your Form W-2. such as for school, vacation, medical care, or detention in a If you received such an amount but juvenile facility, count as time lived at home. If your child is box 11 is blank, contact your presumed to have been kidnapped by someone who is not a employer for the amount received as a family member, see Pub. 596 to find out if that child is a pension or annuity. qualifying child for the EIC. To get Pub. 596, see page 7. If you

were in the military stationed outside the United States, see Earned Income = Members of the Military on page 42.

2. If you have:

• 2 or more qualifying children, is your earned income less Form 8862, Who Must File. You must file Form 8862 if your

than $33,692 ($34,692 if married filing jointly)? EIC for a year after 1996 was reduced or disallowed for any

reason other than a math or clerical error. But you do not have • 1 qualifying child, is your earned income less than to file Form 8862 if either of the following applies. $29,666 ($30,666 if married filing jointly)?

• No qualifying children, is your earned income less than • After your EIC was reduced or disallowed in an earlier year

$11,230 ($12,230 if married filing jointly)? (a) you filed Form 8862 (or other documents) and your EIC was

then allowed and (b) your EIC has not been reduced or Yes. Go to Step 6. No. STOP disallowed again for any reason other than a math or clerical

You cannot take the credit. error.

• You are taking the EIC without a qualifying child and the

only reason your EIC was reduced or disallowed in the earlier Step 6 How To Figure the Credit year was because it was determined that a child listed on

Schedule EIC was not your qualifying child.

1. Do you want the IRS to figure the credit for you?

Yes. See Credit No. Go to the worksheet Also, do not file Form 8862 or take the credit if it was

Figured by the IRS on page 43. determined that your error was due to reckless or intentional

below. disregard of the EIC rules or fraud.

 Form 1040A, Earned Income Credit Worksheet, line 41, page 3

x

x

24,952

24,952
Comprehensive

Problems CW-35

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Earned Income Credit (EIC) Worksheet—Line 41

1040A

Yes. Skip line 5; enter the amount from line 2 on line 6.

STOP

Keep for Your Records

1.

2.

3.

4.

5.

1 Enter your earned income from Step 5 on

page 43.

Look up the amount on line 1 above in the EIC Table on pages 46–51

to find the credit. Be sure you use the correct column for your filing

status and the number of children you have. Enter the credit here.

Enter the amount from Form 1040A, line 22.

Are the amounts on lines 3 and 1 the same?

No. Go to line 5.

If you have:

Yes. Leave line 5 blank; enter the amount from line 2 on line 6.

No. Look up the amount on line 3 in the EIC Table on

pages 46–51 to find the credit. Be sure you use the correct

column for your filing status and the number of children

you have. Enter the credit here.

Enter this amount on

Form 1040A, line 41.

3

Part 3 6

Part 1

Part 2

All Filers

Filers Who

Answered

“No” on

Line 4

Your Earned

Income Credit

2

If line 2 is zero, You cannot take the credit.

Put “No” to the left of the entry space for line 41.

● No qualifying children, is the amount on line 3 less than $6,250 ($7,250

if married filing jointly)?

● 1 or more qualifying children, is the amount on line 3 less than $13,750

($14,750 if married filing jointly)?

Look at the amounts on lines 5 and 2.

Then, enter the smaller amount on line 6.

5

6. This is your earned income credit.

Reminder—

If you have a qualifying child, complete and attach

Schedule EIC.

If your EIC for a year after 1996 was reduced or disallowed, see

page 43 to find out if you must file Form 8862 to take the credit

for 2003.

  

EIC

1040A

 Form 1040A EIC Worksheet

x

24,952

750

24,952

750
CW-36 Comprehensive

Problems

WAGE EARNER

WAGE EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Proof as of

July 21, 2003

(subject to change)

 OMB No. 1545-0074 SCHEDULE EIC Earned Income Credit (Form 1040A or 1040)

Department of the Treasury

Internal Revenue Service

Attachment

Sequence No. 43

Qualifying Child Information

For Paperwork Reduction Act Notice, see Form 1040A

or 1040 instructions.

Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2003

Before you begin: See the instructions for Form 1040A, line 41, or Form 1040, line 63, to make sure that

(a) you can take the EIC and (b) you have a qualifying child.

Qualifying Child Information

● It will take us longer to process your return and issue your refund if you do not fill in all lines that apply

for each qualifying child.

3

2

4

5

1 Child’s name

Next, if the child was born after 1984, go to line 4. Otherwise, continue.

Child’s SSN

Child’s relationship to you

Number of months child lived with

you in the United States during 2003

months

Yes.

months

If the child was born before 1985—

Was the child permanently and totally

disabled during any part of 2003?

b

Yes.

First name Last name First name Last name

Name(s) shown on return Your social security number

(99)

EIC

1040A

1040

Complete and attach to Form 1040A or 1040

only if you have a qualifying child.

● Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s

social security card. Otherwise, at the time we process your return, we may reduce or disallow your

EIC. If the name or SSN on the child’s social security card is not correct, call the Social Security

Administration at 1-800-772-1213.

Child 1 Child 2

If you have more than two qualifying children, you

only have to list two to get the maximum credit.

The child must have an SSN as defined on page 44

of the Form 1040A instructions or page 46 of the

Form 1040 instructions unless the child was born and

died in 2003. If your child was born and died in 2003

and did not have an SSN, enter “Died” on this line

and attach a copy of the child’s birth certificate.

No. No.

Go to line 4. Go to line 4. Continue Continue

Yes. Yes. No. No.

Continue Continue The child is not a

qualifying child.

The child is not a

qualifying child.

● If the child lived with you for more than half of

2003 but less than 7 months, enter “7”.

● If the child was born or died in 2003 and your

home was the child’s home for the entire time he

or she was alive during 2003, enter “12”.

Do not enter more than 12 months. Do not enter more than 12 months.

You may also be able to take the additional child tax credit if your child (a) was under age 17 at the end of 2003, (b) is

claimed as your dependent on line 6c of Form 1040A or Form 1040, and (c) is a U.S. citizen or resident alien. For more

details, see the instructions for line 42 of Form 1040A or line 65 of Form 1040.

. . . . . . . . . .

● If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up

to 10 years. See back of schedule for details.

(for example, son, daughter, grandchild,

niece, nephew, foster child, etc.)

2003

Was the child under age 24 at the end

of 2003 and a student?

a

Marvin Simmons xxx xx xxxx

Eric Simmons

xxx xx xxxx

Grandchild

12

 Schedule EIC
Lesson 11 11-1

PENSION EARNER

 SALE OF STOCK Lesson 11

OBJECTIVES

After completing this lesson you should be able to:

■ Identify the items that affect the basis of a stock.

■ Determine if a stock’s holding period is long term 

or short term.

■ Determine when and how to report commissions 

from sale of stock on Schedule D.

■ Calculate the amount of the qualified 5-year gain 

(On transactions concluded before May 6, 2003.).

■ Calculate the taxable gain or deductible loss using 

Schedule D.

■ Calculate the tax liability using Part IV of 

Schedule D.

■ Calculate the amount of capital loss carryover 

using the capital loss carryover worksheet.

What You Will Need

In order for you to complete Schedule D, the taxpayer 

will need to show you his or her records, including 

information returns he or she receives that are also 

forwarded to IRS.

■ Form 1099-B, Proceeds From Broker and Barter 

Exchange Transactions, which the broker gives the 

taxpayer to report the sale price of stock.

■ The taxpayer’s records of his or her basis in the 

stock sold. Basis is explained in this lesson.

■ The taxpayer’s records of the date he or she 

originally acquired the stock.

■ Form 1099-DIV, Dividends and Distributions, if 

the taxpayer received capital gain distributions 

(for example, from a mutual fund).

■ The taxpayer’s Capital Loss Carryover Worksheet

from last year’s Schedule D instructions if the 

taxpayer is carrying over a loss to 2003.

The Internal Revenue Service (IRS) receives copies of 

Form 1099-B from the broker and copies of Form 1099-

DIV from the payer. The taxpayer should not file these 

items with the return, but keep them with his or her 

records.
11-2 Lesson 11

PENSION EARNER

The Jobs and Growth Tax Relief Reconcilliation Act of 2003 

reduced the 10% and 20% captial gains rates to 5% and 15% for 

capital gains realized on or after May 6, 2003. For tax year 2003 

only the Schedule D will have a column (G) which requires an entry 

for capital gains transactions after May 5, 2003. The net effect of 

this law is that taxpayers may have two different tax rates for capital gains transactions in 2003. The key to successful completion of 

the form and calculation of the correct tax is to follow the Schedule 

D line requests for information very carefully. 

Capital Asset

A capital asset is any asset held either for personal use or for 

investment. Thus, all your items of personal property, such as your 

home and car, are capital assets. Property held for investment 

includes stocks and bonds. Property used in a trade or business, 

such as inventory or machinery, is not a capital asset.

In this lesson, corporate stock is the only capital asset discussed. 

Capital gain distributions are also discussed. They are recognized when the entity (such as a mutual fund) that owned a capital

asset disposes of it and passes gain through to its shareholders. 

The discussion of capital gain distributions in this lesson supplements what you previously learned in Lesson 2.

 Capital Gains Distribution (Only)

The Schedule D generally is not needed for taxpayers who received 

capital gain distributions from mutual funds but did not sell any 

shares of stock and do not have any Forms 1099-B as explained in 

Lesson 2, Income. Instead, report the total capital gain distribution 

on Form 1040, line 13a, or on Form 1040A, line 10a. If the taxpayer 

must file Form 1040, remember to check the box next to line 13 of 

Form 1040 to indicate that Schedule D is not required. If the taxpayer sold stocks, he or she must file Form 1040 and cannot report 

capital gain distributions on Form 1040A.

Basis

The basis of property is usually its cost. Certain additional costs 

relating to its purchase are included in the basis of a capital asset. 

An example of an expense to include in the basis of stock is the 

commission or fee paid to a broker when stock is purchased.

If the taxpayer is not able to provide his or her basis in the property, the IRS will deem it to be zero. The taxpayer should make 

every effort to determine the basis. Refer taxpayers to their stockbroker or financial planner for assistance in determining basis. 

Once the taxpayer has the basis, volunteers may assist in preparing the tax return.
Lesson 11 11-3

PENSION EARNER

Adjusted Basis

Events after purchase can require adjustments to the basis of 

stock. The term adjusted basis refers to the basis after changes 

are made. For example, when a stock dividend or stock split is 

declared, the stockholder receives additional shares of stock. 

Some of the basis from the original stock is then allocated to the 

new stock. This change reduces the basis per share of the original 

shares.

Example 1

Fran paid $1,100 for 100 shares of ABC, Inc. stock (including the 

broker’s commission of $25). Fran received 10 additional shares of 

ABC stock as a tax-free stock dividend. Her $1,100 basis must be 

spread over 110 shares (100 original shares plus the 10-share stock 

dividend). Her basis per share decreases from $11 to $10 per share.

Holding Period

Long-term or short-term. Capital gains and losses are classified 

as either “long-term” or “short-term,” depending on how long the 

taxpayer owned the stock. Stock held for more than one year (12 

months) has a long-term holding period. Stock held for one year or 

less has a short-term holding period.

Example 2

Loretta bought stock on January 11, 2002 (trade date). Her holding period began the next day, January 12. If she sells that stock 

on January 11, 2003, she will not have owned them for more than 

a year. The holding period will be short-term. However, if she sells 

the stock on January 12, 2003, or later, the holding period will be 

long-term.

Blocks. Frequently, a taxpayer owns shares of stock that were 

bought on different dates or for different prices. That is, the individual owns more than one block of stock. Each block may differ 

from the others in its holding period (long-term or short-term), its 

basis (amount paid for the stock), or both.

In directing a broker to sell stock, the taxpayer may specify which 

block, or part of a block, to sell. Specification can make a difference 

in determining the holding period or basis of the stock sold, giving 

the taxpayer an element of control and versatility in handling an 

investment. To be valid, any such specification must be made before 

or at the time of sale. It cannot be made after the sale. If the taxpayer does not identify the specific block at the time of sale, shares 

sold are treated as coming from the earliest block purchased.

TAX TIPS

★★★★★★★★

To fi nd out how long the 

taxpayer has held the 

stocks, begin counting 

on the day after the 

day he or she bought 

the shares of stock 

and include the day the 

shares were sold. This 

sale trade date is part of 

the holding period.

POTENTIAL

PITFALLS

Stock splits and stock 

dividends do not occur 

often. However, do not 

assume that they never 

happen. Ask taxpayers 

if they received any 

additional shares from 

a stock split or stock 

dividend.
11-4 Lesson 11

PENSION EARNER

Example 3

In 1996, Tina bought 100 shares of Acme Corporation stock for 

$2,000. In 1997 she bought another 100 shares of Acme for $2,300. 

In 2003, Tina sold 100 shares of Acme for $3,000.

The adjusted basis of the shares sold is $2,000. However, if Tina 

had told her broker to sell the 100 shares bought in 1997, the 

adjusted basis of the shares sold would have been $2,300, reducing 

her profit (and any taxable amount) on the sale.

Tax-free stock dividends and stock splits. Stock acquired in a 

tax-free stock dividend or stock split has the same holding period 

as the original stock owned. Thus, if the original stock has a longterm holding period, stock received in a tax-free stock dividend also 

has a long-term holding period. Similarly, if the original stock has 

a holding period of three months, the new stock immediately has a 

three-month holding period.

Example 4

On February 18, 1999, Wallace bought 500 shares of XYZ 

Corporation stock for $1,500, including his broker’s commission. 

XYZ distributed a two-percent stock dividend on April 6, 2003. On 

April 9, 2003, Wallace sold all his XYZ stock for $2,030. He has a 

long-term capital gain of $530 on the sale of his stock. Although he 

owned the 10 shares he received as a tax-free stock dividend for 

only three days, all the stock has a long-term holding period.

Taxable dividends. There are several types of taxable dividends, 

as discussed in Lesson 2. A taxpayer who participates in a dividend 

reinvestment plan (one type of taxable dividend) will use the dividends to purchase more shares of the stock. The stocks acquired 

(including fractional shares) through the dividend reinvestment 

plan are added to the taxpayer’s basis at fair market value on the 

date of distribution. Thus, the new shares of stock do not always 

have the same holding period as the original stock. If the taxpayer 

does not know their basis refer them to their stockbroker or financial planner.

Demutualization

Some taxpayers have been informed by their insurance company 

that the company has been demutualized. When this happens the 

policy holder receives either a block of stock or the cash equivalent 

of company stock. The holding period for such stock is the length of 

time the policy has been in effect, usually many years. The basis for 

this stock is zero. The taxpayer must report all of the proceeds as a 

capital gain, usually long term. 

POTENTIAL

PITFALLS

Shares from a stock 

dividend may or may not 

have the same holding 

period as the original 

shares.
Lesson 11 11-5

PENSION EARNER

Wash Sales

Generally, a wash sale occurs when stock is sold and, within 30 

days before or after the sale, substantially identical stock is bought. 

A loss on a wash sale is not deductible, and special rules relate 

to the basis of the replacement stock. However, a gain on a wash 

sale must be reported. Any taxpayer with a wash sale should be 

referred to a paid professional tax preparer.

Sales Price, Form 1099-B, and Adjusted Basis

The stockbroker reports sales price to the Internal Revenue 

Service in box 2 of Form 1099-B, Proceeds From Broker and Barter 

Exchange Transactions (see Exhibit 1). Some brokers do not subtract commissions and fees; they report the gross proceeds as 

the sales price. Other brokers do subtract commissions and fees, 

reporting the gross proceeds less commissions (referred to as 

net proceeds in this lesson) as the sales price. The broker checks 

the appropriate square at the right of box 2 to indicate whether the 

gross or net proceeds were reported to IRS.

If Form 1099-B reports gross proceeds, add the sales broker’s commissions and fees to the basis. If Form 1099-B reports net proceeds, 

the broker already subtracted the commissions and fees the seller 

paid. Do not adjust the basis further.

Exhibit 1 Form 1099-B

Draft as of

6/19/2003

PAYER’S name, street address, city, state, ZIP code, and telephone no. 1a Date of sale OMB No. 1545-0715 Proceeds From

Broker and

Barter Exchange

1b CUSIP no. Transactions

2 Stocks, bonds, etc. Reported

to IRS

Gross proceeds

$ Gross proceeds less commissions and option premiums

PAYER’S Federal identification number RECIPIENT’S identification number 3 Bartering 4 Federal income tax withheld

$ $

RECIPIENT’S name 5 Description

Regulated Futures Contracts

Street address (including apt. no.) Post–5/5/2003 profit or

(loss) realized

Profit or (loss) realized 6b

in 2003

6a

City, state, and ZIP code

$ $

Account number (optional) 2nd TIN not.

Form 1099-B Department of the Treasury - Internal Revenue Service



Cat. No. 14411V

7979 VOID CORRECTED

Form 1099-B

Do Not Cut or Separate Forms on This Page — Do Not Cut or Separate Forms on This Page

Copy A

For

Internal Revenue

Service Center

File with Form 1096.

For Privacy Act

and Paperwork

Reduction Act

Notice, see the

2003 General

Instructions for

Forms 1099, 1098,

5498, and W-2G.

2003

7

$

Unrealized profit or (loss) on

open contracts—12/31/2002

8 Unrealized profit or (loss) on

open contracts—12/31/2003

9a Aggregate profit or (loss) 9b Post–5/5/2003 aggregate

profit or (loss)

$

$ $
11-6 Lesson 11

PENSION EARNER

Example 5

George sold stock for $2,300. He paid his broker a commission of 

$35 on the sale and received net proceeds of $2,265. If his broker 

reported the gross proceeds, box 2 of Form 1099-B would show 

$2,300, and the box next to gross proceeds would be checked. If his 

broker reported the net proceeds, box 2 of Form 1099-B would show 

$2,265, and the box next to gross proceeds less commissions would 

be checked.

As a general rule, you will need the following information from 

Form 1099-B:

Information You Will Need From Form 1099-B

IF Form 1099-B shows 

information in:

THEN report it on: 

Box 1a, Date of sale Schedule D, column (c), of 

either Part I, line 1, or Part II, 

line 8

Box 2, Sales price reported 

to Internal Revenue Service 

whether gross or net proceeds 

were reported

Schedule D, column (d), of 

either Part I, line 1, or Part II, 

(line 8 

Box 4, Federal income tax 

withheld

Form 1040, line 61

Box 5, Description of the

property sold

Schedule D, column (a) in 

either Part I, line 1, or Part II, 

line 8

If there are entries in box 3 or in boxes 6 through 9 of Form 1099-B, 

refer the taxpayer to a paid professional tax preparer.

Form 1099-B does not include the date the taxpayer bought the 

stock or what he or she paid for it. The taxpayer will need to provide you with this information.
Lesson 11 11-7

PENSION EARNER

Some brokers do not issue standard Forms 1099-B. Instead 

they issue a statement, sometimes titled “A 1099 Consolidated 

Statement,” which shows stock sales and other types of distributions such as dividends and interest. Exhibit 2 is an example of 

such a statement.

Exhibit 2 A 1099 Consolidated Statement NEW YORK, NY 10022 123 Green Street 555 CENTER STREET Susan L. Birch KING INVESTMENTS Paul J. Birch Payer Account Number 7764366 SS# 000-00-7026 Claremont, VA 91711 1099-INT Interest Income 2003 Interest income not Early withdrawal US Savings Bonds Federal Foreign tax paid Foreign country or included in box 3 penalty and other US income tax withheld US possession Treasury interest Box 1 $378.00 Box 2 Box 3 $100.00 Box 4 Box 5 Box 6 1099-DIV Dividends & Distributions 2003 Ordinary Capital gain 28% rate gain Unrecaptured Section Nontaxable Federal income dividends distributions sec. 1250 gain 1202 gain distributions tax withheld Box 1 $559.00 Box 2a $179.00 Box 2b Box 2c Box 2d Box 3 Box 4 Box 35 Box 6 expenses US possession distributions—cash distributions—non-cash Investment Foreign tax paid Foreign country or Liquidation Liquidation $25.00 Box 7 Box 8 Box 9 1099-B Proceeds from Broker and Barter Exchange Transactions 2003 Trade Gross proceeds Federal income Reference date CUSIP number less commissions tax withheld number (Box 1a) (Box 1b) Quantity Description (Box 5) Price (Box 2) (Box 4) Totals 239863 927651 300 shrs XYZ Markets, Inc. $83.65 $25,000.20 145367 765298 200 shrs ABC Corp. $16.75 $3,299.90 $28,300.10 1099-R Distributions from IRAs 2003 (Box 1) distribution amount amount not Total tax withheld Code Gross Taxable Taxable (Box 2b) Federal Income Distribution IRA/SEP/SIMPLE (Box 2a) determined Distribution (Box 4) (Box 7) $2,000 $2,000 $0.00 7-Normal Distribution Yes 7/17/03 10/23/03
11-8 Lesson 11

PENSION EARNER

Qualified 5-Year Gain Applies to transactions prior to May 6, 2003

In 2001, the capital gains rate on qualifi ed property held for more 

than fi ve years was lowered to 18% (8% for lower income taxpayers). These reduced rates continue to apply to sales of qualifi ed 

property before May 6, 2003. Sales after May 5, 2003, will be taxed 

using the reduced tax rates introduced earlier in this lesson. The 

schedule D has been redesigned to accommodate the multiple tax 

rates that could apply for 2003. You should exercise caution when 

completing the Schedule D.

Exhibit 3 2003 Qualified 5-year Worksheet

Qualified 5–Year Gain Worksheet—Line 35 Keep for Your Records

1. Enter the total of all gains that you reported on line 8, column (f), of Schedules D and D-1 from property held

more than 5 years and disposed of before May 6, 2003. Do not reduce these gains by any losses .......... 1.

2. Enter the total of all gains from property held more than 5 years and disposed of before May 6, 2003, from

Form 4797, Part I, but only if Form 4797, line 7, column (g), is more than zero. Do not reduce these gains by

any losses ........................................................................ 2.

3. Enter the total of all capital gains from property held more than 5 years and disposed of before May 6, 2003,

from Form 4684, line 4, but only if Form 4684, line 15, is more than zero. Do not reduce these gains by any

losses ........................................................................... 3.

4. Enter the total of all capital gains from property held more than 5 years and disposed of before May 6, 2003,

from Form 6252; Form 6781, Part II; and Form 8824. Do not reduce these gains by any losses ........... 4.

5. Enter the total of any qualified 5-year gain reported to you on:

• Form 1099-DIV, box 2c;

• Form 2439, box 1c; and } ................ 5. • Schedule K-1 from a partnership, S corporation, estate, or trust (do not

include gains from section 1231 property; take them into account on line 2 

above, but only if Form 4797, line 7, column (g), is more than zero).

6. Add lines 1 through 5 ................................................................ 6.

7. Enter the part, if any, of the gain on line 6 that is:

• Attributable to 28% rate gain or } ........................ 7. • Included on line 6, 10, 11, or 12 of the Unrecaptured Section 

1250 Gain Worksheet on page D-7.

8. Qualified 5-year gain. Subtract line 7 from line 6. Enter the result here and on Schedule D, line 35 ........ 8.
Lesson 11 11-9

PENSION EARNER

Exercise 1

For the following situations, determine the adjusted basis of the 

stock sold, whether the holding period is long-term or short-term, 

and how the sales price is reported.

A. On May 11, 2000, Morris bought 1,000 shares of ZZZ 

Corporation stock for $5,000, plus a $100 commission. On 

February 14, 2003, he sold 500 shares for $3,300 and paid a 

$45 commission. The broker reported net proceeds on the sale.

1. What is the adjusted basis of the stock sold? 

 

2. Is the holding period long term or short term?

 

3. What amount is reported to the Internal Revenue Service in 

box 2 of Form 1099-B? 

B. In the case of Morris, above, assume that he bought 500 more 

shares of ZZZ stock on October 6, 2002, for $3,500, plus a $50 

commission. At the time of the sale, he told the broker to sell 

the stock he had bought in 2002. 

1. What is the adjusted basis of the stock sold? 

2. Is the holding period long term or short term?

C. On November 30, 2000, Janice bought 100 shares of ABC 

Corporation stock for $9,965, plus a $35 commission. On 

January 5, 2003, the stock split two-for-one, and she then held 

a total of 200 shares. On March 6, 2003, she sold 100 shares 

for $6,470 and paid a $30 commission. Her broker reported net 

proceeds.

1. What is the adjusted basis of the stock sold? 

2. Is the holding period long term or short term?

3. What amount is reported to the Internal Revenue Service in 

box 2 of Form 1099-B? 

REPORTING GAIN OR LOSS ON SCHEDULE D

Use Schedule D ( Form 1040), Capital Gains and Losses, to report 

gain or loss on the sale of stock. Figure gain or loss by subtracting the adjusted basis of stock sold from its sales price. If the sales 

price is greater, the taxpayer has gain on the sale. By contrast, if 

the adjusted basis is greater than the sales price, the taxpayer has 

a loss on the sale. To denote a loss, place the number in parentheses. The taxpayer should receive Form 1099-B, reporting each sale 

of stock.
11-10 Lesson 11

PENSION EARNER

Also use Schedule D to report capital gain distributions that the 

taxpayer has in addition to any sales of stock. Enter the capital

gain distributions on Schedule D, Part II, line 13. They are reported 

to the taxpayer on Form 1099-DIV, Dividends and Distributions, 

box 2a.

Any distributions that are qualified 5-year gain will be reported to 

the taxpayer in box 2c and used to complete the Qualified 5-year 

gain Worksheet in the Schedule D instructions.

If the taxpayer had capital gain distributions, but did not sell stock, 

he or she may not have to use Schedule D. Instead, report the capital gain distributions as explained in Lesson 2, Income. 

Schedule D is divided into four parts. They are:

■ Part I, Short-Term Capital Gains and Losses. For assets held 

one year or less.

■ Part II, Long-Term Capital Gains and Losses. For assets held 

more than one year. Part II shows all long-term gains and losses 

and identifies the part subject to the 28% tax rate. The 28% rate 

applies to section 1202 gain from the sale or exchange of qualified small business stock and to collectibles.

■ Part III, Taxable Gain or Deductible Loss.

■ Part IV, Tax Computation Using Maximum Capital Gains Rates.

You should have no trouble with Part IV if you take your time 

and do as the form says for each line. Using Part IV, rather than 

the Tax Table or Tax Rate Schedules, may result in lower tax.
Lesson 11 11-11

PENSION EARNER

Parts I and II: Short-Term and Long-Term Capital Gains and Losses

Report transactions in Parts I and II as follows:

To Report Capital Gain or Loss in Part I or II, Schedule D

Short-Term Long-Term

Show the first four 

sales on: 

Part I, Line 1, 

Schedule D

Part II, line 8, 

Schedule D

For additional sales, 

use:

Part I, line 1, 

Schedule D-1

Part II, line 8, 

Schedule D-1

And transfer the 

total sales amount:

From Part I, line 2, 

Schedule D-1

Onto Part I, line 2, 

Schedule D

From Part II, line 9, 

Schedule D-1

Onto Part II, line 9, 

Schedule D

Add the sales price amounts in column (d), lines 1 and 2 of Part 

I. Enter the result on line 3. Then add the amounts in column (d), 

lines 8 and 9 of Part II. Enter the result on line 10. The total of line 

3 plus line 10 must equal the total from box 2 of all the taxpayer’s 

Forms 1099-B. If they do not agree, the taxpayer should attach a 

statement to the return to explain the difference.

The Internal Revenue Service will compare the amounts reported 

on all of a taxpayer’s Forms 1099-B with the sum of the amounts 

reported on lines 3 and 10 of Schedule D. If the numbers do not 

agree and the taxpayer did not explain the difference, IRS will contact the taxpayer.

Example 6

On November 13, 2002, Mary Lou bought 500 shares of XEN, Inc. 

stock for $20 a share ($10,000 total), plus a $50 commission. On 

February 26, 2003, she sold the stock for $8,090 and paid selling

expenses of $40. The Form 1099-B from her broker reported a sales 

price of $8,090 ( gross proceeds). Part I of Mary Lou’s completed 

Schedule D appears in Exhibit 3.

Mary Lou has a short-term capital loss. Notice that Mary Lou 

shows the loss in column (f) of line 1 with no entry in column (g) 

because the transaction was completed before May 6, 2003. She 

completes Part I by entering the net short-term loss on line 7. This 

example shows that:

■ Her broker reported gross proceeds on Form 1099-B. The 

amount shown in column (d) is $8,090 (because selling expenses 

have not been subtracted), and

■ She works those expenses into the computation as an adjustment to basis, column (e)—and the result in column (f) reflects 

her true gain or loss.
11-12 Lesson 11

PENSION EARNER

Exhibit 4 Mary Lou’s Schedule D, Part I

Proof as of

ly 21, 2003

to change)

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

( )

4

4

Part I

b

(b) Date

acquired

(Mo., day, yr.)

2

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

7a ( )

500 sh. XEN 11/13/02 2/26/03 8,090 00 10,090 00 (2,000 00)

8,090 00

(2,000 00)

Example 7

Exhibit 4 shows the three long-term transactions that Tess is 

reporting on Schedule D, Part II, for 2003. On August 21, 1999, she 

bought 200 shares of XYZ Company for $1,500. On October 1, 2000, 

she bought 500 shares of TUV, Inc., for $8,000, and on November 

18, 2000, she bought 2,000 shares of QRS, Inc., for $5,000. Each 

amount includes the commission.

On January 10, 2003, Tess sold the stock in XYZ and TUV. The 

Form 1099-B from her broker reported gross proceeds of $1,875 for 

the XYZ stock, and $6,000 for TUV. Tess paid commissions of $35 

for selling the XYZ shares, and $40 for selling TUV. On May 27, 

2003, Tess sold the QRS stock for $10,000. She paid a $50 commission. Her broker reported net proceeds of $9,950 on Form 1099-B.

This example shows how to:

■ Report basis when Form 1099-B shows gross proceeds (XYZ 

and TUV—basis includes commissions on the sale, as well as 

prior adjusted basis), in contrast to when it shows net proceeds 

(QRS—basis does not include commissions on the sale, but only 

the prior adjusted basis).

■ Net gains and losses in column (f).
Lesson 11 11-13

PENSION EARNER

July 2

(subject to c

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Net short term capital gain or (loss). Combine lines 1 through 6 in column (f) 7b

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

Part II

b

13

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

200 sh. XYZ

500 sh. TUV

2,000 sh. QRS

8/21/99

10/1/00

11/18/00

1/10/03

1/10/03

5/27/03

1,875 00

6,000 00

9,950 00

1,535 00

8,040 00

5,000 00

340 00

(2,040 00)

4,950 00

17,825 00

3,250 00

Exhibit 5 Tess’ Schedule D, Part II

4,950 00

4,950 00
11-14 Lesson 11

PENSION EARNER

Exercise 2

For each of the following situations, figure the gain or loss on the 

sale of stock and indicate whether the gain or loss will be long 

term or short term.

A. On March 15, 2002, Bill bought 1,000 shares of stock for 

$15,000, including commission. On March 15, 2003, he sold 600 

shares of the stock for $7,800, net proceeds on Form 1099-B.

1. Will Bill report a gain or a loss? 

2. How much is the gain or loss? 

3. Is the holding period long term or short term?

B. On January 7, 2001, Margo bought stock for $1,500, plus a $25 

commission. On July 15, 2003, she sold the stock for $2,000 

and paid a $25 commission. Her Form 1099-B shows the gross

proceeds of $2,000 as the sales price.

1. Will Margo report a gain or a loss? 

2. How much is the gain or loss? 

3. Is the holding period long term or short term?
Lesson 11 11-15

PENSION EARNER

Reporting Capital Gain Distributions From Form 1099-DIV on Schedule D

If the taxpayer received Form 1099-DIV, Dividends and 

Distributions, see whether an amount is shown in box 2a and box 

2c.

■ If capital gain distributions from Form 1099-DIV are the only 

capital gains or losses the taxpayer had for the year, the taxpayer may be able to report them directly on Form 1040A or 

Form 1040, as explained in Lesson 2, Income.

■ If the taxpayer also sold stock reported on Form 1099-B, report 

the total capital gain distributions from Form 1099-DIV on line 

13, column (f), of Schedule D. For transactions completed after 

May 5, 2003, include the gain or loss in Column G also.

Example 8

Alec received a Form 1099-DIV. Box 2a which shows he received 

a total capital gain distribution of $170. Alec also received a Form 

1099-B that shows a net sales price of $1,200 on the sale of 600 

shares of ABC Group, Inc. He bought the stock on February 19, 

2000, and sold it on August 25, 2003. His basis in ABC, including 

commission, is $1,455. Alec’s Form 1099-DIV, and Part II of his 

Schedule D, are shown in Exhibits 5 and 6. In this example, the 

capital gain distribution must be shown on Schedule D because

Alec also sold stock in 2003 that must be reported on Schedule D.

Unrecap. Sec. 1250 gain

VOID CORRECTED

PAYER’S name, street address, city, state, ZIP code, and telephone no. 1a Total ordinary dividends OMB No. 1545-0110

$

1b Qualified dividends

$

2a Total capital gain distr. Post-May 5 capital gain distr.

RECIPIENT’S identification

number

PAYER’S Federal identification

number

2c

Collectibles (28%) gain

Qualified 5-year gain 2d

$ $

RECIPIENT’S name Section 1202 gain 2e 2f

$

3

Street address (including apt. no.) 5 Investment expenses

City, state, and ZIP code

Noncash liquidation

distributions

Cash liquidation 9

distributions

Account number (optional) 8

$

$

2b

$ $

Nontaxable distributions

Form 1099-DIV

Dividends and

Distributions

$

9191

2nd TIN not.

Form 1099-DIV Cat. No. 14415N Department of the Treasury - Internal Revenue Service

Copy A

File with Form 1096.

For Privacy Act

and Paperwork

Reduction Act

Notice, see the

2003 General

Instructions for

Forms 1099,

1098, 5498,

and W-2G.

For

Internal Revenue

Service Center

Do Not Cut or Separate Forms on This Page — Do Not Cut or Separate Forms on This Page

6 7

2003

Foreign tax paid Foreign country or U.S. possession

$

$

4 Federal income tax withheld

$

$

170.00

MIG INC.

4321 Main Street

Anytown, VA 00012

00-0000123 000-00-0128

Alec Green

1234 A Street

Anytown, VA 00013

Exhibit 6 Alec’s Form 1099-DIV
11-16 Lesson 11

PENSION EARNER

July

(subject to

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

Part II

13

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

600 sh. ABC 2/19/00 8/25/03 1,200 00 1,455 00 (255 00)

1,200 00

170 00

(85 00)

Exhibit 7 Alec’s Schedule D, Part II

After Completing Parts I and II of Schedule D

Double-check your entries on Schedule D up to this point.

■ Check that the sales price amount from each Form 1099-B 

agrees with the amount entered in column (d) of either line 1 or 

line 8.

■ Check that all entries in column (d), lines 1 and 2, add up to the 

amount on line 3.

■ Check that all entries in column (d), lines 8 and 9, add up to the 

amount on line 10.

■ Check that line 3, added to line 10, agrees with the total sales 

price reported on all of the taxpayer’s Forms 1099-B.

■ Check that the amount on line 13, column (f), is the same as the 

total from all the taxpayer’s Forms 1099-DIV, box 2a.

■ Check Column G of both line 1 or 8 to detail sales, exchanges or 

conversions completed after May 5, 2003 have been recorded.

(255 00)
Lesson 11 11-17

PENSION EARNER

Exercise 3

This exercise will give you practice with Schedule D. Use the following information to complete Parts I and II of Jane’s Schedule D.

Jane sold five stocks during 2003. Her broker reported net proceeds 

as sales price.

Stock

Purchase

Date

Date

Sold

Net Sales

Price

Adjusted

Basis

500 sh LSR 1/21/02 1/4/03 $ 4,000 $9,000

250 sh BGI 3/11/02 2/12/03 10,000 2,500

75 sh ABC 1/22/01 1/29/03 2,000 7,500

400 sh XYZ 12/3/99 3/6/03 15,000 10,000

100 sh DEF 4/2/99 10/16/03 1,200 2,000

Jane also owns shares in a mutual fund that sent her a Form 1099-

DIV. It reported $1,200 paid to her in total capital gain distributions 

for the year.
11-18 Lesson 11

PENSION EARNER

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

Exhibit 8

Complete Parts I and II of Jane’s Schedule D.
Lesson 11 11-19

PENSION EARNER

Part III: Summary of Parts I and II

Combine the amounts from line 7b (net short-term capital gain 

or loss) and line 16 (net long-term capital gain or loss). Enter the 

result on line 17a in Part III. This combined number may be a gain 

or a loss.

■ If the line 17a amount is a gain, also enter it on line 13a of Form 

1040, and go to line 17b.

■ If the line 17a amount is a loss, complete line 18 of Schedule 

D. Line 18 ensures that no more than the maximum allowable 

capital loss is deducted on Form 1040. The line 18 amount is 

limited to the smaller of:

■ The loss from line 17a or

■ $3,000 ($1,500 for a married taxpayer filing separately).

Also enter this amount on line 13a of Form 1040. Because it is a 

loss, be sure to put parentheses around the number when you enter 

it on Form 1040.

Part IV: Tax Computation Using the Maximum Capital Gains Rates

The law limits tax rates on net long-term capital gains. To obtain 

the lowest rate, taxpayers with long-term capital gains must go to 

Part IV of Schedule D to figure their tax. To determine whether you 

need Part IV, complete Form 1040 through line 40, Taxable Income. 

Then go to Part IV of Schedule D if:

■ Both lines 16 and 17a of Schedule D are gains, and

■ Form 1040, line 40, is more than zero.

Example 9

Edmund’s tax return shows:

 Filing status: Form 1040, line 1 box checked, single.

 Amount from: Form 1040, line 40: $65,001

 Schedule D, line 7b: (5,000)

 Schedule D, line 16: 16,000

 Schedule D, line 17a: 11,000

 (Transferred to Form 1040, line 13a.)

There is capital gain on Schedule D, lines 16 and 17a, and Form 

1040, line 40, is more than zero.

Exhibits 9 and 10 show Edmund’s Schedule D, Parts III and IV, 

and his Form 1040, lines 13a and 41. His tax is $12,516. Without 

Schedule D, his tax from the Tax Table would be $13,066. Using 

Schedule D saved Edmund $1,100.
11-20 Lesson 11

PENSION EARNER

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.

Exhibit 9 Edmund’s Schedule D, Parts III and IV

11,000 00

65,001 00

11,000 00

54,001 00

11,000 00

11,000 00

28,400 00

11,000 00

11,000 00

11,000 00

2,200 00

10,316 00

12,516 00

13,066 00

12,516 00
Lesson 11 11-21

PENSION EARNER

(

12 Business income or (loss). Attach Schedule C or C-EZ 12

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

b If box on 13a is checked, enter post-May 5 capital gain distributions 13b

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 Tax (see page 36). Check if any tax is from: a Form(s) 8814 b Form 4972 41

11,000 00

12,516 00

Exhibit 10 Edmund’s Form 1040, Lines 13a and 41.

Exercise 4

Melvin sold the following stocks during 2003. His broker reported 

net sales proceeds on Form 1099-B.

Stock

Purchase

Date

Date

Sold

Net Sales

Price

Adjusted

Basis

50 sh ABC 3/15/02 7/26/03 $ 4,000 $5,000

200 sh MLG 5/10/02 6/7/03 1,200 1,000

150 sh XYZ 4/17/02 3/8/03 5,500 6,000

300 sh MLS 1/13/98 6/19/03 6,000 3,000

Melvin also had shares in a mutual fund. The fund sent him a Form 

1099-DIV that showed he received $1,500 in total capital gain distributions. His taxable income (line 40, Form 1040) was $67,001. His 

fi ling status is single.

Use the information given to complete Melvin’s Schedule D.

What amounts would be shown on his:

(A) 1. Form 1040, line 13? 

 2. Form 1040, line 41? 

 
11-22 Lesson 11

PENSION EARNER

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses (Form 1040)  Attach to Form 1040.  See Instructions for Schedule D (Form 1040).

Department of the Treasury

Internal Revenue Service

Attachment

 Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on Form 1040 Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

2003

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

xxx xx xxxx

Exhibit 11 

(B) Complete this form. Schedule D, page 1
Lesson 11 11-23

PENSION EARNER

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.

Exhibit 12 

(C) Complete this form. Schedule D, page 2
11-24 Lesson 11

PENSION EARNER

Capital Loss Carryovers

Use the Capital Loss Carryover Worksheet in the Schedule D 

instructions to figure how much capital loss the taxpayer can carry 

from 2003 to 2004. As you learned earlier, a taxpayer cannot take 

net losses of more than $3,000 ($1,500 for married taxpayers filing 

separately) in figuring taxable income. The allowable loss for the 

year is also referred to as the deduction limit.

Unused losses are not gone forever. Rather, they are carried over 

to the next year. The carryover losses are combined with the gains 

and losses that actually occur in that next year. Unused losses are 

recycled this way, year after year, until they are all deducted. There 

is no limit on how many times a loss can be carried over during the 

taxpayer’s life.

Unused losses keep their short-term or long-term classification 

when they are carried over. If the taxpayer has a short-term capital loss carryover from 2002, enter it on line 6, Part I, Schedule D. 

Enter it on line 14, Part II, if it is long-term.

NOTE: If a capital loss is limited and the remainder must be carried forward to 2004, remind the Taxpayer to bring a copy of the 

2003 return for 2004 return preparation.

Example 10

Andrew sold two stocks in 2003, as summarized here.

Stock 

Purchase

Date

Date

Sold

Net Sales

Price

Adjusted

Basis

200 sh FFF 5/8/02 1/6/03 $ 4,000 $ 3,025

50 sh WWW 11/6/00 3/12/03 8,700 11,000

Andrew’s 2002 return showed the following capital loss carryovers 

to 2003: a $4,200 short-term loss (line 8 of the 2002 Capital Loss 

Carryover Worksheet) and a $240 long-term loss (line 13 of the 2002 

worksheet). His 2003 Form 1040, line 40, shows $55,825.

Andrew’s Schedule D, Parts I through III, his 2003 Form 1040, line 

13a, and his 2002 Capital Loss Carryover Worksheet appear below 

as Exhibits 13 through 16. This example shows how to:

■ Report a capital loss carryover from 2002 and work it into the 

computation on Schedule D as if it had resulted from a 2003 

sale. This example shows both a short-term loss (reported on 

Schedule D, Part I, line 6) and a long-term loss (reported on 

Schedule D, Part II, line 14).

TAX TIPS

★★★★★★★★

It is easy to double 

check the carryover 

from 2003 to 2004. 

Take as much as 

possible of the $3,000 

(or $1,500) deduction 

from short-term capital 

losses fi rst. Then take 

any remaining amount of 

the $3,000 (or $1,500) 

from long-term capital 

losses. What is left is 

the carryover to 2004.
Lesson 11 11-25

PENSION EARNER

■ Combine a short-term capital loss and a long-term capital loss 

and apply the deduction limit ($3,000 for Andrew). Andrew 

reports the combined long-term and short-term loss on Schedule 

D, Part III, line 17. Line 18 applies Andrew’s deduction limit, his 

allowable loss for the year.

■ Show the allowable loss for the year ($3,000 for Andrew) in the 

Income section of Form 1040.

■ Use the Capital Loss Carryover Worksheet to apply the $3,000 

deduction limit against the short-term loss first and figure the 

capital loss carryover to 2004. In this case, the carryover is a 

short-term loss of $225 (line 8 of the worksheet) and a long-term 

loss of $2,540 (line 13 of the worksheet).
11-26 Lesson 11

PENSION EARNER

Exhibit 13 Andrew’s Schedule D, Parts I and II

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses (Form 1040)  Attach to Form 1040.  See Instructions for Schedule D (Form 1040).

Department of the Treasury

Internal Revenue Service

Attachment

 Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on Form 1040 Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

2003

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

xxx xx xxxx

200 sh. FFF 5/8/02 1/6/03 4,000 00 3,025 00 975 00

4,200 00

(3,225 00)

50 sh. WWW 11/6/00 3/12/03 8,700 00 11,000 00 (2,300 00)

8,700 00

240 00

(2,540 00)

4,000 00
Lesson 11 11-27

PENSION EARNER

Exhibit 14 Andrew’s Schedule D, Part III

Schedule D (Form 1040) 2003

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

(5,765 00)

3,000 00

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

13b

(3,000 00)

Exhibit 15 Andrew’s Form 1040, line 13a

Exhibit 16 Andrew’s Capital Loss Carryover Worksheet
11-28 Lesson 11

PENSION EARNER

Exercise 5

This exercise and the next one review the concepts covered in this 

lesson. They will measure your ability to apply what you have 

learned.

Matthew has a Form 1099-B from Broker One, who reported gross

proceeds:

Stock Date Sold Sales Price

100 sh MNO 2/8/03 $5,050

500 sh ZYX 8/7/03 5,250

Broker One reported sales commissions to Matthew separately. 

They were:

 MNO: $50 ZYX; $200

Matthew also has a Form 1099-B from Broker Two, who reported 

net proceeds:

Stock Date Sold Sales Price

200 sh BCA 8/7/03 $4,000

300 sh JKL 8/7/03 5,910

Matthew gave you the following information about the stocks he 

sold:

■ He paid $6,940, plus a $60 commission, to buy the MNO stock on 

February 9, 2002.

■ He bought the ZYX on March 11, 2000, for $5,200, plus a $100 

commission.

■ He paid $3,900, plus a $50 commission, to buy the BCA stock on 

January 29, 2003.

■ He bought the JKL on June 26, 2001, for $6,300, plus a $30 commission.

Matthew’s filing status is head of household. His Form 1040, line 

40, shows $55,282. When you look at Matthew’s Form 1040 and 

Capital Loss Carryover Worksheet from 2002, you see that he has 

a $450 short-term loss and a $325 long-term loss that he can carry 

over to his 2003 return.

Use this information to complete Matthew’s Schedule D, Parts I, 

II, and III, and his Form 1040, line 13a, for 2003. Also complete the 

Capital Loss Carryover Worksheet to figure how much capital loss 

he can carry over to 2004.
Lesson 11 11-29

PENSION EARNER

Exhibit 17 

(A) Complete this form. Schedule D, Parts I and II

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses (Form 1040)  Attach to Form 1040.  See Instructions for Schedule D (Form 1040).

Department of the Treasury

Internal Revenue Service

Attachment  Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on Form 1040 Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

2003

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

xxx xx xxxx
11-30 Lesson 11

PENSION EARNER

Schedule D (Form 1040) 2003

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

Exhibit 18 

(B) Complete this form. Schedule D, Part III

Exhibit 19 

(C) Complete this line on Matthew’s Form 1040. Form 1040, line 13a

Exhibit 20 

(D) Complete this worksheet. Capital Loss Carryover Worksheet

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

13b
Lesson 11 11-31

PENSION EARNER

Exercise 6

Katherine has two Forms 1099-B. They show:

From Broker No. 1 ( gross proceeds reported):

Stock Date Sold Sales Price

100 sh LMN 4/20/03 $3,000

50 sh PQR 4/17/03 2,600

500 OLE 6/17/03 7,800

Expenses for selling the stock through Broker No. 1 (reported to 

Katherine separately from Form 1099-B) were:

On the sale of: LMN stock: $175 PQR stock: $105 OLE: $590

From Broker No. 2 (net proceeds reported):

Stock Date Sold Sales Price

75 sh ABC 1/24/03 $2,500

125 sh XYZ 3/22/03 6,000

Katherine gave you the following information about these stocks:

■ She bought 100 shares of LMN stock on March 6, 2000, for 

$12.50 a share ($1,250), plus a 10% broker’s commission ($125).

■ She bought 200 shares of PQR stock on January 8, 2003, for $14 

a share ($2,800), plus a 10% broker’s commission ($280).

■ Katherine bought OLE stock on two dates. On November 27, 

2000, she bought 800 shares for $10 a share ($8,000), plus 10% 

broker’s commission ($800). On March 6, 2002, she bought 600 

more shares for $18 a share ($10,800), plus a 10% broker’s commission ($1,080). When Katherine sold 500 shares of OLE in 

2002, she did not specify which block they came from.

■ Katherine bought 100 shares of ABC on October 15, 1999, for 

$72 a share ($7,200), plus a 5% broker’s commission ($360). On 

May 8, 2000, the stock split two-for-one, so Katherine owned 

200 shares after the split.

■ She bought 125 shares of XYZ stock on October 26, 2002, for 

$74 a share ($9,250), plus a broker’s commission of $250.

Katherine also gave you a Form 1099-DIV from the Acme Mutual 

Fund. It showed $1,050 in total capital gain distributions. From 

Katherine’s tax return and worksheets for last year (2002), you 

found she has a $150 long-term capital loss carryover from 2002 to 

2003.

Complete Katherine’s Schedule D, Parts I through IV, and her 

Form 1040, lines 13 and 42. She is single, and her taxable income 

shown on line 40 of her Form 1040 is $61,221.
11-32 Lesson 11

PENSION EARNER

Exhibit 21 

(A) Complete this form. Schedule D, Parts I and II

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )
Lesson 11 11-33

PENSION EARNER

Exhibit 22 

(B) Complete this form. Schedule D, Parts III and IV

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.
11-34 Lesson 11

PENSION EARNER

Exhibit 23 

(C) Complete these lines from Katherine’s Form 1040. Form 1040, lines 13a and 40

( )

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a as o03

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 Tax (see page 36). Check if any tax is from: a Form(s) 8814 b Form 4972 41

42

  Summing Up This Lesson  

To figure and properly report a taxpayer’s gain or loss on a sale 

of stock, you need to know:

1. Sales price (reported to the taxpayer and to the IRS on Form 

1099-B),

2. Adjusted basis, and

3. Holding period.

To determine gain or loss, subtract adjusted basis from sales 

price. The holding period determines whether the gain or loss is 

long-term or short-term. Long-term capital gains are generally 

taxed at lower rates than short-term capital gains. In 2003, capital gains will be subject to different tax rates depending on the 

date of the sale. Transactions completed after May 5, 2003 will 

be taxed at a different rate than transactions completed before 

May 6, 2003.

Use Schedule D, Parts I though IV, to figure capital gain or loss 

and the correct tax. Be sure the total sales price you report on 

line 3 plus line 10 of Schedule D is the same as the total sales 

price from all the taxpayer’s Forms 1099-B, box 2.

Include capital gain distributions (reported to the taxpayer 

and to IRS on Form 1099-DIV) in the computation of longterm 

capital gains. Show them on Schedule D, Part II, line 13. Report 

capital gains distributions directly on Form 1040, line 13a (or on 

Form 1040A, line 10), if a Schedule D is not required to be completed for the gain or loss on a sale of stock.

A taxpayer can deduct up to $3,000 ($1,500 for a married taxpayer filing separately) in net capital loss for the year. The taxpayer can carry over any remaining loss to the next year. If the 

taxpayer has a carryover loss from 2002, include it on Schedule 

D, Part I, line 6, or Part II, line 14. The Capital Loss Carryover 

Worksheet, in the Schedule D instructions, can help you figure 

the carryover amount for 2004. 

Report capital gain or loss on Form 1040, line 13a.
Lesson 11 11-35

PENSION EARNER

 SALE OF STOCK ANSWERS TO EXERCISES Lesson 11

Exercise 1

A. 1. $2,550. [($5,000 + $100) ÷ 1,000] x 500 = $2,550

2. Long-term.

3. $3,255. $3,300 - $45 = $3,255

B. 1. $3,550. $3,500 + $50 = $3,550

2. Short-term.

C. 1. $5,000. [($9,965 + $35) ÷ 200] x 100 = $5,000

2. Long-term.

3. $6,440. $6,470 - $30 = $6,440

Exercise 2

A. 1. Loss.

2. $1,200. $7,800 - [($15,000 ÷ 1,000) x 600] = ($1,200)

3. Short-term.

B. 1. Gain.

2. $450. $2,000 - ($1,500 + $25 + $25) = $450

3. Long-term.
11-36 Lesson 11

PENSION EARNER

Lesson 11 SALE OF STOCK ANSWERS TO EXERCISES

Exercise 3

Jane’s Schedule D, Parts I and II

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis (see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

500 sh. LSR

250 sh. BGI

1/12/02

3/11/02

1/4/03

2/12/03

4,000.00

10,000.00

9,000.00

2,500.00

(5,000.00)

7,500.00

14,000.00

2,500.00

75 sh. ABC

400 sh. XYZ

100 sh. DEF

1/22/01

12/3/99

4/2/99

1/29/03

3/6/03

1/16/03

2,000.00

15,000.00

1,200.00

7,500.00

10,000.00

2,000.00

(5,500.00)

5,000.00

(800.00)

18,200.00

1,200.00

(100.00)
Lesson 11 11-37

PENSION EARNER

 SALE OF STOCK ANSWERS TO EXERCISES Lesson 11

Exercise 4

(A) 1. Form 1040, line 13: $3,200

 2. Form 1040, line 41: $12,766

(B) Melvin’s Schedule D, Page 1

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

50 sh. ABC

200 sh. MLG

3/15/03

5/10/03

7/26/03

6/7/03

4,000.00

1,200.00

5,000.00

1,000.00

(1,000.00)

200.00

5,200.00

(800.00)

150 sh. XYZ

300 sh. MLS

4/17/00

1/13/98

3/8/03

6/19/03

5,500.00

6,000.00

6,000.00

3,000.00

(500.00)

3,000.00

11,500.00

1,500.00

4,000.00

(1,000.00)

200.00

3,000.00

(500.00)

3,000.00
11-38 Lesson 11

PENSION EARNER

Lesson 11 SALE OF STOCK ANSWERS TO EXERCISES

(C) Melvin’s Schedule D, Page 2

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.

3,200 00

67,001 00

3,200 00

0 00

3,200 00

63,801 00

28,400 00

3,200 00

0 00

3,200 00

640 00

12,766 00

12,766 00

13,406 00

3,200 00

63,801 00

 0 00

3,200 00
Lesson 11 11-39

PENSION EARNER

 SALE OF STOCK ANSWERS TO EXERCISES Lesson 11

Exercise 5

(A) Matthew’s Schedule D, Parts I and II

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

100 sh. MNO

200 sh. BCA

2/9/02

1/29/03

2/8/03

8/7/03

7,050 00

4,000 00

5,050 (2000

50

9,050

450

(2,400 00)

00

00

00

00 00)

5,910

5,250

6.330

5,500

11,160

325

(660

(995 00)

00)

00

00

(250 00)

(420 00)

00

00

00

00

3,950 00

500 sh. ZYX

300 sh. JKL

3/11/00

6/26/01

8/7/03

8/7/03

(250 00)

(420 00)
11-40 Lesson 11

PENSION EARNER

Lesson 11 SALE OF STOCK ANSWERS TO EXERCISES

(B) Matthew’s Schedule D, Part III

Schedule D (Form 1040) 2003

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

(3,395 00)

3,000 00

(C) Matthew’s Form 1040, Line 13a

(D) Matthew’s Capital Loss Carryover Worksheet

12 Business income or (loss). Attach Schedule C or C EZ

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a (3,000 00)
Lesson 11 11-41

PENSION EARNER

 SALE OF STOCK ANSWERS TO EXERCISES Lesson 11

Exercise 6

Basis Computations:

LMN:

100 shares bought at $12.50 = $1,250

Commission on purchase = 125

Commission on sale = + 175

Adjusted basis, LMN sold = $1,550

PQR:

200 shares bought at $14 = $2,800

Commission on purchase = + 280

Total paid for purchase = 3,080

Divided by number of shares bought ÷ 200

Per share basis after purchase = 15.40

Times number of shares sold x 50

= 770

Commission on sale = + 105

Adjusted basis, PQR sold $ 875

OLE: Katherine did not specify which block of stock to sell; the 

stocks sold are assumed to be from the block purchased first.

800 shares bought at $10 = $8,000

Commission on purchase = + 800

Total paid for purchase = 8,800

Divided by number of shares bought ÷ 800

Per share basis after purchase = 11

Times number of shares sold x 500

= 5,500

Commission on sale = + 590

Adjusted basis, OLE sold $6,090
11-42 Lesson 11

PENSION EARNER

Lesson 11 SALE OF STOCK ANSWERS TO EXERCISES

ABC:

100 shares bought at $72 = $7,200

Commission on purchase = + 360

Total paid for purchase = 7,560

Divided by number of shares Katherine 

held after the two-for-one split

÷ 200

Per share basis after the split = 37.80

Times number of sheres sold = x 75

Adjusted basis, ABC sold = $2,835

XYZ:

125 shares bought at $74 = $9,250

Commission on purchase = + 250

Adjusted basis, XYZ sold = $9,500
Lesson 11 11-43

PENSION EARNER

 SALE OF STOCK ANSWERS TO EXERCISES Lesson 11

Exercise 6

(A) Katherine’s Schedule D, Parts I and II

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

50 sh. PQR

125 sh. XYZ

1/8/03

10/26/02

4/17/03

3/22/03

2,600.00

6,000.00

875.00

9,500.00

1,725.00

(3,500.00)

8,600.00

1,775.00

100 sh. LMN

500 sh. OLE

3/6/00

11/27/00

4/20/03

6/17/03

3,000.00

7,800.00

1,550.00

6,090.00

1,450.00

1,710.00

13,300.00

1,050.00

3,725.00

75 sh. ABC 10/15/99 1/24/03 2,500.00 2,835.00 (335.00)

150.00

(150.00)
11-44 Lesson 11

PENSION EARNER

Lesson 11 SALE OF STOCK ANSWERS TO EXERCISES

(B) Katherine’s Schedule D, Parts III and IV

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.

1,950 00

61,221 00

1,950 00

0 00

1,950 00

59,271 00

28,400 00

1,950 00

0 00

1,950 00

390 00

12,019 00

12,019 00

12,116 00

1,950 00

1,950 00

11,629 00
Lesson 11 11-45

PENSION EARNER

 SALE OF STOCK ANSWERS TO EXERCISES Lesson 11

(C) Katherine’s Form 1040, lines 13 and 42

( )

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a 1,950 00

41 Tax (see page 36). Check if any tax is from: a Form(s) 8814 b Form 4972 41

42

12,019 00
11-46 Lesson 11

PENSION EARNER

STUDENT NOTES
Lesson 12 12-1

PENSION EARNER

SALE OF HOME Lesson 12

INTRODUCTION AND OBJECTIVES

Introduction

This lesson generally discusses the tax rules that 

apply when a taxpayer sells his or her main home in 

2003. The taxpayer’s main home is the one in which 

he or she lives most of the time.

A taxpayer does not need to report the sale of his or 

her main home on his or her tax return if the gain 

on the sale is less than or equal to an exclusion

amount (discussed later). Generally, if the taxpayer 

meets the ownership and use tests (discussed 

later), he or she can exclude any gain from income up 

to $250,000 ($500,000, if married filing jointly).

This lesson does not cover the sale of a main home 

used as rental property or partially for business. 

Objective

At the end of this lesson you will be able to determine 

the amount of gain a taxpayer may exclude if a 

primary residence is sold.

MAIN HOME

Only the gain from the sale of the taxpayer’s main 

home is eligible for the rules discussed in this lesson. 

If a home that is not the taxpayer’s main home is sold 

during the year, the gain generally will have to be 

reported as income. Any gain that must be reported 

as income is taxable gain and is reported on Schedule 

D ( Form 1040), Capital Gains and Losses. Therefore, 

a clear understanding of what is, and what is not, an 

individual’s main home is very important.

A main home is where the taxpayer lives most of 

the time. The home does not necessarily have to be 

a house. A houseboat, a mobile home, a cooperative 

apartment, or a condominium (house or apartment) 

may also qualify as a main home. Taxpayers cannot 

choose which home to designate as their main home. 

Facts and circumstances determine which home is the 

main home.

POTENTIAL

PITFALLS

A taxpayer’s main home 

is not necessarily a home 

that is owned by the 

taxpayer. A rental home 

may be a main home..
12-2 Lesson 12

PENSION EARNER

If a taxpayer has more than one home, it is necessary to determine 

which home he or she lives in most of the time. In many, if not most 

cases, the taxpayer owns a single home in which he or she lives all 

the time. 

It may seem easy to evaluate this situation, since it is not 

necessary to determine which home is the main home. However, 

you must be sure that the owner of a single home also meets the 

requirement of living in the home most of the time. If not, it cannot 

be considered the main home.

Never assume that the house sold during the year was the 

taxpayer’s main home, even if the house was the only one owned 

by the taxpayer. Be sure to check that the house was, in fact, the 

individual’s main home.

Example 1

Lucille owns a home in a Colorado ski area (the ski home). She 

stays at the ski home most weekends and spends the entire months 

of December, January, and February there. When she is not at the 

ski home, she lives in a four-room apartment that she rents in 

Denver. For over half the year, she lives in Denver. Lucille’s main

home is her rental apartment in Denver, because she lives there 

most of the time. This is so even though she does not own the 

apartment in Denver.

GAIN ON SALE OF MAIN HOME

To figure the gain (or loss) on the sale of the taxpayer’s main home, 

you must know the selling price, the amount realized, and the 

adjusted basis.

Selling price

The selling price is the total amount the taxpayer (seller) received 

for his or her main home. It includes money, all notes, mortgages, 

or other debts taken over by the buyer as part of the sale, and the 

fair market value of any other property or services that the seller 

received.

Form 1099-S

If the taxpayer received Form 1099-S, Proceeds From Real Estate 

Transactions, box 1 shows the date of sale (closing) and box 2 shows 

the gross proceeds received from the sale of his or her main

home. (Exhibit 1 shows a blank Form 1099-S.) If the taxpayer can 

exclude the entire gain from a sale in 2003, the person responsible 

for closing the sale (for example, a real estate broker or settlement 

agent) generally will not have to report it on Form 1099-S.

POTENTIAL

PITFALLS

If there is a loss on the 

sale of a taxpayer’s 

main home, the taxpayer 

cannot deduct it on his 

or her tax return.
Lesson 12 12-3

PENSION EARNER

Exhibit 1 Form 1099-S

CORRECTED (if checked)

Copy B

This is important tax

information and is being

furnished to the Internal

Revenue Service. If you

are required to file a

return, a negligence

penalty or other

sanction may be

imposed on you if this

item is required to be

reported and the IRS

determines that it has

not been reported.

(keep for your records)

For Transferor

OMB No. 1545-0997

Proceeds From Real

Estate Transactions

FILER’S Federal identification number TRANSFEROR’S identification number

Gross proceeds

1 Date of closing

TRANSFEROR’S name

Address or legal description

Street address (including apt. no.)

City, state, and ZIP code Transferor received or will receive property or services

as part of the consideration (if checked) 

Account number (optional)

Form 1099-S Department of the Treasury - Internal Revenue Service

FILER’S name, street address, city, state, ZIP code, and telephone no.

2

3

4

$ Form 1099-S

5 Buyer’s part of real estate tax

$

2003

Amount realized

The amount realized is the selling price minus selling expenses.

Selling expenses

Selling expenses include commissions, advertising fees, legal fees, 

and loan charges paid by the seller, such as points ( points were 

discussed in lesson 4).

Adjusted basis

While the taxpayer owned his or her main home, he or she may 

have made adjustments (increases or decreases) to the basis.

This adjusted basis is used to figure gain or loss on the sale of the 

taxpayer’s main home. For information on how to figure the home’s 

adjusted basis, see Basis in Publication 523.

Amount of gain (or loss)

When you know the amount realized and the home’s adjusted

basis, you can figure the taxpayer’s gain or loss. If the amount

realized is more than the adjusted basis, the difference is a gain 

and the taxpayer may be able to exclude all or part of it. If the 

amount realized is less than the adjusted basis, the difference is a 

loss. A loss on the sale of the taxpayer’s main home cannot be 

deducted.
12-4 Lesson 12

PENSION EARNER

AMOUNT OF EXCLUSION

A single homeowner can generally exclude up to $250,000 of gain 

from the sale of a main home. A married couple can exclude up to 

$500,000 if they meet all of the following conditions.

1. They filed a joint return.

2. Either spouse or both meet the ownership test.

3. Both individuals meet the use test.

4. Neither individual excluded gain in the 2 years before the 

current sale of the home (not counting any sales before May 7, 

1997).

For married individuals filing jointly who do not qualify for the 

$500,000 exclusion of gain on the sale of a home because they do 

not satisfy the two-year ownership test, two-year use test, and the 

prohibition on any other sale or exchange of a residence within the 

last two years, the limit on the amount of excludable gain should be 

calculated separately for each spouse. In that case, the maximum 

exclusion for the couple is equal to the sum of the exclusions to 

which the spouses would otherwise be entitled if they had not been 

married.

OWNERSHIP AND USE TESTS

The exclusion is allowed each time a taxpayer sells or exchanges 

his or her main home, but generally no more than once every 2 

years. To be eligible, the property must have been:

1. Owned by the taxpayer for a combined period of at least 2 years 

out of a 5-year period ending on the date of sale (the ownership 

test).

2. Lived in as the taxpayer’s main home for at least 2 years of that 

5-year period (the use test).

Period of ownership and use

The required 2 years of ownership and use do not have to be 

continuous. The taxpayer meets the tests if the taxpayer can show 

that he or she owned and lived in the property as his or her main

home for either 24 full months or 730 days during the 5-year 

period. Short temporary absences, even if the property is rented 

during those absences, are counted as periods of use.

Ownership and use tests can be met during different 2-year 

periods. However, a taxpayer must meet both tests during the 5-

year period ending on the date of the sale.

POTENTIAL

PITFALLS

 A taxpayer cannot 

exclude the part of any 

depreciation allowed 

or allowable for the 

business use of his or 

her home.

Refer a taxpayer who 

used his or her main 

home for business to 

a paid professional tax 

preparer.
Lesson 12 12-5

PENSION EARNER

Example 2

In 1995, Helen Jones lived in a rented apartment. The apartment 

building was later changed to a condominium, and she bought her 

apartment on December 1, 2000. In 2001, Helen became ill and on 

April 14 of that year she moved in to her daughter’s home. On July 

10, 2003, while still living in her daughter’s home, she sold her 

apartment.

Helen can exclude all the gain on the sale of her apartment because 

she met the ownership and use tests. Her 5-year period is from 

July 11, 1998, to July 10, 2003, the date she sold the apartment. 

She owned her apartment from December 1, 2000, to July 10, 2003 

(over 2 years). She lived in the apartment from July 11, 1998 (the 

beginning of the 5-year period), to April 14, 2001 (over 2 years).

Reduced Exclusion

If the property was owned and used as a main home for less than 2 

years, a taxpayer may be able to claim a reduced exclusion. If this 

situation applies to a taxpayer, use the worksheet in Publication 

523 to figure how to claim the reduced exclusion.

Example 3

Amanda, who is single, bought her first home in August 2001. In 

December 2002, the company she worked for notified her that 

she would be transferred to another town by the end of 2003. She 

continued to live in the home until June 2003, when she sold it at 

a gain and moved to the new town. Amanda owned and lived in the 

home less than 2 years, so she does not meet the ownership and use 

tests. However, she qualifies to exclude the gain because she sold 

the home due to a change in place of employment.
12-6 Lesson 12

PENSION EARNER

Exercise 1

John is single and sold his home in July 2003, for $300,000. The 

amount he realized from the sale was $297,500. His adjusted

basis in the home was $255,500. Assuming he meets the ownership and use tests,

a. What is the amount of the gain?

b. What is his exclusion amount?

Exercise 2

Tim owns two homes. One residence is located in St. Louis where 

he works and the other is located in a resort area approximately 

100 miles away. Tim lives in his St. Louis home during the week 

(Monday through Friday) and travels to his weekend home for 

Saturday and Sunday. His office allows him to work from home 

so approximately 5 months of the year he works from his weekend home. Which home is his main home?

 TAXWISE HINTS

If a gain on the sale of a main home must be reported on the 

taxpayer’s Form 1040. Link to a Schedule D, enter the description 

of property, and complete the remaining entries annotated in red. 

The software will calculate the gain and carry the calculation to the 

Form 1040.

  SUMMING UP THIS LESSON  

In this lesson you have learned about the simplified rules that 

apply to homeowners who sell or exchange their principal residence. For more information on the tax rules that apply on the 

sale of a main home, see Publication 523.
Lesson 12 12-7

PENSION EARNER

 SALE OF HOME ANSWERS TO EXERCISES Lesson 12

Exercise 1a. $42,000 ($297,500 minus $255,500)

 1b. $42,000

Exercise 2. His main home is the St. Louis residence.
12-8 Lesson 12

PENSION EARNER

STUDENT NOTES
Lesson 13 13-1

PENSION EARNER

 PENSIONS Lesson 13

INTRODUCTION

In this lesson, you will learn about Pensions and 

Annuities.

Pensions and annuities provide cash payments, usually 

after a person has retired. The payments may be for life 

or for a fixed period of time. They may begin at retirement or at a specific age.

OBJECTIVES

After completing this lesson, you should be able to:

■ Identify different types of Retirement Income

■ Determine the taxable portion of the Retirement 

Income

■ Report Retirement Income on the Tax Return

■ Explain when a Minimum Distribution is required

■ Determine when an adjustment to withholding 

should be made

DEFINITIONS

A pension is generally a series of definitely determinable payments made to an employee or survivor (the 

beneficiary of a deceased employee’s pension) after the 

employee retires from work. Payments are made regularly and are for past services with an employer. A pension is fully or partially taxable depending on whether 

the employee contributed to the pension plan. The total 

amount of the pension will usually depend on how long 

the taxpayer worked for the company and how much the 

taxpayer earned over the years.

Employee contributions that are “after-tax” contributions are amounts that the employer usually deducts

from wages and deposits them into the pension fund on 

behalf of the employee. Each year, the employee pays tax 

on the amount that he or she contributed that year. The 

employee’s contributions are included in his or her Form 

W-2. Employee contributions are often referred to as the 

cost of the pension or as the investment in the annuity

contract.
13-2 Lesson 13

PENSION EARNER

Employee contributions that are “before-tax” include amounts 

deposited to a 401(K) or 403(b) program. Each year, the employee 

pays income tax on the salary after the “before-tax” contributions 

have been deducted.

A disability pension is generally paid to a taxpayer who retires 

because of a disability before the minimum retirement age (set by 

the employer). The disability pension is considered regular pension 

income when the taxpayer reaches the minimum retirement age.

An annuity is a series of payments under a contract from an 

insurance company, a trust company, or an individual. Annuity payments are made at regular intervals over a period of more than one 

full year.

An Individual Retirement Arrangement (IRA) is a personal 

savings plan that provides tax advantages for setting money aside 

for retirement.

Social Security Benefits are payments made under Title II of 

the Social Security Act. They include old-age, survivors, disability 

insurance, and some workers’ compensation benefits. Social security benefits are reported to the taxpayer on Form SSA-1099, Social

Security Benefit Statement.

Railroad Retirement Benefits (RRB) are based on the number 

of months that the taxpayer was working in a job that was covered 

by the Railroad Retirement Act. The RRA has two components. Tier 

1 is the equivalent of Social Security Benefits and Tier 2 is like an 

employer’s pension plan.

There are several other types of pension plans, including 403(b), 

Keogh, SEP and SIMPLE. Payments from any of these types of 

plans should be reported to the taxpayer on Form 1099R. You will 

use this form to prepare the tax return. It is not necessary for 

you to understand all of the contribution rules associated with the 

many types of pension plans.

TAKING A LOOK AT THE FORMS

Retirement income may be reported on Form 1099R, Form SSA1099, Form RRB-1099 or Form RRB-1099-R. Disability income may 

be reported on Form W-2 or Form 1099R. It is very important to 

enter all of the required information from these forms when using 

tax preparation software. This allows the software to do its job and 

help you with the calculations.
Lesson 13 13-3

PENSION EARNER

Form 1099-R

The Form 1099-R (as seen in Exhibit 1) is used by payers to 

report distributions from Pensions, Annuities, Retirement or Profit 

Sharing plans, IRAs, Insurance Contracts etc. While it is important 

to review all of the boxes on the form, you will be most concerned 

about the entries in Boxes 1, 2a, 2b, 4, 5, 7 and the little box that 

indicates whether this is an IRA/SEP/SIMPLE payment.

Exhibit 1

Employee contributions

or insurance premiums

CORRECTED (if checked)

PAYER’S name, street address, city, state, and ZIP code 1 Gross distribution Distributions From

Pensions, Annuities,

Retirement or

Profit-Sharing

Plans, IRAs,

Insurance

Contracts, etc.

$

2a Taxable amount

$

Total

distribution

Taxable amount

not determined

2b

RECIPIENT’S identification

number

PAYER’S Federal identification

number

3 Capital gain (included

in box 2a)

4 Federal income tax

withheld

$ $

RECIPIENT’S name Net unrealized

appreciation in

employer’s securities

5 6

$ $

Distribution

code(s)

Street address (including apt. no.) 7 8 Other

%

City, state, and ZIP code

Account number (optional) 10 State tax withheld 11 State/Payer’s state no.

$

13 Local tax withheld 14 Name of locality

$

Form 1099-R Department of the Treasury - Internal Revenue Service

12

15

State distribution

Local distribution

$

Copy B

Report this

income on your

Federal tax

return. If this

form shows

Federal income

tax withheld in

box 4, attach

this copy to

your return.

This information is

being furnished to

the Internal

Revenue Service.

$

$

$

$ $

$

OMB No. 1545-0119

Your percentage of total

distribution

9a

%

Form 1099-R

9b Total employee contributions

$

IRA/

SEP/

SIMPLE

2003

Some 1099-R forms may not look like the one above. Some payer’s 

receive permission to customize the form. In all cases, the box numbers will remain the same.

Exhibit 2 is the instructions for the recipient of the Form 1099-R. 

While these instructions can be found on the back of copies B and 

C of the Form 1099-R, the print is small and may be difficult to 

read. Therefore, we are duplicating the information here in a larger 

print.
13-4 Lesson 13

PENSION EARNER

Box 1. Shows the total amount you received this year. The amount

may have been a direct rollover, a transfer or conversion to a Roth

IRA, a recharacterized IRA contribution; or you may have received it

as periodic payments, as nonperiodic payments, or as a total

distribution. Report the amount on Form 1040 or 1040A on the line

for “IRA distributions” or “Pensions and annunities” (or the line for

“Taxable amount”), and on Form 8606, whichever applies. However,

if this is a lump-sum distribution, report it on Form 4972, Tax on

If a life insurance, annuity, or endowment contract was transferred

tax free to another trustee or contract issuer, an amount will be

shown in this box and Code 6 will be shown in box 7. You need not

report this on your tax return.

Instructions for Recipient

Generally, distributions from pensions, annuities, profit-sharing and

retirement plans (including section 457 state and local government

plans), IRAs, insurance contracts, etc., are reported to recipients on

Form 1099-R.

IRAs. For distributions from a traditional individual retirement

arrangement (IRA), simplified employee pension (SEP), or savings

incentive match plan for employees (SIMPLE), generally the payer is

not required to compute the taxable amount. Therefore, the amounts

in boxes 1 and 2a will be the same most of the time. See the Form

1040 or 1040A instructions to determine the taxable amount. If you

are at least age 701⁄2, you must take minimum distributions from your

IRA (other than a Roth IRA). If you do not, you may be subject to a

50% excise tax on the amount that should have been distributed.

See Pub. 590, Individual Retirement Arrangements (IRAs), and Pub.

560, Retirement Plans for Small Business (SEP, SIMPLE, and

Qualified Plans), for more information on IRAs.

(Continued on the back of Copy C.)

Box 2a. This part of the distribution is generally taxable. If there is

no entry in this box, the payer may not have all the facts needed to

figure the taxable amount. In that case, the first box in box 2b

should be checked. You may want to get one of the following

publications from the IRS to help you figure the taxable amount:

Pub. 560, Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) for

Employees of Public Schools and Certain Tax-Exempt Organizations,

Pub. 575, Pub. 590, Pub. 721, Tax Guide to U.S. Civil Service

Retirement Benefits, or Pub. 939, General Rule for Pensions and

Annuities. For an IRA distribution, see IRAs and Roth IRAs above.

For a direct rollover, zero should be shown, and you must enter zero

(-0-) on the “Taxable amount” line of your tax return.

If this is a total distribution from a qualified plan (other than an IRA

or tax-sheltered annuity) and you were born before January 2, 1936

(or you are the beneficiary of someone born before January 2, 1936),

you may be eligible for the 10-year tax option. See the Instructions

for Form 4972 for more information.

Box 2b. If the first box is checked, the payer was unable to

determine the taxable amount, and box 2a should be blank.

However, if this is a traditional IRA, SEP, or SIMPLE distribution,

then see IRAs above. If the second box is checked, the distribution

was a total distribution that closed out your account.

Loans treated as distributions. If you borrow money from a

qualified plan, tax-sheltered annuity, or government plan, you may

have to treat the loan as a distribution and include all or part of the

amount borrowed in your income. There are exceptions to this rule.

If your loan is taxable, Code L will be shown in box 7. See Pub. 575.

Qualified plans. If your annuity starting date is after 1997, you must

use the simplified method to figure your taxable amount if your payer

did not show the taxable amount in box 2a. See Pub. 575, Pension

and Annuity Income.

Roth IRAs. For distributions from a Roth IRA, generally the payer is

not required to compute the taxable amount. You must compute any

taxable amount on Form 8606, Nondeductible IRAs. An amount

shown in box 2a may be taxable earnings on an excess contribution.

Lump-Sum Distribution. If you have not reached minimum retirement

age, report your disability payments on the line for “Wages, salaries,

tips, etc.” Also report on that line corrective distributions of excess

deferrals, excess contributions, or excess aggregate contributions.

Box 3. If you received a lump-sum distribution from a qualified plan

and were born before January 2, 1936 (or you are the beneficiary of

someone born before January 2, 1936), you may be able to elect to

treat this amount as a capital gain on Form 4972 (not on Schedule D

(Form 1040)). See the Instructions for Form 4972. For a charitable

gift annuity, report as a long-term capital gain on Schedule D (Form

1040).

Exhibit 2
Lesson 13 13-5

PENSION EARNER

If the IRA/SEP/SIMPLE box is checked, you have received a

traditional IRA, SEP, or SIMPLE distribution.

Box 8. If you received an annuity contract as part of a distribution,

the value of the contract is shown. It is not taxable when you receive

it and should not be included in boxes 1 and 2a. When you receive

periodic payments from the annuity contract, they are taxable at that

time. If the distribution is made to more than one person, the

percentage of the annuity contract distributed to you is also shown.

You will need this information if you use the 10-year tax option

(Form 4972).

Box 9a. If a total distribution was made to more than one person,

the percentage you received is shown.

Boxes 10–15. If state or local income tax was withheld from the

distribution, these boxes may be completed. Boxes 12 and 15 may

show the part of the distribution subject to state and/or local tax.

Box 4. This is the amount of Federal income tax withheld. Include

this on your income tax return as tax withheld, and if box 4

shows an amount (other than zero), attach Copy B to your

return. Generally, if you will receive payments next year that are not

eligible rollover distributions, you can change your withholding or

elect not to have income tax withheld by giving the payer Form

W-4P, Withholding Certificate for Pension or Annuity Payments.

Box 5. Generally, this shows the employee’s investment in the

contract (after-tax contributions), if any, recovered tax free this year;

the part of premiums paid on commercial annuities or insurance

contracts recovered tax free; or the nontaxable part of a charitable

gift annuity. This box does not show any IRA contributions.

Box 6. If you received a lump-sum distribution from a qualified plan

that includes securities of the employer’s company, the net unrealized

appreciation (NUA) (any increase in value of such securities while in

the trust) is taxed only when you sell the securities unless you choose

to include it in your gross income this year. See Pub. 575 and the

Instructions for Form 4972. If you did not receive a lump-sum

distribution, the amount shown is the NUA attributable to employee

contributions, which is not taxed until you sell the securities.

Box 7. The following codes identify the distribution you received.

1—Early distribution, no known exception (in most cases, under age

591⁄2). See Form 5329, Additional Taxes on Qualified Plans (Including

IRAs) and Other Tax-Favored Accounts. For a rollover to a traditional

IRA of the entire taxable part of the distribution, do not file Form

5329. See the Form 1040/1040A instructions. 2—Early distribution,

exception applies (under age 591⁄2)*. 3—Disability*. 4—Death*.

5—Prohibited transaction. 6—Section 1035 exchange (a tax-free

exchange of life insurance, annuity, or endowment contracts). 

7—Normal distribution. 8—Excess contributions plus

earnings/excess deferrals (and/or earnings) taxable in 2003. 9—Cost

of current life insurance protection (premiums paid by a trustee or

custodian for current insurance protection, taxable to you currently).

A—May be eligible for 10-year tax option. See Form 4972. D—

Excess contributions plus earnings/excess deferrals taxable in 2001.

E—Excess annual additions under section 415 and certain excess

amounts under section 403(b) plans. Report on Form 1040/1040A on

the line for taxable pension or annuity income*. F—Charitable gift

Instructions for Recipient ( Continued)

Box 9b. For a life annuity from a qualified plan or from a tax-sheltered

annuity (with after-tax contributions), an amount may be shown for the

employee’s total investment in the contract. It is used to compute the

taxable part of the distribution. See Pub. 575.

*You are not required to file Form 5329.

annuity. G—Direct rollover to a qualified plan, a tax-sheltered

annuity, a governmental 457(b) plan, or an IRA. May also include a

transfer from a conduit IRA to a qualified plan*. J—Early distribution

from a Roth IRA, no known exception (in most cases, under age

591⁄2). Report on Forms 1040 and 8606 and see Form 5329. L—

Loans treated as distributions. N—Recharacterized IRA contribution

made for 2003 and recharacterized in 2003. Report on 2003 Form

1040/1040A and Form 8606, if applicable. P—Excess contributions

plus earnings/excess deferrals taxable in 2002. Q—Roth IRA

qualified distribution. You are age 591⁄2 or over and meet the 5-year

holding period for a Roth IRA. See the Form 1040/1040A

instructions*. R—Recharacterized IRA contribution made for 2002

and recharacterized in 2003. Report on 2002 Form 1040/1040A and

Form 8606, if applicable. S—Early distribution from a SIMPLE IRA in

first 2 years, no known exception (under age 591⁄2). May be subject

to an additional 25% tax. See Form 5329. T—Roth IRA distribution,

exception applies. You are either age 591⁄2 or over or an exception

(code 3 or 4) applies. See the Form 1040/1040A instructions.

Exercise 1

Alisha received a Form 1099R for 2003. In box 7 of the form there 

is a number 7. What does this mean? 
13-6 Lesson 13

PENSION EARNER

Form SSA-1099

Every person who received Social Security Benefits will receive a 

Form SSA-1099. Sometimes the taxpayer does not bring this form 

with them because they didn’t think that their Social Security is 

taxable. You need to know how much is in box 5 of the Form SSA1099 to correctly calculate the taxpayers return. You may need to 

ask the taxpayer to go home and get the form. If the taxpayer did 

not receive the form or has misplaced it, they can get a printout of 

benefits from the local Social Security office. The amount in box 5 

should be entered in the tax software program, even if the benefits 

aren’t taxable (we will explain later how to determine if the benefits are taxable). This is a critical step to calculating the correct tax.

FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT

● PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME.

● SEE THE REVERSE FOR MORE INFORMATION.

Box 1. Name Box 2. Beneficiary’s Social Security Number

Box 3. Benefits Paid in 2001 Box 4. Benefits Repaid to SSA in 2001 Box 5. Net Benefits for 2001 (Box 3 minus Box 4)

DESCRIPTION OF AMOUNT IN BOX 3 DESCRIPTION OF AMOUNT IN BOX 4

Box 7. Address

Box 8. Claim Number (Use this number if you need to contact SSA.)

Form SSA-1099-SM (1-2003) DO NOT RETURN THIS FORM TO SSA OR IRS

Box 6. Voluntary Federal Income Tax Withholding

2003

Exhibit 3
Lesson 13 13-7

PENSION EARNER

Exercise 2

Ralph comes to your site to get help with his taxes. You ask him 

if he received Social Security benefits. He tells you that he gets 

the benefits but that they have never been taxable so he didn’t 

bring that informaiton with him. Can you accurately complete his 

return without the information? 

Forms RRB-1099 and Form RRB-1099R

Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes.

The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee 

or beneficiary would have been entitled to receive under the social 

security system. This part of the tier 1 benefit is called the “social 

security equivalent benefit” and is treated for tax purposes like 

social security benefits. It is shown on the BLUE part of the Form 

RRB-1099, Payments by the Railroad Retirement Board. (An example of this form is contained in Publication 915, Social Security and 

Tier 1 Railroad Retirement Benefits.) Use the amount from box 5 of 

Form RRB-1099 to complete the Social Security worksheet.

The second category contains the rest of the tier 1 benefits, called 

the “non-social security equivalent benefit,” any tier 2 benefits, 

vested dual benefits, and supplemental annuity benefits. This 

category of benefits, shown on the GREEN part of the Form RRB1099-R, Annuities or Pensions by the Railroad Retirement Board,

is treated as an amount received from a qualified employer plan. 

Vested dual benefits and supplemental annuity benefits are fully 

taxable pensions. Publication 575, Pension and Annuity Income

shows an example of this form and explains the items shown on the 

form.

Exercise 3

Jacob is a retired railroad switchyard operator. He receives 

Railroad Retirement Benefits. What Railroad Retirement forms 

does he need to bring with him when he gets his taxes done?
13-8 Lesson 13

PENSION EARNER

DETERMINING THE TAXABLE PORTION OF THE RETIREMENT INCOME

To make the correct determinations about the taxability of the 

taxpayer’s retirement income, you may need to ask the taxpayer 

several questions. Be considerate when probing for the information 

you need to complete the return.

If the taxpayer cannot provide the required information, suggest 

that the former employer or annuity administrator be contacted. 

You may want to give the taxpayer a written list of questions that 

should be answered by the employer.

 Pensions In General

Generally, if the taxpayer did not pay any part of the cost of his 

or her employee pension or annuity and his or her employer did 

not withhold part of the cost from his or her pay while he or she 

worked, the amounts received each year are fully taxable.

Example 1

Delilah worked for a software development company for 20 years. 

She retired in 2003 and she receives a monthly pension of $1,348. 

She never contributed to the pension plan while she was working, 

her employer made all of the contributions. Her pension is fully 

taxable.

Exercise 4

Dotty worked for the local tire plant for 32 years. She retired in 

June of 2003 and she receives a monthly pension of $1,679 (she 

received 6 payments in 2003). Dotty never contributed to the pension plan. Her employer made all of the contributions. How much 

of her pension is taxable? 

If the taxpayer made contributions to a pension plan with “before 

tax” dollars, then the entire distribution will be taxable. The contribution that the taxpayer made was with money that had not been 

taxed. This is common in 401(K) and Thrift Savings plans.

If the taxpayer paid part of the cost of the annuity or pension with 

“after tax” dollars, he or she is not taxed on the part of the annuity or pension he or she receives that represents a return of his or 

her cost. Generally, this amount will be clearly stated on the Form 

1099R. See the next section for more information on determining 

the taxable portion of an annuity or pension.
Lesson 13 13-9

PENSION EARNER

Example 2

Joseph retired in 2003 after working 30 years for a construction 

company. Each week, he contributed to the Carpenter’s Pension 

Plan. Every year, he paid tax on the gross amount of his salary. His 

pension contributions were made with dollars that had already 

been taxed. Joseph’s pension payments will be partially taxable.

Partially Taxable Pensions and Annuities Other Than IRAs 

General Rule

The General Rule is one of the two methods used to figure the taxfree part of each pension/ annuity payment. It is based on the ratio 

of the investment in the contract to the total expected return.

Most taxpayers who retire after 1996 can no longer use the General 

Rule. Unless the exception applies, retirees must use the Simplified

Method for annuity payments from a qualified plan.

The General Rule must be used if the pension or annuity payment 

is from a nonqualified plan (for example, a private annuity, a purchased commercial annuity, or a nonqualified employee plan).

The calculation of the taxable portion of a payment under the 

General Rule is outside of the scope of the volunteer program. 

However, if the exclusion percentage has already been computed, 

you can assist the taxpayer with the return.

If you need more information, please see Publication 939, General

Rule for Pensions and Annuities.

 Simplified Method

Under the Simplified Method, the tax-free portion of each pension/

annuity payment is figured by dividing the taxpayer’s cost in the 

contract by the total number of expected monthly payments. For a 

pension/annuity that is payable for the life of the taxpayer (and his 

or her beneficiary), the number of expected months is based on the 

age of the taxpayer and is determined from a table.

Example 3

James retired from a manufacturing plant in 2003. While he was 

working at the plant, his employer withheld money from each 

paycheck and sent it to the Engineer’s Pension Fund. James will 

receive a monthly pension payment for the rest of his life. James 

will use the table at the bottom of the Simplified Method worksheet 

to determine the number of expected monthly payments.

To determine the taxable portion of a pension or annuity, you will 

use the Simplified General Rule Worksheet (see Exhibit 4). Once 

figured, the monthly exclusion amount remains the same even 

when the pension income increases.
13-10 Lesson 13

PENSION EARNER

Draft as of

08/27/2003

Before you begin:  If you are the beneficiary of a deceased employee or former employee who died before August

21, 1996, see Pub. 939 to find out if you are entitled to a death benefit exclusion of up to

$5,000. If you are, include the exclusion in the amount entered on line 2 below.

Note. If you had more than one partially taxable pension or annuity, figure the taxable part of each separately. Enter the total of the taxable

parts on Form 1040, line 16b. Enter the total pension or annuity payments received in 2003 on Form 1040, line 16a.

1. Enter the total pension or annuity payments received in 2003. Also, enter this amount on Form 1040, line 16a . . 1.

2. Enter your cost in the plan at the annuity starting date .......................... 2.

3. Enter the appropriate number from Table 1 below. But if your annuity starting date was

after 1997 and the payments are for your life and that of your beneficiary, enter the

appropriate number from Table 2 below .................................... 3.

4. Divide line 2 by the number on line 3 ..................................... 4.

5. Multiply line 4 by the number of months for which this year’s payments were made. If

your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on

line 8. Otherwise, go to line 6 ........................................... 5.

6. Enter the amount, if any, recovered tax free in years after 1986 .................... 6.

7. Subtract line 6 from line 2 ............................................. 7.

8. Enter the smaller of line 5 or line 7 ...................................................... 8.

9. Taxable amount. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, enter this amount on

Form 1040, line 16b. If your Form 1099-R shows a larger amount, use the amount on this line instead of the

amount from Form 1099-R ............................................................ 9.

Table 1 for Line 3 Above

AND your annuity starting date was—

IF the age at annuity starting date before November 19, 1996, after November 18, 1996,

(see page 26) was . . . enter on line 3 . . . enter on line 3 . . .

55 or under 300 360

56–60 260 310

61–65 240 260

66–70 170 210

71 or older 120 160

Table 2 for Line 3 Above

IF the combined ages at annuity starting

date (see page 26) were . . . THEN enter on line 3 . . .

110 or under 410

111–120 360

121–130 310

131–140 260

141 or older 210

Exhibit 4 Blank Simplified Method Worksheet

For pensions starting after December 31, 1986, the taxpayer will 

exclude the nontaxable pension amount until the pension cost is 

recovered. Once the pension cost is recovered, the entire pension 

income is taxable.

Example 4

Peter, age 65, receives retirement benefits under a joint and survivor annuity, to be paid over the joint lives of Peter and his wife, 

Mary, age 62. Peter’s annuity starting date is January 1, 2003.

He contributed $31,000 to a qualified plan and did not receive 

any distributions before the annuity starting date. Peter receives 

monthly payments of $1,200 and his tax-free monthly amount is 

$100. Mary will receive monthly survivor benefits of $600 upon her 

husband’s death.
Lesson 13 13-11

PENSION EARNER

See Exhibit 5 for a completed Simplified Method Worksheet for 

Peter.

Draft as of

08/27/2003

Before you begin:  If you are the beneficiary of a deceased employee or former employee who died before August

21, 1996, see Pub. 939 to find out if you are entitled to a death benefit exclusion of up to

$5,000. If you are, include the exclusion in the amount entered on line 2 below.

Note. If you had more than one partially taxable pension or annuity, figure the taxable part of each separately. Enter the total of the taxable

parts on Form 1040, line 16b. Enter the total pension or annuity payments received in 2003 on Form 1040, line 16a.

1. Enter the total pension or annuity payments received in 2003. Also, enter this amount on Form 1040, line 16a . . 1.

2. Enter your cost in the plan at the annuity starting date .......................... 2.

3. Enter the appropriate number from Table 1 below. But if your annuity starting date was

after 1997 and the payments are for your life and that of your beneficiary, enter the

appropriate number from Table 2 below .................................... 3.

4. Divide line 2 by the number on line 3 ..................................... 4.

5. Multiply line 4 by the number of months for which this year’s payments were made. If

your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on

line 8. Otherwise, go to line 6 ........................................... 5.

6. Enter the amount, if any, recovered tax free in years after 1986 .................... 6.

7. Subtract line 6 from line 2 ............................................. 7.

8. Enter the smaller of line 5 or line 7 ...................................................... 8.

9. Taxable amount. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, enter this amount on

Form 1040, line 16b. If your Form 1099-R shows a larger amount, use the amount on this line instead of the

amount from Form 1099-R ............................................................ 9.

Table 1 for Line 3 Above

AND your annuity starting date was—

IF the age at annuity starting date before November 19, 1996, after November 18, 1996,

(see page 26) was . . . enter on line 3 . . . enter on line 3 . . .

55 or under 300 360

56–60 260 310

61–65 240 260

66–70 170 210

71 or older 120 160

Table 2 for Line 3 Above

IF the combined ages at annuity starting

date (see page 26) were . . . THEN enter on line 3 . . .

110 or under 410

111–120 360

121–130 310

131–140 260

141 or older 210

14,400

31,000

310

100

1,200

1,200

1,200

13,200

Exhibit 5 Simplified Method Worksheet from Peter and Mary

We use the Simplified Method for Peter because his annuity starting date is after November 18, 1986, and the payments are from 

a qualified plan. In addition, because his annuity starting date is 

after December 31, 1997, and his annuity is payable over the lives 

of more than one annuitant, you must combine his age with his 

wife’s age in completing line 3 of the worksheet.

After Peter has excluded a total of $31,000 the rest of his retirement benefits will be fully taxable.
13-12 Lesson 13

PENSION EARNER

Because this is a joint and survivor annuity, if Peter dies before 

recovering all of the pension cost, his wife will also exclude $100 

from her $600 monthly payment until the pension cost is fully 

recovered. If she dies before recovering all of the pension cost, the 

remaining unrecovered cost will be deducted on her final income 

tax return as a miscellaneous itemized deduction on Schedule A 

(Form 1040) (not subject to the 2-percent of adjusted-gross-income 

limitation).

Exercise 5

George, age 65, began receiving pension income under a joint 

and survivor annuity. George’s annuity starting date is January 

1, 2003. George had contributed $26,000 to a qualified plan and 

had received no distribution before 2003. George is to receive a 

monthly retirement benefit of $1,000 and his wife, age 66, is to 

receive a monthly survivor benefit of $500 upon George’s death.

Complete the Simplified Method Worksheet for George.
Lesson 13 13-13

PENSION EARNER

Draft as of

08/27/2003

Before you begin:  If you are the beneficiary of a deceased employee or former employee who died before August

21, 1996, see Pub. 939 to find out if you are entitled to a death benefit exclusion of up to

$5,000. If you are, include the exclusion in the amount entered on line 2 below.

Note. If you had more than one partially taxable pension or annuity, figure the taxable part of each separately. Enter the total of the taxable

parts on Form 1040, line 16b. Enter the total pension or annuity payments received in 2003 on Form 1040, line 16a.

1. Enter the total pension or annuity payments received in 2003. Also, enter this amount on Form 1040, line 16a . . 1.

2. Enter your cost in the plan at the annuity starting date .......................... 2.

3. Enter the appropriate number from Table 1 below. But if your annuity starting date was

after 1997 and the payments are for your life and that of your beneficiary, enter the

appropriate number from Table 2 below .................................... 3.

4. Divide line 2 by the number on line 3 ..................................... 4.

5. Multiply line 4 by the number of months for which this year’s payments were made. If

your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on

line 8. Otherwise, go to line 6 ........................................... 5.

6. Enter the amount, if any, recovered tax free in years after 1986 .................... 6.

7. Subtract line 6 from line 2 ............................................. 7.

8. Enter the smaller of line 5 or line 7 ...................................................... 8.

9. Taxable amount. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, enter this amount on

Form 1040, line 16b. If your Form 1099-R shows a larger amount, use the amount on this line instead of the

amount from Form 1099-R ............................................................ 9.

Table 1 for Line 3 Above

AND your annuity starting date was—

IF the age at annuity starting date before November 19, 1996, after November 18, 1996,

(see page 26) was . . . enter on line 3 . . . enter on line 3 . . .

55 or under 300 360

56–60 260 310

61–65 240 260

66–70 170 210

71 or older 120 160

Table 2 for Line 3 Above

IF the combined ages at annuity starting

date (see page 26) were . . . THEN enter on line 3 . . .

110 or under 410

111–120 360

121–130 310

131–140 260

141 or older 210

Exhibit 6 George’s Simplified Method Worksheet

Exercise 6

Gustav retired in 2003 at the age of 63. He has never been married. He paid in to his pension with after tax dollars, so part of 

his pension payments will not be taxable. How many months of 

life expectancy will you use when you determine the taxable portion of his pension? 
13-14 Lesson 13

PENSION EARNER

 Individual Retirement Arrangement

A taxpayer establishes an individual retirement arrangement 

(IRA) and makes contributions to it through a bank, credit union, 

brokerage, or other entity approved by the IRS. Earnings and gains 

generally accumulate tax free until they are withdrawn as taxable, 

non-taxable or partly taxable distributions.

There are four kinds of IRAs, each of which offer tax advantages.

Traditional IRA

If the taxpayer made nondeductible contributions into the IRA, 

he or she need not pay income tax on those contributions again 

when receiving them later as part of a distribution from the traditional IRA.

If the taxpayer made nondeductible contributions to a traditional

IRA he or she has a cost basis (investment in the contract) equal 

to the amount of those contributions. The nondeductible contributions are not taxed when they are distributed. They are a return of 

investment.

Form 8606, Nondeductible IRAs, must be completed and attached 

to the return if the taxpayer received a distribution from a traditional IRA and he or she has ever made a nondeductible contribution to any traditional IRAs.

The taxpayer cannot withdraw only nondeductible contributions 

from a traditional IRA; if there have been any earnings or gains on 

contributions or deductible contributions have been made to any 

traditional IRA, part of each distribution will be taxable.

Example 5

Tyrone contributed $500 a year to a traditional IRA. Each year he 

deducted his traditional IRA contribution from his income. This 

year he received his first distribution from the traditional IRA. It 

is fully taxable. Tyrone will pay income tax on the distributions he 

receives which represent the contributions he made and deducted 

as well as the money the contributions have earned over the years.

Example 6

Dorothy contributed $750 a year to a traditional IRA. She did not 

qualify to deduct her contributions from her income. This year she 

received her first distribution from the traditional IRA. She will 

pay income tax only on the part of the distribution from the traditional IRA that represents earnings on the contributions. She will 

use Form 8606, Nondeductible IRAs to determine the taxable portion of her distribution.
Lesson 13 13-15

PENSION EARNER

 Savings Incentive Match Plans for Employees (SIMPLE) IRA

Some employers offer their employees, including a self employed 

individual, the chance to contribute part of their pay to an IRA as 

part of a SIMPLE plan. The employer is also generally required to 

make contributions on behalf of eligible employees. The employee is 

not currently taxed on his or her contributions when they are paid 

into the IRA. Distributions from a SIMPLE IRA are generally fully 

taxable.

Simplified Employee Pension (SEP) IRA

Some employers offer their employees the chance to take part in a 

SEP. Self employed people also can establish a SEP-IRA for themselves. Generally, SEP-IRA contributions are not included in an 

employee’s income when paid into the IRA. Distributions are generally fully taxable when the employee receives them in later years.

 Roth IRA

Contributions to a Roth IRA are not deductible. Distributions from 

a Roth IRA are tax free if they meet certain conditions, even if they 

represent earnings that accumulated in the Roth IRA. For the 

distribution of earnings to be excluded from income, the following 

requirements must be met:

1. The distribution is made after the 5-year period beginning with 

the first taxable year for which a contribution was made to a 

Roth IRA set up for the taxpayer’s benefit, and

2. The distribution is:

a) Made on or after age 59 1/2,

b) made becasue the taxpayer was disabled,

c) made to a beneficiary or to an estate, or

d) to pay certain qualified first-time homebuyer amounts.

Social Security Benefits

Social security benefits are reported to the taxpayer on Form SSA1099, Social Security Benefit Statement. Part of the social security 

benefits or Part of the social security equivalent portion of tier 1 

railroad retirement benefits a taxpayer receives may be taxable. 

The taxable amount, if any, depends upon the rest of the taxpayer’s 

income and filing status.

Generally, if Social Security benefits were the taxpayers only 

source of income, the benefits are not taxable and the taxpayer 

probably does not need to file a federal income tax return. If the 

taxpayer received Social Security benefits plus other income, the 

answer to how much, if any, is taxable can be found by completing 

the Social Security Benefits Worksheet.

The Social Security Benefits Worksheet is found in the instruction 

booklets for Forms 1040 and 1040A. The worksheet is also available on tax software packages. If you are using Taxwise you will not 
13-16 Lesson 13

PENSION EARNER

need to complete the worksheet. The software will calculate the 

taxable portion of the benefits. The worksheet is used to figure the 

taxable portion of benefits received. Some of the benefits received 

are taxable if total income, plus one-half of the benefits received, 

is more than certain base amounts. The current base income 

amounts are:

■ $32,000 if married and filing a joint return

■ $25,000 if taxpayer is filing as single, head of household, or 

qualifying widow(er) with dependent child

■ $25,000 if married but filing separately, and the taxpayer did

not live with his or her spouse at any time during 2003

■ $0 if married filing separately, and the taxpayer did live with 

his or her spouse at any time during 2003

The taxable amount of benefits received is figured using the worksheet provided in the instruction booklets for Forms 1040and 

1040A. The amount in box 5, Net benefits for 2003, is entered on a 

worksheet to figure if any of the benefits are taxable. Net benefits 

are the gross benefits less any repayments made by the taxpayer 

in the tax year. Make sure you enter only the amount from box 5 of 

Form SSA-1099 on line 1 of the worksheet or on the tax preparation software.

Example 7

Ray and Susan are married and file a joint Form 1040. Ray is 

retired and receives a fully taxable pension of $12,000 ( Form 1040, 

line 16b). Ray received a $3,000 short-term capital gain from the 

sale of stock.

Ray also receives social security benefits. His Form SSA-1099 is 

shown in Exhibit 7. Susan worked and earned wages of $21,000 

(Form 1040, line 7) in 2003. She also contributed $560 to her traditional IRA ( Form 1040, line 23). Susan is not covered at work by a 

pension plan.

Ray and Susan’s completed Social Security Benefits Worksheet is 

shown in Exhibit 8.
Lesson 13 13-17

PENSION EARNER

Draft as of

09/01/2003

FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT

2003 ● PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME.

● SEE THE REVERSE FOR MORE INFORMATION.

Box 1. Name Box 2. Beneficiary’s Social Security Number

Box 3. Benefits Paid in 2003 Box 4. Benefits Repaid to SSA in 2003 Box 5. Net Benefits for 2003 (Box 3 minus Box 4)

DESCRIPTION OF AMOUNT IN BOX 3 DESCRIPTION OF AMOUNT IN BOX 4

Box 7. Address

Box 8. Claim Number (Use this number if you need to contact SSA.)

Form SSA-1099-SM (1-2004) DO NOT RETURN THIS FORM TO SSA OR IRS

Box 6. Voluntary Federal Income Tax Withholding

Ray Maple xxx-xx-xxxx

$7,056.00 $7,056.00

123 Ash Street

Your Town, IL 00000

Exhibit 7 Ray’s Form SSA-1099
13-18 Lesson 13

PENSION EARNER

Draft as of

08/27/2003

Before you begin:  Complete Form 1040, lines 21, 23, 24, and 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  If you are married filing separately and you lived apart from your spouse for all of

2003, enter “D” to the right of the word “benefits” on line 20a.  Be sure you have read the Exception on page 26 to see if you can use this worksheet

instead of a publication to find out if any of your benefits are taxable.

1. Enter the total amount from box 5 of all your Forms SSA-1099 and Forms

RRB-1099 ................................................ 1.

2. Enter one-half of line 1 ....................................... 2.

3. Enter the total of the amounts from Form 1040, lines 7, 8a, 9a, 10 through 12, 13a, 14, 15b,

16b, 17 through 19, and 21. Do not include amounts from box 5 of Forms SSA-1099 or

RRB-1099 .............................................................. 3.

4. Enter the amount, if any, from Form 1040, line 8b ................................. 4.

5. Add lines 2, 3, and 4 ....................................................... 5.

6. Enter the total of the amounts from Form 1040, lines 23, 24, and 27 through 32a, plus any

amount you entered on the dotted line next to line 33 ............................... 6.

7. Is the amount on line 6 less than the amount on line 5?

No. STOP None of your social security benefits are taxable.

Yes. Subtract line 6 from line 5 ........................................... 7.

8. If you are:

• Married filing jointly, enter $32,000

• Single, head of household, qualifying widow(er), or married filing

separately and you lived apart from your spouse for all of 2003, enter } ........... 8. $25,000

• Married filing separately and you lived with your spouse at any time in

2003, skip lines 8 through 15; multiply line 7 by 85% (.85) and enter the

result on line 16. Then go to line 17

9. Is the amount on line 8 less than the amount on line 7?

No. STOP None of your social security benefits are taxable. You do not have to enter any

amounts on lines 20a or 20b of Form 1040. But if you are married filing

separately and you lived apart from your spouse for all of 2003, enter -0- on

line 20b. Be sure you entered “D” to the right of the word “benefits” on line

20a.

Yes. Subtract line 8 from line 7 ........................................... 9.

10. Enter: $12,000 if married filing jointly; $9,000 if single, head of household, qualifying

widow(er), or married filing separately and you lived apart from your spouse for all of 2003 10.

11. Subtract line 10 from line 9. If zero or less, enter -0- ............................... 11.

12. Enter the smaller of line 9 or line 10 ........................................... 12.

13. Enter one-half of line 12 .................................................... 13.

14. Enter the smaller of line 2 or line 13 ........................................... 14.

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- ........................... 15.

16. Add lines 14 and 15 ....................................................... 16.

17. Multiply line 1 by 85% (.85) ................................................. 17.

18. Taxable social security benefits. Enter the smaller of line 16 or line 17 ................ 18.

• Enter the amount from line 1 above on Form 1040, line 20a.

• Enter the amount from line 18 above on Form 1040, line 20b.

If part of your benefits are taxable for 2003 and they include benefits paid in 2003 that were for an

earlier year, you may be able to reduce the taxable amount. See Pub. 915 for details.

TIP

7,056

3,528

36,000

39,528

560

✔ 38,968

✔

32,000

✔ 6,968

12,000

6,968

3,484

3,484

3,484

5,998

3,484

✔

0

0

Exhibit 8 Ray and Susan’s Social Security Benefits Worksheet
Lesson 13 13-19

PENSION EARNER

Exercise 7

Jules and Olga are both over 65 and they both received Social 

Security benefits. They will file a joint return. They had $2,093 of 

tax-exempt interest income. Do you need to include this amount 

on the Social Security benefits worksheet ?

Example 8

Anne and her son, Tony, both receive survivor social security benefits. Anne receives a benefit check for $400 each month.

A portion of these benefits belongs to Tony. He was sent a Form 

SSA-1099, which showed $1,800 of net benefits received. Tony also 

had $4,000 income from a summer job and some interest income. 

When you prepare his tax return, you would complete a Social

Security Benefits Worksheet for Tony to figure if any of his social

security benefits are taxable.

When you complete Anne’s tax return, you would include only the 

$3,000 of her social security benefits on her worksheet to figure if 

any of her benefits are taxable.

Exercise 8

Antoinette’s husband was killed by a drunk driver. He was only 

34 and he left behind three young children in addition to his wife. 

Each of the three kids will receive Social Security benefits until 

they turn 18. Antoinette does not receive a survivor’s benefit for 

herself. Since Antoinette will claim the children on her return, 

should she include the children’s Social Security benefits on her 

return?

If the taxpayer files a joint return, you must combine the income 

and benefits of both spouses when completing the worksheet. 

Even if the spouse received no social security benefits, include 

the spouse’s other income when completing the worksheet. If both 

spouses received benefits, combine both their benefits and income, 

and complete only one worksheet.
13-20 Lesson 13

PENSION EARNER

Example 9

Wanda and Dan are both retired and they file a joint return. Wanda 

received a Form SSA-1099 with an amount of $4,300 appearing in 

box 5. Dan retired from the railroad, and box 5 of his Form RRB1099 shows an amount of $6,800. Wanda and Dan will use benefits 

of $11,100 and only one worksheet to figure if any of their benefits 

are taxable.

Disability Pension Income

Generally, a taxpayer who retires on disability must include all of 

his or her disability payments in income. Disability payments are 

taxed as wages until the taxpayer reaches the minimum retirement 

age set by the employer. After the taxpayer reaches the minimum

retirement age, disability payments are treated as pension income. 

Minimum retirement age is generally the earliest age at which the 

taxpayer may receive a pension whether or not disabled.

(Some taxpayers with retirement income may be eligible for the 

credit for the elderly or the disabled. See Lesson 14 for more information.)

REPORTING THE RETIREMENT INCOME

Reporting Pension Income

Total pension income is entered on Form 1040, line 16a, or Form 

1040A, line 12a. The taxable part is entered on Form 1040, line 16b, 

or on Form 1040A, line 12b. If the pension is fully taxable, enter it 

on Form 1040, line 16b, or Form 1040A, line 12b and leave Form 

1040, line 16a, or Form 1040A, line 12a, blank. Social Security 

benefits and IRA distributions are not reported on the pension 

line of the tax return. Later in this lesson, you will learn where to 

report these payments. If the taxpayer has more than one pension 

or annuity that is not fully taxable, figure the taxable part of each 

separately. Enter only totals on the proper lines of Form 1040 and 

Form 1040A. If you are using tax preparation software, the totals 

will be computed for you and placed on the appropriate lines, if you 

correctly enter all of the information from the 1099 forms.

When the taxpayer has more than one pension or annuity, and you 

are preparing the return by hand, use a separate piece of paper as 

a worksheet to group together detailed information. Only the summary information is entered on Form 1040 or Form 1040A. The 

worksheet should be kept for future reference.

Be sure to add the amounts shown on all Forms 1099-R as federal 

income tax withheld and enter the total on Form 1040, line 62, 

or on Form 1040A, line 39. The omission of pension withholding 

is a frequent error that results in an incorrect amount owed or 

refunded (and an unhappy taxpayer).
Lesson 13 13-21

PENSION EARNER

Exercise 9

Verna comes to you for help with her tax return. She tells you 

that she worked for 17 years in a factory and then she worked for 

22 years in a state job. She opens up a big brown envelope and 

takes out many pieces of paper. After you help her sort through 

the papers, you determine that she had the follwing income:

■ Form 1099INT for Interest on her savings - $3,951

■ Form 1099INT for Interest on her checking - $504

■ Form 1099INT for Interest on her CDs - $1,832

■ Form 1099R for Pension from her Factory employer - $2,637 

(fully taxable)

■ Form 1099R for IRA distribution - $1,030 (fully taxable)

■ Form 1099R for Pension from her state employer - $17,044 

(she has been getting this for several years and she shows you 

the simplified general rule worksheet that indicates that $219 

of each monthly payment is non-taxable).

■ Form SSA1099 with an amount of $3,692 in box 5.

She also had receipts for medical bills, prescriptions, real estate 

taxes and contributions. They totaled $3,904.

What amount should you enter on lines 12 a and 12b of Verna’s 

form 1040A?

DISABILITY REPORTING

An employer may report disability income on Form W-2, Wage and 

Tax Statement. However, an employer may also report disability 

income on Form 1099-R, Distributions from Pensions, Annuities, 

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Enter disability income reported on Form W-2 on line 7 of either 

Form 1040 or Form 1040A.

If the employer reports disability income on Form 1099-R, Box 

2a shows the taxable amount. Check to see if Box 7 (Distribution 

Code) shows the code number 3 (Disability). If Box 7 indicates that 

the taxpayer is receiving disability payments, then determine if the 

taxpayer has reached the minimum retirement age.

1. Until the taxpayer reaches the minimum retirement age, report 

the disability income as wages on line 7 of Form 1040 or Form 

1040A.
13-22 Lesson 13

PENSION EARNER

2. After the taxpayer has reached the minimum retirement age, 

report the disability income as a taxable pension. If the disability payments are partially taxable, use lines 16a and 16b ( Form 

1040) or lines 12a and 12b ( Form 1040A). If the payments are 

fully taxable, enter the taxable amount on line 16b or line 12b; 

do not make an entry on line 16a or line 12a.

Exercise 10

Annie Jo is 47 years old and she tells you that she has retired on 

disability from her job. She used to load cargo for a tractor-trailer 

company, but a large box fell on her and left her paralyzed. She 

receives a monthly payment from her former employer’s pension 

plan. She has not reached the minimum retirement age set by her 

company’s pension plan. Where should you report her disability 

income?

Reporting Social Security Benefits

Report taxable social security benefits on Form 1040, line 20b, or 

Form 1040A, line 14b. Complete the other income and adjustment 

items on page 1 of Form 1040 or Form 1040A before you use the 

Social Security Benefits Worksheet. Then complete the other lines of 

the worksheet to figure if any of the benefits are taxable.

If the worksheet shows that no benefits are taxable, leave the line 

blank for social security benefits on Form 1040 or Form 1040A. 

Then total page 1 and complete the remainder of the tax return. 

If you determine that any benefits are taxable, complete line 20 of 

Form 1040 or line 14 of Form 1040A. 

Enter the social security benefits received on Form 1040, line 20a, 

and enter the taxable portion (from line 18 of the worksheet) on 

line 20b. On Form 1040A, enter the benefits received on line 14a, 

and enter the taxable portion of benefits on line 14b.

The taxable portion of social security benefits is never more than 

85 percent of the net benefits the taxpayer has received. In many 

cases, the taxable portion is less than 50 percent.
Lesson 13 13-23

PENSION EARNER

Exercise 11

Hank comes to your site for some help with his tax return. He 

is really upset because his neighbor told him that he would have 

to pay tax on all of his Social Security benefits this year. After 

talking to Hank, you learn that his wife died in 2002 and that 

he decided to sell his farm and move into senior housing in 2003. 

The sale of the farm created $31,896 of taxable income for Hank. 

His neighbor told him that with that much income, the entire 

$11,724 of his Social Security benefits would be taxable. What is 

the maximum taxable amount of Hank’s benefits? 

Reporting IRA Distributions

IRA distributions are reported on Form 1099-R, Distributions from 

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, 

Insurance Contracts, etc.

Traditional IRA, SIMPLE IRA, or SEP-IRA: Box 7 of Form 

1099-R shows “7” as the distribution code for a normal distribution, and the box “IRA/SEP/SIMPLE” is checked. Ask the taxpayer 

whether he or she deducted all traditional IRA contributions from 

income in the year they were made. If so, the entire distribution is 

taxable. Report it on Form 1040A, lines 11a and 11b, or on Form 

1040, lines 15a and 15b. Distributions from a SIMPLE IRA and 

from a SEP-IRA are generally fully taxable.

Exercise 12

Steve and Sally need you to help them with their taxes. They 

have done most of the work, but they are not sure what to put on 

lines 11a, 11b, 12a and 12b of their Form 1040A. You look at the 

1099R forms that they have brought with them and you make the 

following observations:

■ ABC Pension - fully taxable - $4,382

■ XYZ Pension - partially taxable - Gross amount = $9,202, 

Taxable portion = $7,834

■ Sally’s IRA withdrawal - fully taxable - $3,809

■ Steve’s IRA withdrawal - partially taxable - Gross amount = 

$4,800, Taxable mount $4,193

What amount should Steve and Sally put on:

Line 11a

Line 11b

Line 12a

Line 12b
13-24 Lesson 13

PENSION EARNER

OTHER ISSUES

Premature Distributions

Most distributions (both periodic and lump-sum) from qualified 

retirement plans made before the taxpayer has reached age 59 1/2 

are subject to an additional tax of 10%. The tax applies to the taxable portion of the distribution or payment. Certain early distributions are excepted for the early distribution tax. If the distribution 

code in box 7 of Form 1099R is 2, 3, or 4, the taxpayer does not have 

to pay the additional tax. If the Form 1099R shows a code 1 in box 

7 you may need to complete Form 5329 to determine the additional 

tax on the distribution. However, if the taxpayer does not meet one 

of the exceptions to the additional tax (as noted on Form 5329), you 

can just enter 10% of the distribution on line 57 of Form 1040.

Lump-sum Distributions

A lump-sum distribution is the distribution or payment within 

one tax year of an employee’s entire balance (less deductible voluntary employee contributions and certain amounts forfeited or 

subject to forfeiture) from all qualified pension, stock bonus, or 

profit-sharing plans that the employer maintains. To qualify as a 

lump-sum distribution, the payment must have been made:

■ Because the plan participant died, or

■ After the participant reached age 59 1/2, or

■ Because the participant (not including a self-employed individual) separated from service with the employer, or

■ After the participant, if a self-employed individual, becomes 

totally and permanently disabled.

Lump-sum distributions are reported on Form 1099-R like any 

other pension distribution. Some lump-sum distributions qualify 

for special tax treatments. Code A in box 7 of the 1099-R indicates 

that it is a lump-sum distribution and it qualifies for special tax 

treatments such as:

■ Distributions allocable to pre-1974 participation being taxed at 

a special rate (there will be an amount in box 3 of Form 1099-R) 

(The part after 1973 is ordinary income)

■ Ten-year tax option of the distributions

■ Tax-free rollover of the distribution into an Individual

Retirement Arrangement (IRA).

 Minimum Distributions

Taxpayers are required to receive minimum distributions from 

qualified employee retirement plans, qualified annuity plans, 

deferred compensation plans, tax-sheltered annuity plans and 

Individual Retirement Arrangements (IRAs) other than Roth IRAs.
Lesson 13 13-25

PENSION EARNER

Distributions must begin by April 1 of the calendar year that follows the calendar year in which the taxpayer reaches age 70 1/2 or 

retires, if later. (For IRAs, it does not matter whether the taxpayer 

is employed. Distributions must begin by April 1 of the year following the calendar year in which the taxpayer reaches age 70 1/2.) 

Required distributions for later years must be made by December 

31 of that year.

IMPORTANT! If the taxpayer does not receive the minimum distribution, an excise tax may be imposed. The tax is 50 percent of 

the difference between the minimum distribution and the amount 

actually distributed for the tax year.

Exercise 13

Helen turned 71 on March 17, 2004. She retired in 1998. She has 

never taken any distribution from her traditional IRA accounts. 

She is asking for your help, because she knows that she will have 

to take a distribution from the IRA this year. The bank where she 

has her IRA told her that she needs to take a minimum distribution of $1,479 per year. What does Helen need to do?

a) Helen only needs to take a distribution of $1,479 by 12-31-04.

b) Helen needs to take a distribution of at least $1,479 by 4-1-04 

and at least another $1,479 by 12-31-04.

c) Helen needs to take a distribution of $2,958 by 12-31-04.

d) Helen does not need to take any distributions until 2005.

Lump-Sum Benefit Payments

Some taxpayers may have received a lump-sum benefit payment in 2003. This payment could be for both the current tax year 

and the prior tax year. The lump-sum payment will be included in 

box 3 of the Form SSA-1099 or Form RRB-1099 that the taxpayer 

receives.

The form will also show the year, or years, of the payment. When 

figuring the taxable portion of social security benefits, two options 

are available for lump-sum benefit payments. The first option 

allows the taxpayer to report the whole payment in 2003, the year 

it was received. When the taxpayer chooses this option, complete 

the Social Security Benefits Worksheet as usual by including the 

entire lump-sum payment on line 1.

The taxpayer also has the option of treating the payment as 

received in the earlier year or years. This is done by figuring 

whether any part of these benefits is taxable, based on the earlier 
13-26 Lesson 13

PENSION EARNER

year’s income. Any part that is taxable is then added to any taxable 

benefits for the current year (2003) and included on Form 1040, 

line 20b.

If the taxpayer chooses to spread the payments back to earlier 

years, only 2003 income will be adjusted. The taxpayer does not file 

amended returns for the earlier years. However, a special procedure 

must be used to figure the taxable portion of the benefits assigned 

to the earlier years. If the taxpayer wants to use this option, refer 

him or her to a paid professional tax preparer or to IRS Publication 

915, Social Security and Equivalent Railroad Retirement Benefits.

IRAs Withdrawal of Excess Contributions

If the taxpayer withdraws excess contributions and any earnings 

by the due date of the return, he or she will not be subject to an 

additional 6% tax on the excess contribution. The withdrawal must 

be completed by the due date of the tax return for that year, including extensions.

The withdrawn excess contribution is not included in the taxpayer’s gross income if both of the following conditions are met.1) No 

deduction was allowed for the excess contribution. 2) All interest 

or other income earned on the excess contribution is withdrawn. 

However, the taxpayer must include in his or her gross income the 

interest or other income that was earned on the excess contribution. Report it on the return for the year in which the excess contribution was made.

The withdrawal of interest or other income may be subject to an 

additional 10% tax on early withdrawals. Taxpayers will receive 

Form 1099-R indicating the amount of the withdrawal. If the excess 

contribution was made in a previous tax year, the form will indicate 

the year in which the earnings are taxable.

In general, a taxpayer must include all withdrawals from his or 

her traditional IRA in gross income. However, if the total contributions to an IRA (other than rollover contributions for the year) are 

$3,000 or less ($3,500 or less if taxpayer is age 50 or older), and 

there are no employer contributions for the year, the taxpayer can 

withdraw any excess contribution after the due date for filing the 

tax return for that year, including extensions, and not include the 

amount withdrawn in his or her gross income.

This applies only to the part of the excess for which the taxpayer did not take a deduction. For more information on excess 

contributions, see Publication 590.

Pension Withholding and Estimated Tax Payments

Income tax is normally withheld from the taxable part of a pension 

or annuity. At the taxpayer’s request, the payer of the pension or 

annuity can adjust the withholding amount or stop the withholding 

completely. Generally, Form W-4P is used to request a change in 

withholding on a pension. The taxpayer should complete the form 
Lesson 13 13-27

PENSION EARNER

and send it to the payer of the pension. The taxpayer can request 

withholding from their Social Security benefits by completing Form 

W-4V, Voluntary Wihholding Request, and filing it with the Social 

Security Administration.

A taxpayer who chooses not to have tax withheld may have to pay 

estimated tax. For more information about estimated tax or withholding, see Lesson 7 and Publication 505, Tax Withholding and 

Estimated Tax. Failure to have enough federal income tax paid in 

throughout the year can result in an estimated tax penalty. Also, it 

can result in a large amount of tax due when the return is filed. If 

the taxpayer owes more than $1,000 on the tax return, you should 

discuss their withholding and estimated tax options with them.

Exercise 14

FaithMae comes to your site to get her 2003 tax return done. 

When you finish her return, you explain to her that she owes 

$985. You tell her that she needs to pay this amount by April 15, 

2004. She says that she will pay the amount, but she wants to 

know if there is some way to have more tax withheld from her 

pension so that she doesn’t owe so much at the end of the year. 

What form should she complete to increase the withholding from 

her pension? Who does she give the form to? 

Health Coverage Tax Credit

The following information is provided for awareness only. You are 

not expected to calculate this new credit.

The Health Coverage Tax Credit (HCTC) is a federal tax credit that 

was established to assist the following groups of people:

1. Workers who lose their jobs due to the effects of international trade. The worker must be eligible for either certain 

Trade Adjustment Assistance benefits or Alternative Trade 

Adjustment Assistance.

2. People who receive benefits from the Pension Benefit Guaranty 

Corporation (PBGC) and are at least 55 years old.

Taxpayers who are potentially eligible for this credit will be notified by mail. Shortly after the mailing, the HCTC Customer 

Contact Center will mail the taxpayer a packet describing the program and eligibility requirements.

For additional information on this topic, you can visit the IRS website at: www.irs.gov.
13-28 Lesson 13

PENSION EARNER

  SUMMING UP THIS LESSON  

Pensions or annuities may have a tax-free portion if the taxpayer 

made after-tax contributions to the plan.

To determine the taxable portion of the annuity payments of a 

taxpayer, use:

a. The Simplified Method if the taxpayer’s annuity starting date 

is after November 18, 1996, and annuity payments are from a 

qualified plan. For annuity starting dates after 1997, use the 

annuitant’s age (or combined ages if more than one annuitant) at the annuity starting date of the taxpayer(s).

b. The General Rule for annuity payments from a nonqualified 

plan and for certain retirees age 75 or older.

 Total pension or annuity income and taxable pension or 

annuity income are entered on Form 1040, lines 16a and 16b, 

or Form 1040A, lines 12a and 12b.

 Social security – Nontaxable or taxable To determine taxable 

portion of social security payments received by a taxpayer, 

use: Social Security Benefits Worksheet.

 Total social security income and taxable portion are entered 

on Form 1040, lines 20a and 20b, or Form 1040A, lines 14a 

and 14b.

 Federal income tax on pension, annuity and social security 

income can be withheld by the payer, or the taxpayer may 

choose to pay estimated tax.
Lesson 13 13-29

PENSION EARNER

 PENSIONS

Answers to Exercises

Exercise 1

The distribution was a “normal distribution”.

Exercise 2

No

Exercise 3

Form RRB-1099 and Form RRB 1099-R.

Exercise 4

All of it. $10,074

ANSWERS TO EXERCISES Lesson 13
13-30 Lesson 13

PENSION EARNER

 PENSIONS

 ANSWERS TO EXERCISES

Exercise 5

Draft as of

08/27/2003

Before you begin:  If you are the beneficiary of a deceased employee or former employee who died before August

21, 1996, see Pub. 939 to find out if you are entitled to a death benefit exclusion of up to

$5,000. If you are, include the exclusion in the amount entered on line 2 below.

Note. If you had more than one partially taxable pension or annuity, figure the taxable part of each separately. Enter the total of the taxable

parts on Form 1040, line 16b. Enter the total pension or annuity payments received in 2003 on Form 1040, line 16a.

1. Enter the total pension or annuity payments received in 2003. Also, enter this amount on Form 1040, line 16a . . 1.

2. Enter your cost in the plan at the annuity starting date .......................... 2.

3. Enter the appropriate number from Table 1 below. But if your annuity starting date was

after 1997 and the payments are for your life and that of your beneficiary, enter the

appropriate number from Table 2 below .................................... 3.

4. Divide line 2 by the number on line 3 ..................................... 4.

5. Multiply line 4 by the number of months for which this year’s payments were made. If

your annuity starting date was before 1987, skip lines 6 and 7 and enter this amount on

line 8. Otherwise, go to line 6 ........................................... 5.

6. Enter the amount, if any, recovered tax free in years after 1986 .................... 6.

7. Subtract line 6 from line 2 ............................................. 7.

8. Enter the smaller of line 5 or line 7 ...................................................... 8.

9. Taxable amount. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, enter this amount on

Form 1040, line 16b. If your Form 1099-R shows a larger amount, use the amount on this line instead of the

amount from Form 1099-R ............................................................ 9.

Table 1 for Line 3 Above

AND your annuity starting date was—

IF the age at annuity starting date before November 19, 1996, after November 18, 1996,

(see page 26) was . . . enter on line 3 . . . enter on line 3 . . .

55 or under 300 360

56–60 260 310

61–65 240 260

66–70 170 210

71 or older 120 160

Table 2 for Line 3 Above

IF the combined ages at annuity starting

date (see page 26) were . . . THEN enter on line 3 . . .

110 or under 410

111–120 360

121–130 310

131–140 260

141 or older 210

12,000

26,000

260

100

1,200

1,200

1,200

10,800

Lesson 13
Lesson 13 13-31

PENSION EARNER

 PENSIONS

Exercise 6

260 months

Exercise 7

Yes

Exercise 8

No

Exercise 9

Line 12a $19,681

Line 12b $17,053

Exercise 10

Line 7 - Wages

Exercise 11

$9,965.40 85%

Exercise 12

Line 11a $8,609

Line 11b $8,002

Line 12a $13,584

Line 12b $12,216

Exercise 13

B

Exercise 14

Form W-4P

Give to the payer of the pension.

ANSWERS TO EXERCISES Lesson 13
13-32 Lesson 13

PENSION EARNER

STUDENT NOTES
Lesson 13

Military Segment M-13-1

THRIFT SAVINGS PLAN

Lesson 13

Military Segment

INTRODUCTION AND OBJECTIVE

In the basic lesson we learned how to handle pension income, both 

regular and disability. In this segment we will learn about Thrift 

Savings Plan (TSP) that affects many military participants. The 

TSP is a retirement saving and investment plan that has been 

available to civilian employees of the Federal Government since 

1987 and was made available to members of the Armed Forces 

in 2002. It offers participants the same type of savings and tax 

benefits that many private corporations offer their employees in 

a 401(k) type plan. The TSP allows participants to save a portion 

of their pay in a special retirement account administered by the 

Federal Retirement Thrift Investment Board. The money that 

participants invest in TSP comes from pre-tax dollars and reduces 

their current taxable income and therefore their federal income 

tax. Investments and earnings are not taxed until they are 

withdrawn.

Participation in TSP is optional. Armed Forces members must sign 

up with their respective service to participate in TSP. Uniformed 

members of the Army, Navy, Air Force, Marine Corps, Coast Guard, 

Public Health Service, and the National Oceanic and Atmospheric 

Administration serving on active duty and members of the Ready 

Reserve or National Guard of those services in any pay status can 

contribute to TSP.

At the end of this segment you will be able to:

■ Determine the maximum amount a uniformed service member 

can contribute to TSP.

■ Explain the combat zone rule for uniformed service members.

■ Determine the Tax Saver’s Credit for uniformed service 

members.

CONTRIBUTIONS

Your participation in the TSP does not affect your eligibility to 

contribute to an IRA.

The IRS sets annual limits on the amounts that a participant can 

contribute to TSP. For tax-deferred contributions, the IRS imposes 

an annual elective deferral limit. Law adjusts it each year to take 

into account increases in the cost of living. The elective deferral 

limit does not affect most uniformed services participants. Their 

contributions to the TSP are limited to 8 percent of their basic 

pay each pay period. For 2003, the limit is $12,000. However, 

participants who are also making contributions from incentive, 

special, or bonus pay must be aware of these limits because they 

can contribute all or any portion of these payments to the TSP (as 
Lesson 13 M-13-2 Military Segment

long as they are also contributing from basic pay). The TSP will 

not accept contributions that exceed this limit, unless you are over 

age 50, in which case your contributions cannot exceed the sum 

of the elective deferral limit plus the “catch-up” contribution limit 

($2,000 for 2003.)

If you are a member of the Ready Reserve and also contribute to a 

Federal civil service TSP account or to another qualified plan, the 

total tax-deferred contributions you make to all TSP plans cannot 

exceed the elective deferral limit. If you contribute to a civilian and 

uniformed services TSP account in a single calendar year, the TSP 

will refund to you any excess contributions to your TSP account.

In addition to the elective deferral limit, for participants who are 

age 50 or older there is an IRS limit on the amount of catch-up 

contributions that a participant can make. These contributions 

are in addition to regular (including incentive, special and bonus 

pay) tax-deferred contributions, and thus have their own limits 

that are in addition to the annual elective deferral limit. As with 

regular tax-deferred contributions, the combined total of catch-up 

contributions to all eligible plans cannot exceed the annual catchup contribution limit. 

If you contribute to two TSP accounts (civilian and 

uniformed services) during the year, your combined 

contributions to both plans cannot exceed the IRS limit. If 

you exceed the elective deferral limit because you made excess 

contributions to two TSP accounts, the TSP will notify you that the 

excess money will be returned to you from your uniformed services 

account (unless you specify otherwise) in order to reduce the effect 

on matching contributions.

A service members’ payroll office will deduct contributions from 

military pay each pay period based on the election and will remit 

these contributions to the TSP. Service members cannot send a 

check to the TSP; once the service member receives his pay, he or 

she cannot contribute any of it to the TSP.

Combat Zone rules.

If the service member served in a combat zone, special rules apply. 

Because all or part of pay earned during a month in a combat zone 

is tax exempt, they do not receive the benefit of tax deferral when 

they contribute it to the TSP. As a consequence, contributions from 

tax-exempt pay are not subject to the elective deferral limit.

Tax Saver’s Credit

Members, who participate in the TSP during tax years 2003 

through 2006, may be eligible for a tax credit on their federal 

income tax return for each year they contribute to the plan. For 

married members who file a joint return, the maximum credit is 

$2,000.
Lesson 13

Military Segment M-13-3

For single members, the maximum credit is $1,000. However, the 

amount of the tax credit may be offset by any taxable distribution 

paid directly to them by the TSP. This benefit, called the saver’s 

tax credit, is available to participants with an adjusted gross 

income of no more than $50,000 if married filing jointly, $37,500 if 

head of household, or $25,000 if single or married filing separately.

  SUMMING UP THIS SEGMENT  

In this segment you have learned that:

 Military members deployed to a combat zone have 180 days 

of additional time, to make qualified retirement contribution 

to an IRA, after they leave the combat zone.

 The Thrift Savings Plan is a retirement savings and investment plan that is now available to members of the Armed 

Forces. Service members could contribute up to 8 percent of 

their basic pay earned each pay period in 2003. Service members were also able to contribute all or any whole percentage 

of special, incentive, or bonus pay they received. The maximum amount they could contribute in 2003 was $12,000.
Lesson 13 M-13-4 Military Segment

STUDENT NOTES
Lesson 14 14-1

PENSION EARNER

CREDIT FOR THE ELDERLY OR

DISABLED Lesson 14

INTRODUCTION AND OBJECTIVES

Although few taxpayers will qualify for this credit, we 

still get questions about who qualifies for the credit. 

Even if a taxpayer meets the basic qualifications, he 

or she may not have a credit due to the income limits 

on their nontaxable social security, veterans benefits, 

or other excludable pension, annuity, or disability 

benefit. 

In this lesson, you will learn about the credit for the 

elderly or the disabled. After completing this lesson 

you should be able to:

■ Determine who is a qualified individual for the 

“credit for the elderly or disabled”

■ Apply the income limits to the qualified individual

■ Calculate the credit

WHO IS A QUALIFIED INDIVIDUAL FOR THE “CREDIT

FOR THE ELDERLY OR THE DISABLED”?

Elderly individuals and individuals who are 

permanently and totally disabled may be able to 

claim a special credit on their tax returns if they are 

a U.S. citizen or resident.

To be eligible for the credit, an individual must be:

■ At least 65 years old by the end of the year, or

■ Under age 65, retired on permanent and total 

disability by the end of the year and did not reach 

mandatory retirement age before this year. They 

must also have received taxable disability income 

for this year.

Although physician statements are no longer required 

to be attached to the return, they must be completed 

and kept with the taxpayer’s records.

Certain work offered at qualified locations to persons 

with disabilities or with mental retardation is 

considered sheltered employment. Because a person 

has accepted sheltered employment is not proof of 

the person’s ability to engage in substantial gainful 

activity.

Exhibit 1 helps to determine if the taxpayer is a 

qualified individual for this credit.
14-2 Lesson 14

PENSION EARNER

 Income Limits

Taxpayers cannot exceed the income limits for their filing status 

(see Exhibit 2).

CALCULATE THE CREDIT

If the taxpayer is a qualified individual and meets the income 

limits, complete a Schedule 3 for 1040A filers or a Schedule R for 

1040 filers. Schedule R ( Form 1040) and Schedule 3 ( Form 1040A) 

are nearly identical. 

Example 1

John (000-00-9850) and Sarah Hillsdale are married and file a 

joint return. Their respective ages are 66 and 68. They received 

nontaxable social security benefits of $4,500 in 2003. They had 

adjusted gross income (line 35, Form 1040) of $13,000. Parts I and 

III of the Schedule R will be completed and the schedule attached 

to their Form 1040 for 2003. (Part II need not be completed since 

both are age 65 or older.) See Exhibits 3 and 4. 
Lesson 14 14-3

PENSION EARNER

Exhibit 1 Are you a Qualified Individual?

1 If you were a nonresident alien at any time during the tax year and were married to a U.S. citizen or resident at the end of

the tax year, see U.S. citizen or resident under Qualified individual. If you and your spouse both choose to be treated as U.S.

residents, answer yes to this question.

2 Mandatory retirement age is the age set by your employer at which you would have been required to retire, had you not

become disabled.

Are you a U.S. citizen or resident?1

Were you 65 or older at the end of the 

tax year?

Are you retired on permanent and total

disability?

Did you reach mandatory retirement

age before this year?2

Did you receive taxable disability

benefits this year?

Start Here

No

Yes

No

Yes

Yes

Yes

No

No

Yes

No

You are a qualified

individual and may

be able to take the

credit for the

disabled unless your

income exceeds the

limits in Figure B.

You are not a qualified individual and 

cannot take the 

credit for the elderly or the disabled. 

Exhibit 2 Income Limits

Even if you qualify (see Figure A), you CANNOT take the credit if:

AND OR

Your filing status is your adjusted gross income your nontaxable social security 

(AGI)* is equal to or more than or other nontaxable pension(s)

is equal to or more than

Single, Head of household, or $17,500 $5,000

Qualifying widow(er) with 

dependent child

Married filing a joint return and $25,000 $7,500

both spouses qualify in Figure A

Married filing a joint return and $20,000 $5,000

only one spouse qualifies in

Figure A

Married filing a separate return $12,500 $3,750

and you did not live with your 

spouse at any time during the year

*AGI is the amount on Form 1040A, line 21, or Form 1040, line 35.
14-4 Lesson 14

PENSION EARNER

Exhibit 3 John and Sarah Hillsdale’s Schedule R, page 1

 John and Sarah Hillsdale 000 00 9850

x
Lesson 14 14-5

PENSION EARNER

Exhibit 4 John and Sarah Hillsdale’s Schedule R, page 2

Proof as of

July 21, 2003

(subject to change)

Schedule R (Form 1040) 2003 Page 2

Figure Your Credit

Box 1, 2, 4, or 7 $5,000

10 Enter:

10

● Box 6, add $5,000 to the taxable disability income of the

spouse who was under age 65. Enter the total.

11

If you completed line 11, enter the smaller of line 10 or line 11; all others, enter the

amount from line 10

12

12

Enter the following pensions, annuities, or disability income

that you (and your spouse if filing a joint return) received in

2003.

13

a Nontaxable part of social security benefits and

13a Nontaxable part of railroad retirement benefits

treated as social security (see page R-3).

b Nontaxable veterans’ pensions and

13b Any other pension, annuity, or disability benefit that

is excluded from income under any other provision

of law (see page R-3).

Add lines 13a and 13b. (Even though these income items are

not taxable, they must be included here to figure your credit.)

If you did not receive any of the types of nontaxable income

listed on line 13a or 13b, enter -0- on line 13c

c

13c

14

Enter the amount from Form 1040,

line 35

14

15

15

Subtract line 15 from line 14. If zero or

less, enter -0-

16

16

17 Enter one-half of line 16 17

18 Add lines 13c and 17 18

Subtract line 18 from line 12. If zero or less, stop; you cannot take the credit. Otherwise,

go to line 20

19

19

24

20 Multiply line 19 by 15% (.15)

Did you check

box 2, 4, 5, 6,

or 9 in Part I?

Box 3, 5, or 6 $7,500

Box 8 or 9 $3,750

If you checked (in Part I):

Box 1 or 2 $7,500

Enter:

Box 3, 4, 5, 6, or 7 $10,000

Box 8 or 9 $5,000

If you checked (in Part I):

Part III







● Box 2, 4, or 9, enter your taxable disability income.

● Box 5, add your taxable disability income to your spouse’s

taxable disability income. Enter the total.

For more details on what to include on line 11, see page R-3.

11

If you checked (in Part I):



Printed on recycled paper

Yes You must complete line 11.

No Enter the amount from line 10

on line 12 and go to line 13.







Schedule R (Form 1040) 2003

21 Enter the amount from Form 1040, line 43

23 Subtract line 22 from line 21

Add the amounts from Form 1040, lines 44 and 45, and enter

the total

22

Credit for the elderly or the disabled. Enter the smaller of line 20 or line 23 here and

on Form 1040, line 46

24

22

21

20

23

7,500 00

7,500 00

4,500 00

4,500 00

13,000 00

10,000 00

3,000 00

1,500 00

6,000 00

225 00

0 00

225 00

1,500 00
14-6 Lesson 14

PENSION EARNER

 TAXWISE HINTS

The credit for the elderly will be calculated automatically. The 

software will check age, income, and filing status to determine eligibility. However, it is extremely important to input Social Security 

Benefit income even if you know it is not taxable. Without this 

information the software may incorrectly calculate the credit.

  SUMMING UP THIS LESSON  

 The credit for the elderly or disabled is a nonrefundable

credit which allows a taxpayer to reduce their liability.

 Due to the income limitations, very few taxpayers are eligible 

to receive this credit.

 The credit is based on filing status, age, and income.

 The credit is calculated and reported on Form 1040, Schedule 

R, or Form 1040A, Schedule 3.
Comprehensive

Problems CP-1

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

INTRODUCTION

In this section, you will complete tax returns for 

several common pension earner scenarios often 

encountered at volunteer assistance sites. This will 

be valuable practice as you prepare to help taxpayers. 

Although answers to each of the problems are shown 

at the end of this section, you should try to complete 

the blank forms for each problem before referring to 

its answers.

After completing this section, you will be able to:

■ accurately complete a basic tax return with some 

advanced topics.

PROBLEM 1

Stuart Morehouse (born July 2, 1935) and Donna 

Morehouse (born December 28, 1950) are married and 

will file a joint tax return. Neither one wishes to contribute to the presidential campaign fund. 

Stuart is retired and received a pension from his former 

employer as well as social security benefits.

Donna is a secretary and received a Form W-2. She 

made a $900 payment to her 2003 traditional IRA on 

January 15, 2004. Stuart and Donna do not want to 

name a third party designee.

If they are entitled to a refund they would like the 

check mailed to them. Their address and social security 

numbers are correct on their income statements. 
CP-2 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Form W-2, First Bank of Hillsdale

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

xx-xxxxxxx $18,526.00

$18,526.00

$18,526.00

$2,423.00

$1,149.00

 $269.00

xx-xxxxxxx $18,526.00 $984.00

8162834

✘

First Bank of Hillsdale

1000 Main St.

Your City, State, Zip Code

Donna Morehouse

10923 Fullerton

Your City, State, Zip Code
Comprehensive

Problems CP-3

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Form 1099, Social Security Benefit Statement

Draft as of

09/01/2003

FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT

2003 ● PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME.

● SEE THE REVERSE FOR MORE INFORMATION.

Box 1. Name Box 2. Beneficiary’s Social Security Number

Box 3. Benefits Paid in 2003 Box 4. Benefits Repaid to SSA in 2003 Box 5. Net Benefits for 2003 (Box 3 minus Box 4)

DESCRIPTION OF AMOUNT IN BOX 3 DESCRIPTION OF AMOUNT IN BOX 4

Box 7. Address

Box 8. Claim Number (Use this number if you need to contact SSA.)

Form SSA-1099-SM (1-2004) DO NOT RETURN THIS FORM TO SSA OR IRS

Box 6. Voluntary Federal Income Tax Withholding

Stuart Morehouse xxx-xx-xxxx

10,499 10,499

10923 Fullerton

Your City, State, Zip Code
CP-4 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Employee contributions

or insurance premiums

CORRECTED (if checked)

PAYER’S name, street address, city, state, and ZIP code 1 Gross distribution Distributions From

Pensions, Annuities,

Retirement or

Profit-Sharing

Plans, IRAs,

Insurance

Contracts, etc.

$

2a Taxable amount

$

Total

distribution

Taxable amount

not determined

2b

RECIPIENT’S identification

number

PAYER’S Federal identification

number

3 Capital gain (included

in box 2a)

4 Federal income tax

withheld

$ $

RECIPIENT’S name Net unrealized

appreciation in

employer’s securities

5 6

$ $

Distribution

code(s)

Street address (including apt. no.) 7 8 Other

%

City, state, and ZIP code

Account number (optional) 10 State tax withheld 11 State/Payer’s state no.

$

13 Local tax withheld 14 Name of locality

$

Form 1099-R Department of the Treasury - Internal Revenue Service

12

15

State distribution

Local distribution

$

Copy B

Report this

income on your

Federal tax

return. If this

form shows

Federal income

tax withheld in

box 4, attach

this copy to

your return.

This information is

being furnished to

the Internal

Revenue Service.

$

$

$

$ $

$

OMB No. 1545-0119

Your percentage of total

distribution

9a

%

Form 1099-R

9b Total employee contributions

$

IRA/

SEP/

SIMPLE

2003 AB Industries

346 North 3rd Terrace

Your City, State, Zip Code

13,567.00

13,567.00

xx-xxxxxxx xxx-xx-xxxx 1,357.00

Stuart Morehouse

10923 Fullerton

Your City, State, Zip Code

7

2003 Form 1099-R, AB Industries
Comprehensive

Problems CP-5

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Form 1099-INT, Fisk Bank

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0112 Payer’s RTN (optional)

Interest Income

PAYER’S Federal identification number RECIPIENT’S identification number 1 Interest income not included in box 3

$

Early withdrawal penalty Interest on U.S. Savings

Bonds and Treas. obligations

RECIPIENT’S name 2 3

$ $

Street address (including apt. no.) 4 Federal income tax withheld

$

Foreign country or U.S.

possession

City, state, and ZIP code 6 Foreign tax paid 7

Account number (optional)

$

Form 1099-INT Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-INT

5 Investment expenses

$

2003 Fisk Bank

4010 North Second St.

Your City, State, Zip Code

xx-xxxxxxx xxx-xx-xxxx

Stuart Morehouse

10923 Fullerton

Your City, State, Zip Code

235.00
CP-6 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Form 1040A, page 1

Proof as of

July 21, 2003

(subject to change)

Form Department of the Treasury—Internal Revenue Service

1040A 2003 U.S. Individual Income Tax Return

OMB No. 1545-0085

Your social security number

Your first name and initial Last name Label L

A

B

E

L

H

E

R

E

(See page 21.)

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the

IRS label. Home address (number and street). If you have a P.O. box, see page 22. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 22.

Filing

status

No. of boxes

checked on

6a and 6b

Yourself. If your parent (or someone else) can claim you as a

dependent on his or her tax return, do not check box 6a. Exemptions 6a

b Spouse No. of children

on 6c who: (4) if qualifying

child for child

tax credit (see

page 25)

(2) Dependent’s social

security number

c ● lived with

you

● did not live

with you due

to divorce or

separation

(see page 26)

If more than six

dependents,

see page 24.

Dependents

on 6c not

entered above

d

Add numbers

on lines Total number of exemptions claimed. above

7 Wages, salaries, tips, etc. Attach Form(s) W-2. 7

8a Taxable interest. Attach Schedule 1 if required. 8a

b Tax-exempt interest. Do not include on line 8a. 8b

Attach

Form(s) W-2

here. Also

attach

Form(s)

1099-R if tax

was withheld.

9a Ordinary dividends. Attach Schedule 1 if required. 9a

IRA

distributions.

11a Taxable amount

(see page 27).

11b

Enclose, but do

not attach, any

payment.

11a 11b

Taxable amount

(see page 28).

12a Pensions and 12b

annuities. 12a 12b

13 Unemployment compensation and Alaska Permanent Fund dividends. 13

14a Taxable amount

(see page 30).

Social security

benefits.

14b

14a 14b

15 Add lines 7 through 14b (far right column). This is your total income.  15

17 IRA deduction (see page 30). 17

Student loan interest deduction (see page 33).

Income

18

Add lines 16 through 19. These are your total adjustments. 20

Subtract line 20 from line 15. This is your adjusted gross income. 

18

21

Dependents:



Check only

one box.

If you did not

get a W-2, see

page 27.

Form 1040A (2003)

IRS Use Only—Do not write or staple in this space.

(3) Dependent’s

relationship to

(1) First name Last name you

20

21

Adjusted

gross 

income

Important! 

Cat. No. 11327A

Otherwise,

please print

or type.

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 57.

(99)

10a Capital gain distributions (see page 27). 10a

Presidential

Election Campaign

(See page 22.)  Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund?  No Yes

You Spouse

19 Tuition and fees deduction (see page 33). 19

1 Single

2 Married filing jointly (even if only one had income)

3

Qualifying widow(er) with dependent child (See page 24.) Married filing separately. Enter spouse’s SSN above and

full name here. 

Head of household (with qualifying person). (See page 23.)

If the qualifying person is a child but not your dependent,

enter this child’s name here. 

4

5

16 Educator expenses (see page 30). 16

b Qualified dividends (see page XX). 9b

b Post-May 5 capital gain distributions (see page 27). 10b
Comprehensive

Problems CP-7

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Proof as of

July 21, 2003

(subject to change)

Single or

Married filing

separately,

$4,750

30

22 Enter the amount from line 21 (adjusted gross income). 22

Total boxes

checked 

Check You were born before January 2, 1939, Blind

if:

23a

Spouse was born before January 2, 1939, Blind 23a

b

23b

If you are married filing separately and your spouse itemizes

deductions, see page 34 and check here 

Tax,

credits,

and

payments

24 24

25 Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-. 25

26 Multiply $3,050 by the total number of exemptions claimed on line 6d. 26

Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.

This is your taxable income. 

27

27

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration

of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.



Enter your standard deduction (see left margin).

Form 1040A (2003)

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b

c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



41 Earned income credit (EIC). 41

Page 2

Form 1040A (2003)

If you have

a qualifying

child, attach

Schedule

EIC.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

● People who

checked any

box on line

23a or 23b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

34 34

Printed on recycled paper

Child tax credit (see page 38).

Type:

2003 Form 1040A, page 2
CP-8 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Draft as of

08/27/2003

Before you begin:  Complete Form 1040A, lines 16 and 17, if they apply to you.

 If you are married filing separately and you lived apart from your spouse for all of 2003, enter

“D” to the right of the word “benefits” on line 14a.

 Be sure you have read the Exception on page 27 to see if you can use this worksheet instead of

a publication to find out if any of your benefits are taxable.

1. Enter the total amount from box 5 of all your Forms SSA-1099 and Forms RRB-1099 . . . . . 1.

2. Enter one-half of line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Enter the total of the amounts from Form 1040A, lines 7, 8a, 9a, 10a, 11b, 12b, and 13 . . . . . . . . . . . . . . . . . . . 3.

4. Enter the amount, if any, from Form 1040A, line 8b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

5. Add lines 2, 3, and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

6. Enter the total of the amounts from Form 1040A, lines 16 and 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Is the amount on line 6 less than the amount on line 5?

No. STOP None of your social security benefits are taxable.

Yes. Subtract line 6 from line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

8. If:

• Married filing jointly, enter $32,000.

• Single, head of household, qualifying widow(er), or married filing separately and you 

lived apart from your spouse for all of 2003, enter $25,000. } . . . . . . . . . . . . 8.

• Married filing separately and you lived with your spouse at any time in 2003, skip 

lines 8 through 15; multiply line 7 by 85% (.85) and enter the result on line 16. 

Then go to line 17.

9. Is the amount on line 8 less than the amount on line 7?

No. STOP None of your social security benefits are taxable. You do not have to enter any amount on line 

 14a or 14b of Form 1040A. But if you are married filing separately and you lived apart from 

 your spouse for all of 2003, enter -0- on line 14b. Be sure you entered “D” to the right of the 

 word “benefits” on line 14a.

Yes. Subtract line 8 from line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.

10. Enter: $12,000 if married filing jointly; $9,000 if single, head of household, qualifying widow(er), or married filing

separately and you lived apart from your spouse for all of 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.

11. Subtract line 10 from line 9. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.

12. Enter the smaller of line 9 or line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.

13. Enter one-half of line 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.

14. Enter the smaller of line 2 or line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.

16. Add lines 14 and 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.

17. Multiply line 1 by 85% (.85) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.

18. Taxable social security benefits. Enter the smaller of line 16 or line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.

• Enter the amount from line 1 above on Form 1040A, line 14a.

• Enter the amount from line 18 above on Form 1040A, line 14b.

If part of your benefits are taxable for 2003 and they include benefits paid in 2003 that were for an earlier year, you may be able

to reduce the taxable amount. See Pub. 915 for details.

TIP

 Form 1040A, Social Security Benefits Worksheet
Comprehensive

Problems CP-9

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

PROBLEM 2

Jay Lehigh (born February 10, 1930) and Sandra Lehigh 

(November 27, 1935) are married and will file a joint return. They 

both wish to contribute to the presidential election campaign. Jay’s 

social security number and address are correct as shown on his 

income statements. Sandra’s social security number is xxx-xx-xxxx. 

Jay and Sandra do not want to name a third party designee.

Jay is retired, receives a pension from his former employer, and 

receives social security benefits.

Sandra is a housewife. She provided day care for her 3 grandchildren. The state paid her for this service and issued her a Form 

1099-MISC. She incurred no expenses.

Jay and Sandra sold some stock in 2003 and provided the following 

information: The principal business code for child care is 624410.

Company # of Shares Purchase

Date

Per Share

Basis

Sale Date Per Share

Sales Price

ABC Inc 100 12/01/1985 24.00 07/15/2003 51.24

XYZ Inc 200 12/20/1987 28.50 11/14/2003 53.98

2003 Form 1099-R, CD Associates

Employee contributions

or insurance premiums

CORRECTED (if checked)

PAYER’S name, street address, city, state, and ZIP code 1 Gross distribution Distributions From

Pensions, Annuities,

Retirement or

Profit-Sharing

Plans, IRAs,

Insurance

Contracts, etc.

$

2a Taxable amount

$

Total

distribution

Taxable amount

not determined

2b

RECIPIENT’S identification

number

PAYER’S Federal identification

number

3 Capital gain (included

in box 2a)

4 Federal income tax

withheld

$ $

RECIPIENT’S name Net unrealized

appreciation in

employer’s securities

5 6

$ $

Distribution

code(s)

Street address (including apt. no.) 7 8 Other

%

City, state, and ZIP code

Account number (optional) 10 State tax withheld 11 State/Payer’s state no.

$

13 Local tax withheld 14 Name of locality

$

Form 1099-R Department of the Treasury - Internal Revenue Service

12

15

State distribution

Local distribution

$

Copy B

Report this

income on your

Federal tax

return. If this

form shows

Federal income

tax withheld in

box 4, attach

this copy to

your return.

This information is

being furnished to

the Internal

Revenue Service.

$

$

$

$ $

$

OMB No. 1545-0119

Your percentage of total

distribution

9a

%

Form 1099-R

9b Total employee contributions

$

IRA/

SEP/

SIMPLE

2003 CD Associates

345 East 100th St.

Your City, State, Zip Code

18,945.00

18,945.00

xx-xxxxxxx xxx-xx-xxxx 1,895.00

Jay Lehigh

99 Danville Ave

Your City, State, Zip Code

7
CP-10 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Form 1099, Social Security Benefit Statement

Draft as of

09/01/2003

FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT

2003 ● PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME.

● SEE THE REVERSE FOR MORE INFORMATION.

Box 1. Name Box 2. Beneficiary’s Social Security Number

Box 3. Benefits Paid in 2003 Box 4. Benefits Repaid to SSA in 2003 Box 5. Net Benefits for 2003 (Box 3 minus Box 4)

DESCRIPTION OF AMOUNT IN BOX 3 DESCRIPTION OF AMOUNT IN BOX 4

Box 7. Address

Box 8. Claim Number (Use this number if you need to contact SSA.)

Form SSA-1099-SM (1-2004) DO NOT RETURN THIS FORM TO SSA OR IRS

Box 6. Voluntary Federal Income Tax Withholding

Jay Lehigh xxx-xx-xxxx

$14,263.00 $14,263.00

99 Danville

Your City, State, Zip Code
Comprehensive

Problems CP-11

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Reserved for Form 1099-MISC

Division of Social Services

1000 N. 16th St.

Your City, State, Zip Code

xx-xxxxxxx xxx-xx-xxxx

Sandra Lehigh

99 Danville Ave

Your City, State, Zip Code

6,000.00
CP-12 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Proof as of

July 21, 2003

(subject to change)

Department of the Treasury—Internal Revenue Service 1040 U.S. Individual Income Tax Return

For the year Jan. 1–Dec. 31, 2003, or other tax year beginning , 2003, ending , 20 OMB No. 1545-0074

Your first name and initial Last name Your social security number

(See

instructions

on page 21.)

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the IRS

label.

Otherwise,

please print

or type.

Home address (number and street). If you have a P.O. box, see page 21. Apt. no.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 21.

Presidential

Election Campaign

1 Single

Filing Status 2 Married filing jointly (even if only one had income)

Check only

one box.

3

Qualifying widow(er) with dependent child. (See page 21.)

6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax

Exemptions return, do not check box 6a

b Spouse

(4) if qualifying

child for child tax

credit (see page 22)

c Dependents: (2) Dependent’s

social security number

(3) Dependent’s

relationship to (1) First name Last name you

If more than five

dependents,

see page 22.

d Total number of exemptions claimed

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7

Income 8a Taxable interest. Attach Schedule B if required 8a

b Tax-exempt interest. Do not include on line 8a 8b Attach

Forms W-2 and

W-2G here.

Also attach

Form(s) 1099-R

if tax was

withheld.

9a Ordinary dividends. Attach Schedule B if required 9a

10 Taxable refunds, credits, or offsets of state and local income taxes (see page 25) 10

11 Alimony received 11

12 Business income or (loss). Attach Schedule C or C-EZ 12

Enclose, but do

not attach, any

payment. Also,

please use

Form 1040-V.

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions 15a 15b b Taxable amount (see page 25)

16a Pensions and annuities 16a b Taxable amount (see page 25) 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F 18

19 Unemployment compensation 19

20a Social security benefits 20a b Taxable amount (see page 27) 20b

21 21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income  22

IRA deduction (see page 29) 24

23

26

25

One-half of self-employment tax. Attach Schedule SE

27

Self-employed health insurance deduction (see page 33)

26

28

27

Self-employed SEP, SIMPLE, and qualified plans

29

28

Penalty on early withdrawal of savings

30

29

Alimony paid b Recipient’s SSN 

Add lines 23 through 32a 33

30

Subtract line 33 from line 22. This is your adjusted gross income 

31

Adjusted

Gross

Income

34

If you did not

get a W-2,

see page 23. Form

Married filing separately. Enter spouse’s SSN above

and full name here. 

Cat. No. 11320B





Label

Form 1040 (2003)

IRS Use Only—Do not write or staple in this space.

Head of household (with qualifying person). (See page 21.) If

the qualifying person is a child but not your dependent, enter

this child’s name here. 

Other income. List type and amount (see page 29)

Moving expenses. Attach Form 3903

24

25

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 76.

No. of boxes

checked on

6a and 6b

No. of children

on 6c who:

Dependents on 6c

not entered above

Add numbers

on lines

above 

● lived with you

● did not live with

you due to divorce

or separation

(see page 22)

32a 32a

Student loan interest deduction (see page 31)

31

33

Important!

Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund? 

You must enter

your SSN(s) above.

No Yes

You Spouse

(See page 21.)

(99)

Tuition and fees deduction (see page 32)

34

4

5

Educator expenses (see page 29) 23

2003

b Qualified dividends (see page 25) 9b

b If box on 13a is checked, enter post-May 5 capital gain distributions 13b

2003 Form 1040, page1
Comprehensive

Problems CP-13

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Proof as of

July 21, 2003

(subject to change)

Itemized deductions (from Schedule A) or your standard deduction (see left margin)

Add lines 61 through 67. These are your total payments 

Form 1040 (2003) Page 2

35 Amount from line 34 (adjusted gross income) 35

Check

if:

36a

Tax and

Credits

36a

Single or

Married filing

separately,

$4,750

If you are married filing separately and your spouse itemizes deductions, or

you were a dual-status alien, see page 34 and check here 

b

36b

37 37

38 Subtract line 37 from line 35 38

39

If line 35 is $104,625 or less, multiply $3,050 by the total number of exemptions claimed on

line 6d. If line 35 is over $104,625, see the worksheet on page 35

39

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 41

45

46

51

Education credits. Attach Form 8863

44

49

Other credits. Check applicable box(es):

48

53

54

Add lines 44 through 52. These are your total credits

48

Subtract line 53 from line 43. If line 53 is more than line 43, enter -0- 

53

Self-employment tax. Attach Schedule SE

54

Other

Taxes

55

69

Social security and Medicare tax on tip income not reported to employer. Attach Form 4137

Tax on qualified plans, including IRAs, and other tax-favored accounts. Attach Form 5329 if required 57

56

58

Add lines 54 through 59. This is your total tax 

59 59

61 Federal income tax withheld from Forms W-2 and 1099 61

62 2003 estimated tax payments and amount applied from 2002 return 62

Payments

63

Amount paid with request for extension to file (see page 56) 66

65

Excess social security and tier 1 RRTA tax withheld (see page 56) 64

66

68

67 Other payments from:

70a 70a

71 71

If line 68 is more than line 60, subtract line 60 from line 68. This is the amount you overpaid

72 72

Amount of line 69 you want refunded to you 

Refund

73

Amount of line 69 you want applied to your 2004 estimated tax 

Estimated tax penalty (see page 57)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and

belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

73

You were born before January 2, 1939, Blind.

Spouse was born before January 2, 1939, Blind.

a Form 3800

b Form 8801 c Specify

a Form 2439 b Form 4136

57

Household employment taxes. Attach Schedule H

58

67

Amount

You Owe

Sign

Here Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

Preparer’s

Use Only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation

Tax (see page 36). Check if any tax is from:

Amount you owe. Subtract line 68 from line 60. For details on how to pay, see page 57 

b

Direct deposit?

See page 56

and fill in 70b,

70c, and 70d.

Routing number

Account number

c Checking Savings

a Form(s) 8814 Form 4972

b

d





68

47

44

Retirement savings contributions credit. Attach Form 8880

55

56

Advance earned income credit payments from Form(s) W-2

69



Child tax credit (see page 39)

Credits from:

47

51

49

Additional child tax credit. Attach Form 8812

64

65

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

Joint return?

See page 21.

Daytime phone number

( )

Earned income credit (EIC)

Credit for the elderly or the disabled. Attach Schedule R

42

43

45

Alternative minimum tax (see page 37). Attach Form 6251

Add lines 41 and 42 

Credit for child and dependent care expenses. Attach Form 2441

46

If you have a

qualifying

child, attach

Schedule EIC.

42

43

63

Spouse’s occupation

( )

Form 1040 (2003)

● People who

checked any

box on line

36a or 36b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 58)? Third Party

Designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

52

Foreign tax credit. Attach Form 1116 if required

52

a Form 8396 b Form 8859

50 Adoption credit. Attach Form 8839 50

60 60

Type:

c Form 8885

Total boxes  checked 

2003 Form 1040, page 2
CP-14 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Schedule C-EZ

Proof as of

July 21, 2003

(subject to change)

SCHEDULE C-EZ OMB No. 1545-0074

(Form 1040)

Net Profit From Business

(Sole Proprietorship)

 Partnerships, joint ventures, etc., must file Form 1065 or 1065-B.

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040 or 1041.  See instructions on back. Sequence No. 09A

Business name. If no separate business name, leave blank. D Employer ID number (EIN), if any

Business address (including suite or room no.). Address not required if same as on Form 1040, page 1.

C

E

Gross receipts. Caution. If this income was reported to you on Form W-2 and the “Statutory

employee” box on that form was checked, see Statutory Employees in the instructions for

Schedule C, line 1, on page C-3 and check here  1

2 Total expenses (see instructions). If more than $2,500, you must use Schedule C 2

3

3 Net profit. Subtract line 2 from line 1. If less than zero, you must use Schedule C. Enter on

Form 1040, line 12, and also on Schedule SE, line 2. (Statutory employees do not report this

amount on Schedule SE, line 2. Estates and trusts, enter on Form 1041, line 3.)

For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 14374D Schedule C-EZ (Form 1040) 2003

City, town or post office, state, and ZIP code

You May Use

Schedule C-EZ

Instead of

Schedule C

Only If You:

And You:

● Use the cash method of accounting.

● Had only one business as a sole

proprietor.

● Had business expenses of $2,500 or

less. ● Are not required to file Form 4562,

Depreciation and Amortization, for

this business. See the instructions

for Schedule C, line 13, on page

C-4 to find out if you must file.

● Do not deduct expenses for

business use of your home.

● Do not have prior year unallowed

passive activity losses from this

business.

 

Name of proprietor Social security number (SSN)

General Information

A Principal business or profession, including product or service B Enter code from pages C-7, 8, & 9



Figure Your Net Profit

Part I

Part II

● Did not have a net loss from your

business.

● Had no employees during the year.

1

● Did not have an inventory at any

time during the year.

6 Do you (or your spouse) have another vehicle available for personal use? Yes No

8a Do you have evidence to support your deduction? Yes No

If “Yes,” is the evidence written? Yes No

7 Was your vehicle available for personal use during off-duty hours? Yes No

5 Of the total number of miles you drove your vehicle during 2003, enter the number of miles you used your vehicle for:

Business b Commuting c Other

4

Part III Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 2.

a

b

(99)

When did you place your vehicle in service for business purposes? (month, day, year)  . / /

2003
Comprehensive

Problems CP-15

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Proof as of

July 21, 2003

(subject to change)

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment  Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003

2003 Form 1040 Schedule SE
CP-16 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Schedule D, page 1

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses (Form 1040)  Attach to Form 1040.  See Instructions for Schedule D (Form 1040). Department of the Treasury

Internal Revenue Service

Attachment  Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on Form 1040 Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date

acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date

acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

2003

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

xxx xx xxxx
Comprehensive

Problems CP-17

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Schedule D, page 2

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.
CP-18 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Social Security Benefits Worksheet

Draft as of

08/27/2003

Before you begin:  Complete Form 1040, lines 21, 23, 24, and 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  If you are married filing separately and you lived apart from your spouse for all of

2003, enter “D” to the right of the word “benefits” on line 20a.  Be sure you have read the Exception on page 26 to see if you can use this worksheet

instead of a publication to find out if any of your benefits are taxable.

1. Enter the total amount from box 5 of all your Forms SSA-1099 and Forms

RRB-1099 ................................................ 1.

2. Enter one-half of line 1 ....................................... 2.

3. Enter the total of the amounts from Form 1040, lines 7, 8a, 9a, 10 through 12, 13a, 14, 15b,

16b, 17 through 19, and 21. Do not include amounts from box 5 of Forms SSA-1099 or

RRB-1099 .............................................................. 3.

4. Enter the amount, if any, from Form 1040, line 8b ................................. 4.

5. Add lines 2, 3, and 4 ....................................................... 5.

6. Enter the total of the amounts from Form 1040, lines 23, 24, and 27 through 32a, plus any

amount you entered on the dotted line next to line 33 ............................... 6.

7. Is the amount on line 6 less than the amount on line 5?

No. STOP None of your social security benefits are taxable.

Yes. Subtract line 6 from line 5 ........................................... 7.

8. If you are:

• Married filing jointly, enter $32,000

• Single, head of household, qualifying widow(er), or married filing

separately and you lived apart from your spouse for all of 2003, enter } ........... 8. $25,000

• Married filing separately and you lived with your spouse at any time in

2003, skip lines 8 through 15; multiply line 7 by 85% (.85) and enter the

result on line 16. Then go to line 17

9. Is the amount on line 8 less than the amount on line 7?

No. STOP None of your social security benefits are taxable. You do not have to enter any

amounts on lines 20a or 20b of Form 1040. But if you are married filing

separately and you lived apart from your spouse for all of 2003, enter -0- on

line 20b. Be sure you entered “D” to the right of the word “benefits” on line

20a.

Yes. Subtract line 8 from line 7 ........................................... 9.

10. Enter: $12,000 if married filing jointly; $9,000 if single, head of household, qualifying

widow(er), or married filing separately and you lived apart from your spouse for all of 2003 10.

11. Subtract line 10 from line 9. If zero or less, enter -0- ............................... 11.

12. Enter the smaller of line 9 or line 10 ........................................... 12.

13. Enter one-half of line 12 .................................................... 13.

14. Enter the smaller of line 2 or line 13 ........................................... 14.

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- ........................... 15.

16. Add lines 14 and 15 ....................................................... 16.

17. Multiply line 1 by 85% (.85) ................................................. 17.

18. Taxable social security benefits. Enter the smaller of line 16 or line 17 ................ 18.

• Enter the amount from line 1 above on Form 1040, line 20a.

• Enter the amount from line 18 above on Form 1040, line 20b.

If part of your benefits are taxable for 2003 and they include benefits paid in 2003 that were for an

earlier year, you may be able to reduce the taxable amount. See Pub. 915 for details.

TIP
Comprehensive

Problems CP-19

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Comprehensive Problem 1 2003 Form 1040A, page 1

Draft as of

6/30/2003

Form Department of the Treasury—Internal Revenue Service

1040A 2003 U.S. Individual Income Tax Return

OMB No. 1545-0085

Your social security number

Your first name and initial Last name Label L

A

B

E

L

H

E

R

E

(See page 21.)

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the

IRS label. Home address (number and street). If you have a P.O. box, see page 22. Apt. no.

You must enter your

SSN(s) above.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 22.

Filing

status

No. of boxes

checked on

6a and 6b

Yourself. If your parent (or someone else) can claim you as a

dependent on his or her tax return, do not check box 6a. Exemptions 6a

b Spouse No. of children

on 6c who: (4) if qualifying

child for child

tax credit (see

page 25)

(2) Dependent’s social

security number

c ● lived with you

● did not live with you due

to divorce or

separation

(see page 26)

If more than six

dependents,

see page 24.

Dependents

on 6c not

entered above

d

Add numbers

on lines Total number of exemptions claimed. above

7 Wages, salaries, tips, etc. Attach Form(s) W-2. 7

8a Taxable interest. Attach Schedule 1 if required. 8a

b Tax-exempt interest. Do not include on line 8a. 8b

Attach

Form(s) W-2

here. Also

attach

Form(s)

1099-R if tax

was withheld.

9a Ordinary dividends. Attach Schedule 1 if required. 9a

IRA

distributions.

11a Taxable amount

(see page 27).

11b

Enclose, but do

not attach, any

payment.

11a 11b

Taxable amount

(see page 28).

12a Pensions and 12b

annuities. 12a 12b

13 Unemployment compensation and Alaska Permanent Fund dividends. 13

14a Taxable amount

(see page 30).

Social security

benefits.

14b

14a 14b

15 Add lines 7 through 14b (far right column). This is your total income.  15

17 IRA deduction (see page 30). 17

Student loan interest deduction (see page 33).

Income

18

Add lines 16 through 19. These are your total adjustments. 20

Subtract line 20 from line 15. This is your adjusted gross income. 

18

21

Dependents:



Check only

one box.

If you did not

get a W-2, see

page 27.

Form 1040A (2003)

IRS Use Only—Do not write or staple in this space.

(3) Dependent’s

relationship to

(1) First name Last name you

20

21

Adjusted

gross 

income

Important! 

Cat. No. 11327A

Otherwise,

please print

or type.

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 57.

(99)

10a Capital gain distributions (see page 27). 10a

Presidential

Election Campaign

(See page 22.)  Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund?  No Yes

You Spouse

19 Tuition and fees deduction (see page 33). 19

1 Single

2 Married filing jointly (even if only one had income)

3

Qualifying widow(er) with dependent child (See page 24.) Married filing separately. Enter spouse’s SSN above and

full name here. 

Head of household (with qualifying person). (See page 23.)

If the qualifying person is a child but not your dependent,

enter this child’s name here. 

4

5

16 Educator expenses (see page 30). 16

b Qualified dividends (see page XX). 9b

b Post-May 5 capital gain distributions (see page 27). 10b

Stuart Morehouse

Donna Morehouse

10923 Fullerton

Your City, State, Zip Code

xxx xx xxxx

xxx xx xxxx

✘ ✘

✘

✘

✘

2

2

18,526.00

235.00

13,567.00

10,499.00 2,339.00

34,667.00

900.00

900.00

35,567.00

ANSWERS TO PROBLEMS

33,767
CP-20 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Form 1040A, page 2

Draft as of

6/30/2003

Single or

Married filing

separately,

$4,750

30

22 Enter the amount from line 21 (adjusted gross income). 22

Total boxes

checked 

Check You were born before January 2, 1939, Blind

if:

23a

Spouse was born before January 2, 1939, Blind 23a

b

23b

If you are married filing separately and your spouse itemizes

deductions, see page 34 and check here 

Tax,

credits,

and

payments

24 24

25 Subtract line 24 from line 22. If line 24 is more than line 22, enter -0-. 25

26 Multiply $3,050 by the total number of exemptions claimed on line 6d. 26

Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.

This is your taxable income. 

27

27

28 Tax, including any alternative minimum tax (see page 35). 28

31 Education credits. Attach Form 8863. 31

35

36 Subtract line 35 from line 28. If line 35 is more than line 28, enter -0-. 36

37 Advance earned income credit payments from Form(s) W-2. 37

Add lines 36 and 37. This is your total tax.  38

Federal income tax withheld from Forms W-2

and 1099.

39

39

2003 estimated tax payments and amount

applied from 2002 return. 40

Add lines 39 through 42. These are your total payments.  43

If line 43 is more than line 38, subtract line 38 from line 43.

This is the amount you overpaid.

44

45a

Refund

Amount of line 44 you want applied to your

2004 estimated tax.

46

46

Amount you owe. Subtract line 43 from line 38. For details on how

to pay, see page 53. 

47

47

48 Estimated tax penalty (see page 53). 48

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration

of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.



Enter your standard deduction (see left margin).

Form 1040A (2003)

44

45a Amount of line 44 you want refunded to you. 

38

Credit for child and dependent care expenses.

Attach Schedule 2.

29

29

Adoption credit. Attach Form 8839.

33 33

Retirement savings contributions credit. Attach

Form 8880.

32

32

Credit for the elderly or the disabled. Attach

Schedule 3.

30

35 Add lines 29 through 34. These are your total credits.

40

42

43

Additional child tax credit. Attach Form 8812. 42

Routing

number

Account

number

Checking Savings  b c

 d

Amount

you owe

Direct

deposit?

See page 52

and fill in

45b, 45c,

and 45d.



41 Earned income credit (EIC). 41

Page 2

Form 1040A (2003)

If you have

a qualifying

child, attach

Schedule

EIC.

Sign

here

Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s signature Check if

self-employed

Paid

preparer’s

use only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation Joint return?

See page 22.

Daytime phone number

( )

Spouse’s occupation

( )

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

● People who

checked any

box on line

23a or 23b or

who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 54)? Third party

designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

34 34

Child tax credit (see page 38).

Type:

/ /

/ /

/ /

33,767.00

✔

1

10,450.00

23,317.00

6,100.00

17,217.00

1,884.00

0.00

1,884.00

1,884.00

3,780.00

3,780.00

1,896.00

1,896.00

✔

Retired

Secretary

Pxx-xx-xxxx

ANSWERS TO PROBLEMS
Comprehensive

Problems CP-21

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Social Security Benefits Worksheet

ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Social Security Benefits Worksheet—Lines 20a and 20b Keep for Your Records

Before you begin:  Complete Form 1040, lines 21, 23, 24, and 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  If you are married filing separately and you lived apart from your spouse for all of

2003, enter “D” to the right of the word “benefits” on line 20a.  Be sure you have read the Exception on page 26 to see if you can use this worksheet

instead of a publication to find out if any of your benefits are taxable.

1. Enter the total amount from box 5 of all your Forms SSA-1099 and Forms

RRB-1099 ................................................ 1.

2. Enter one-half of line 1 ....................................... 2.

3. Enter the total of the amounts from Form 1040, lines 7, 8a, 9a, 10 through 12, 13a, 14, 15b,

16b, 17 through 19, and 21. Do not include amounts from box 5 of Forms SSA-1099 or

RRB-1099 .............................................................. 3.

4. Enter the amount, if any, from Form 1040, line 8b ................................. 4.

5. Add lines 2, 3, and 4 ....................................................... 5.

6. Enter the total of the amounts from Form 1040, lines 23, 24, and 27 through 32a, plus any

amount you entered on the dotted line next to line 33 ............................... 6.

7. Is the amount on line 6 less than the amount on line 5?

No. STOP None of your social security benefits are taxable.

Yes. Subtract line 6 from line 5 ........................................... 7.

8. If you are:

• Married filing jointly, enter $32,000

• Single, head of household, qualifying widow(er), or married filing

separately and you lived apart from your spouse for all of 2003, enter } ........... 8. $25,000

• Married filing separately and you lived with your spouse at any time in

2003, skip lines 8 through 15; multiply line 7 by 85% (.85) and enter the

result on line 16. Then go to line 17

9. Is the amount on line 8 less than the amount on line 7?

No. STOP None of your social security benefits are taxable. You do not have to enter any

amounts on lines 20a or 20b of Form 1040. But if you are married filing

separately and you lived apart from your spouse for all of 2003, enter -0- on

line 20b. Be sure you entered “D” to the right of the word “benefits” on line

20a.

Yes. Subtract line 8 from line 7 ........................................... 9.

10. Enter: $12,000 if married filing jointly; $9,000 if single, head of household, qualifying

widow(er), or married filing separately and you lived apart from your spouse for all of 2003 10.

11. Subtract line 10 from line 9. If zero or less, enter -0- ............................... 11.

12. Enter the smaller of line 9 or line 10 ........................................... 12.

13. Enter one-half of line 12 .................................................... 13.

14. Enter the smaller of line 2 or line 13 ........................................... 14.

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- ........................... 15.

16. Add lines 14 and 15 ....................................................... 16.

17. Multiply line 1 by 85% (.85) ................................................. 17.

18. Taxable social security benefits. Enter the smaller of line 16 or line 17 ................ 18.

• Enter the amount from line 1 above on Form 1040, line 20a.

• Enter the amount from line 18 above on Form 1040, line 20b.

If part of your benefits are taxable for 2003 and they include benefits paid in 2003 that were for an

earlier year, you may be able to reduce the taxable amount. See Pub. 915 for details.

TIP

10,499

5,250

32,328

0

37,578

900

✔ 36,678

✔

32,000

✔ 4,678

12,000

0

4,678

2,339

2,339

0

2,339

8,924

2,339
CP-22 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Comprehensive Problem 2 2003 Form 1040, page 1

Draft as of

6/23/2003

Department of the Treasury—Internal Revenue Service 1040 U.S. Individual Income Tax Return

For the year Jan. 1–Dec. 31, 2003, or other tax year beginning , 2003, ending , 20 OMB No. 1545-0074

Your first name and initial Last name Your social security number

(See

instructions

on page 21.)

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the IRS

label.

Otherwise,

please print

or type.

Home address (number and street). If you have a P.O. box, see page 21. Apt. no.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 21.

Presidential

Election Campaign

1 Single

Filing Status 2 Married filing jointly (even if only one had income)

Check only

one box.

3

Qualifying widow(er) with dependent child. (See page 21.)

6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax

Exemptions return, do not check box 6a

b Spouse

(4) if qualifying

child for child tax

credit (see page 22)

c Dependents: (2) Dependent’s

social security number

(3) Dependent’s

relationship to (1) First name Last name you

If more than five

dependents,

see page 22.

d Total number of exemptions claimed

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7

Income 8a Taxable interest. Attach Schedule B if required 8a

b Tax-exempt interest. Do not include on line 8a 8b Attach

Forms W-2 and

W-2G here.

Also attach

Form(s) 1099-R

if tax was

withheld.

9a Ordinary dividends. Attach Schedule B if required 9a

10 Taxable refunds, credits, or offsets of state and local income taxes (see page 25) 10

11 Alimony received 11

12 Business income or (loss). Attach Schedule C or C-EZ 12

Enclose, but do

not attach, any

payment. Also,

please use

Form 1040-V.

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here  13a

14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions 15a 15b b Taxable amount (see page 25)

16a Pensions and annuities 16a b Taxable amount (see page 25) 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F 18

19 Unemployment compensation 19

20a Social security benefits 20a b Taxable amount (see page 27) 20b

21 21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income  22

IRA deduction (see page 29) 24

23

26

25

One-half of self-employment tax. Attach Schedule SE

27

Self-employed health insurance deduction (see page 33)

26

28

27

Self-employed SEP, SIMPLE, and qualified plans

29

28

Penalty on early withdrawal of savings

30

29

Alimony paid b Recipient’s SSN 

Add lines 23 through 32a 33

30

Subtract line 33 from line 22. This is your adjusted gross income 

31

Adjusted

Gross

Income

34

If you did not

get a W-2,

see page 23. Form

Married filing separately. Enter spouse’s SSN above

and full name here. 

Cat. No. 11320B





Label

Form 1040 (2003)

IRS Use Only—Do not write or staple in this space.

Head of household (with qualifying person). (See page 21.) If

the qualifying person is a child but not your dependent, enter

this child’s name here. 

Other income. List type and amount (see page 29)

Moving expenses. Attach Form 3903

24

25

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 76.

No. of boxes

checked on

6a and 6b

No. of children

on 6c who:

Dependents on 6c

not entered above

Add numbers

on lines

above 

● lived with you

● did not live with

you due to divorce

or separation

(see page 22)

32a 32a

Student loan interest deduction (see page 31)

31

33

Important!

Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund? 

You must enter

your SSN(s) above.

No Yes

You Spouse

(See page 21.)

(99)

Tuition and fees deduction (see page 32)

34

4

5

Educator expenses (see page 29) 23

2003

b Qualified dividends (see page 25) 9b

b If box on 13a is checked, enter post-May 5 capital gain distributions 13b

Jay Lehigh

Sandra Lehigh

99 Danville

Your City, State Zip Code

xxx xx xxxx

xxx xx xxxx

✘ ✘

✘

✘

✘

2

2

6,000.00

7,820.00

18,945.00

14,263.00 3,737.00

36,502.00

424.00

424.00

36,078.00

ANSWERS TO PROBLEMS
Comprehensive

Problems CP-23

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Draft as of

6/23/2003

Itemized deductions (from Schedule A) or your standard deduction (see left margin)

Add lines 61 through 67. These are your total payments 

Form 1040 (2003) Page 2

35 Amount from line 34 (adjusted gross income) 35

Check

if:

36a

Tax and

Credits

36a

Single or

Married filing

separately,

$4,750

If you are married filing separately and your spouse itemizes deductions, or

you were a dual-status alien, see page 34 and check here 

b

36b

37 37

38 Subtract line 37 from line 35 38

39

If line 35 is $104,625 or less, multiply $3,050 by the total number of exemptions claimed on

line 6d. If line 35 is over $104,625, see the worksheet on page 35

39

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 41

45

46

51

Education credits. Attach Form 8863

44

49

Other credits. Check applicable box(es):

48

53

54

Add lines 44 through 52. These are your total credits

48

Subtract line 53 from line 43. If line 53 is more than line 43, enter -0- 

53

Self-employment tax. Attach Schedule SE

54

Other

Taxes

55

69

Social security and Medicare tax on tip income not reported to employer. Attach Form 4137

Tax on qualified plans, including IRAs, and other tax-favored accounts. Attach Form 5329 if required 57

56

58

Add lines 54 through 59. This is your total tax 

59 59

61 Federal income tax withheld from Forms W-2 and 1099 61

62 2003 estimated tax payments and amount applied from 2002 return 62

Payments

63

Amount paid with request for extension to file (see page 56) 66

65

Excess social security and tier 1 RRTA tax withheld (see page 56) 64

66

68

67 Other payments from:

70a 70a

71 71

If line 68 is more than line 60, subtract line 60 from line 68. This is the amount you overpaid

72 72

Amount of line 69 you want refunded to you 

Refund

73

Amount of line 69 you want applied to your 2004 estimated tax 

Estimated tax penalty (see page 57)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and

belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

73

You were born before January 2, 1939, Blind.

Spouse was born before January 2, 1939, Blind.

a Form 3800

b Form 8801 c Specify

a Form 2439 b Form 4136

57

Household employment taxes. Attach Schedule H

58

67

Amount

You Owe

Sign

Here Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s signature Check if

self-employed

Paid

Preparer’s

Use Only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation

Tax (see page 36). Check if any tax is from:

Amount you owe. Subtract line 68 from line 60. For details on how to pay, see page 57 

b

Direct deposit?

See page 56

and fill in 70b,

70c, and 70d.

Routing number

Account number

c Checking Savings

a Form(s) 8814 Form 4972

b

d





68

47

44

Retirement savings contributions credit. Attach Form 8880

55

56

Advance earned income credit payments from Form(s) W-2

69



Child tax credit (see page 39)

Credits from:

47

51

49

Additional child tax credit. Attach Form 8812

64

65

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

Joint return?

See page 21.

Daytime phone number

( )

Earned income credit (EIC)

Credit for the elderly or the disabled. Attach Schedule R

42

43

45

Alternative minimum tax (see page 37). Attach Form 6251

Add lines 41 and 42 

Credit for child and dependent care expenses. Attach Form 2441

46

If you have a

qualifying

child, attach

Schedule EIC.

42

43

63

Spouse’s occupation

( )

Form 1040 (2003)

● People who

checked any

box on line

36a or 36b or who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 58)? Third Party

Designee Phone

no.  ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

52

Foreign tax credit. Attach Form 1116 if required

52

a Form 8396 b Form 8859

50 Adoption credit. Attach Form 8839 50

60 60

Type:

c Form 8885

Total boxes  checked 

/ /

/ /

/ /

36,078.00

✔

✔

2

11,400.00

24,678.00

6,100.00

18,578.00

2,086.00

2,086.00

0.00

2086.00

848.00

2934.00

1,895.00

1,895.00

1,039.00

✔

Pxx-xx-xxxx

ANSWERS TO PROBLEMS

2003 Form 1040, page 2
CP-24 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Proof as of

July 21, 2003

(subject to change)

SCHEDULE C-EZ OMB No. 1545-0074

(Form 1040)

Net Profit From Business

(Sole Proprietorship)

 Partnerships, joint ventures, etc., must file Form 1065 or 1065-B.

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040 or 1041.  See instructions on back. Sequence No. 09A

Business name. If no separate business name, leave blank. D Employer ID number (EIN), if any

Business address (including suite or room no.). Address not required if same as on Form 1040, page 1.

C

E

Gross receipts. Caution. If this income was reported to you on Form W-2 and the “Statutory

employee” box on that form was checked, see Statutory Employees in the instructions for

Schedule C, line 1, on page C-3 and check here  1

2 Total expenses (see instructions). If more than $2,500, you must use Schedule C 2

3

3 Net profit. Subtract line 2 from line 1. If less than zero, you must use Schedule C. Enter on

Form 1040, line 12, and also on Schedule SE, line 2. (Statutory employees do not report this

amount on Schedule SE, line 2. Estates and trusts, enter on Form 1041, line 3.)

For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 14374D Schedule C-EZ (Form 1040) 2003

City, town or post office, state, and ZIP code

You May Use

Schedule C-EZ

Instead of

Schedule C

Only If You:

And You:

● Use the cash method of accounting.

● Had only one business as a sole

proprietor.

● Had business expenses of $2,500 or

less. ● Are not required to file Form 4562,

Depreciation and Amortization, for

this business. See the instructions

for Schedule C, line 13, on page

C-4 to find out if you must file.

● Do not deduct expenses for

business use of your home.

● Do not have prior year unallowed

passive activity losses from this

business.

 

Name of proprietor Social security number (SSN)

General Information

A Principal business or profession, including product or service B Enter code from pages C-7, 8, & 9



Figure Your Net Profit

Part I

Part II

● Did not have a net loss from your

business.

● Had no employees during the year.

1

● Did not have an inventory at any

time during the year.

6 Do you (or your spouse) have another vehicle available for personal use? Yes No

8a Do you have evidence to support your deduction? Yes No

If “Yes,” is the evidence written? Yes No

7 Was your vehicle available for personal use during off-duty hours? Yes No

5 Of the total number of miles you drove your vehicle during 2003, enter the number of miles you used your vehicle for:

Business b Commuting c Other

4

Part III Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 2.

a

b

(99)

When did you place your vehicle in service for business purposes? (month, day, year)  . / /

2003

Sandra Leigh xxx xx xxxx

Day Care 6 2 4 4 1 0

6,000

6,000

ANSWERS TO PROBLEMS

2003 Schedule C-EZ, page 1
Comprehensive

Problems CP-25

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Schedule SE

Proof as of

July 21, 2003

(subject to change)

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment  Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003

Sandra Leigh xxx xx xxxx

6,000 00

6,000 00

5,541 00

848 00

424 00

ANSWERS TO PROBLEMS
CP-26 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

Proof as of

July 21, 2003

(subject to change)

*Include in column (g) all gains and losses from column (f) from sales, exchanges, or conversions (including installment payments received) after

May 5, 2003. However, do not include gain attributable to unrecaptured section 1250 gain, “collectibles gains and losses” (as defined on page

D-6 of the instructions) or eligible gain on qualified small business stock (see page D-4 of the instructions).

OMB No. 1545-0074 SCHEDULE D Capital Gains and Losses (Form 1040)  Attach to Form 1040.  See Instructions for Schedule D (Form 1040).

Department of the Treasury

Internal Revenue Service

Attachment  Use Schedule D-1 to list additional transactions for lines 1 and 8. Sequence No. 12

Name(s) shown on Form 1040 Your social security number

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(e) Cost or other basis

(see page D-5 of the

instructions)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(d) Sales price

(see page D-5 of

the instructions)

(c) Date sold

(Mo., day, yr.)

1

Enter your short-term totals, if any, from

Schedule D-1, line 2

2

Total short-term sales price amounts.

Add lines 1 and 2 in column (d)

3

3

5

Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684,

6781, and 8824

5

6

6

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

7b

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your

2002 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)

Long-Term Capital Gains and Losses—Assets Held More Than One Year

8

Enter your long-term totals, if any, from

Schedule D-1, line 9

9

10 Total long-term sales price amounts.

Add lines 8 and 9 in column (d) 10

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and

long-term gain or (loss) from Forms 4684, 6781, and 8824

11

12

12

13

Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts

from Schedule(s) K-1

14

Capital gain distributions. See page D-1 of the instructions

15 15

14

16

Long-term capital loss carryover. Enter the amount, if any, from line 13 of your

2002 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 13 in column (g). If zero or less, enter -0-

Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f)

Next: Go to Part III on the back.

16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2003 Cat. No. 11338H

( )

4

4

Part I

Part II

b

13

(b) Date acquired

(Mo., day, yr.)

2

9

(99)

(a) Description of property

(Example: 100 sh. XYZ Co.)

(c) Date sold

(Mo., day, yr.)

(b) Date acquired

(Mo., day, yr.)

(e) Cost or other basis

(see page D-5 of the

instructions)

(d) Sales price

(see page D-5 of

the instructions)

2003

(g) Post-May 5 gain

or (loss)*

(see below)

Combine lines 1 through 5 in column (g). If the result is a loss, enter the result.

Otherwise, enter -0-. Do not enter more than zero

7a

(f) Gain or (loss) for

the entire year

Subtract (e) from (d)

(g) Post-May 5 gain

or (loss)*

(see below)

7a ( )

Jay and Sandra Lehigh xxx xx xxxx

100 sh. ABC Inc 12/01/85 07/15/03 5,124 00 2,400 00 2,724 00 2,724 00

200 sh. XYZ Inc 12/20/87 11/14/03 10,796 00 5,700 00 5,096 00 5,096 00

105 22

7,820 00

7,820 00

ANSWERS TO PROBLEMS

2003 Schedule D, page 1
Comprehensive

Problems CP-27

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS

2003 Schedule D, page 2

Proof as of

July 21, 2003

(subject to change)

Schedule D (Form 1040) 2003

Printed on recycled paper

Taxable Gain or Deductible Loss

Combine lines 7b and 16 and enter the result. If a loss, enter -0- on line 17b and go to line 18.

If a gain, enter the gain on Form 1040, line 13a, and go to line 17b below

17a

17a

18 ( )

Part III

Page 2

18

Next:

If line 17a is a loss, enter here and on Form 1040, line 13a, the smaller of (a) that loss or

(b) ($3,000) (or, if married filing separately, ($1,500)) (see page D-6 of the instructions)

Part IV Tax Computation Using Maximum Capital Gains Rates

Enter your unrecaptured section 1250 gain, if any, from line 18 of the worksheet on page D-6

22

23

24

25

Add lines 22 and 23

26

27

31

33

34

41

42

43

Subtract line 41 from line 40

25

26

27

28

29

30

37

32

21 Enter your taxable income from Form 1040, line 40

22

● If both lines 16 and 17a of Schedule D are gains or you have qualified dividends on

Form 1040, line 9b, complete Part IV below (unless Form 1040, line 40, is zero).

Amount from line 4g of Form 4952 (investment interest expense)

Enter the amount from line 27

Subtract line 29 from line 28. If zero or less, go to line 40

Enter the smaller of line 30 or line 31

Multiply line 32 by 5% (.05)

Enter the smaller of line 21 or line 26

Enter the amount from line 30 (if line 30 is blank, enter -0-)

19

39

34

35

36

47

44

Add lines 17b and 23*

Schedule D (Form 1040) 2003

● Otherwise, skip the rest of Schedule D and complete Form 1040.

Next: ● If you have qualified dividends on Form 1040, line 9b, complete Form 1040 through

line 40, and then complete Part IV below (but skip lines 19 and 20).

● Otherwise, skip Part IV below and complete the rest of Form 1040.

20

If lines 19 and 20 are zero, go to line 21. Otherwise, complete the worksheet on page D-10 of the instructions to figure

the amount to enter on lines 35 and 53 below, and skip all other lines below.

24

Enter the smaller of line 16 or line 17a, but not less than zero

Enter your qualified dividends from Form 1040, line 9b 23

Subtract line 25 from line 24. If zero or less, enter -0-

If line 27 is more than line 28, skip lines 29–39 and go to line 40.

32

Add lines 17b and 23*

35

Subtract line 32 from line 30

38

36

Enter your qualified 5-year gain, if any, from

line 8 of the worksheet on page D-8

45

46

47

Enter the amount from line 32 (if line 32 is blank, enter -0-)

Subtract line 44 from line 43

Enter the smaller of line 42 or line 45

49

40

If lines 26 and 30 are the same, skip lines 40–49 and go to line 50.

20 Enter your 28% rate gain, if any, from line 7 of the worksheet on page D-9 of the instructions

Subtract line 26 from line 21. If zero or less, enter -0-

28 Enter the smaller of line 21 or:

29

30

37

Enter the smaller of line 34 or line 35

38

Multiply line 36 by 8% (.08)

39

Subtract line 36 from line 34

40

Multiply line 38 by 10% (.10)

48

49

50

Multiply line 48 by 20% (.20)

Multiply line 46 by 15% (.15)

Subtract line 46 from line 42

51

Figure the tax on the amount on line 27. Use the Tax Table or Tax Rate Schedules, whichever applies

52

53

Add lines 33, 37, 39, 47, 49, and 50

Figure the tax on the amount on line 21. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income. Enter the smaller of line 51 or line 52 here and on Form 1040, line 41

b Combine lines 7a and 15. If zero or less, enter -0-. Then complete Form 1040 through line 40 17b

19

21

31

33

41

42

43

44

45

46

48

50

51

52

53

● $56,800 if married filing jointly or qualifying widow(er);

● $28,400 if single or married filing separately; or

● $38,050 if head of household 

If lines 30 and 32 are the same, skip lines 34–39 and go to line 40.

If line 16 or line 17a is zero or less, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19.

*If line 25 is more than zero, see Lines 31 and 43 on page D-9 for the amount to enter.

7,820 00

7,820 00

18,578 00

7,820 00

7,820 00

7,820 00

10,758 00

18,578 00

10,758 00

7,820 00

7,820 00

7,820 00

391 00

1,078 00

1,469 00

2,086 00

1,469 00

ANSWERS TO PROBLEMS
CP-28 Comprehensive

Problems

PENSION EARNER

PENSION EARNER COMPREHENSIVE

PROBLEMS ANSWERS TO PROBLEMS

Draft as of

08/27/2003

Before you begin:  Complete Form 1040, lines 21, 23, 24, and 27 through 32a, if they apply to you.  Figure any amount to be entered on the dotted line next to line 33 (see page 32.)  If you are married filing separately and you lived apart from your spouse for all of

2003, enter “D” to the right of the word “benefits” on line 20a.  Be sure you have read the Exception on page 26 to see if you can use this worksheet

instead of a publication to find out if any of your benefits are taxable.

1. Enter the total amount from box 5 of all your Forms SSA-1099 and Forms

RRB-1099 ................................................ 1.

2. Enter one-half of line 1 ....................................... 2.

3. Enter the total of the amounts from Form 1040, lines 7, 8a, 9a, 10 through 12, 13a, 14, 15b,

16b, 17 through 19, and 21. Do not include amounts from box 5 of Forms SSA-1099 or

RRB-1099 .............................................................. 3.

4. Enter the amount, if any, from Form 1040, line 8b ................................. 4.

5. Add lines 2, 3, and 4 ....................................................... 5.

6. Enter the total of the amounts from Form 1040, lines 23, 24, and 27 through 32a, plus any

amount you entered on the dotted line next to line 33 ............................... 6.

7. Is the amount on line 6 less than the amount on line 5?

No. STOP None of your social security benefits are taxable.

Yes. Subtract line 6 from line 5 ........................................... 7.

8. If you are:

• Married filing jointly, enter $32,000

• Single, head of household, qualifying widow(er), or married filing

separately and you lived apart from your spouse for all of 2003, enter } ........... 8. $25,000

• Married filing separately and you lived with your spouse at any time in

2003, skip lines 8 through 15; multiply line 7 by 85% (.85) and enter the

result on line 16. Then go to line 17

9. Is the amount on line 8 less than the amount on line 7?

No. STOP None of your social security benefits are taxable. You do not have to enter any

amounts on lines 20a or 20b of Form 1040. But if you are married filing

separately and you lived apart from your spouse for all of 2003, enter -0- on

line 20b. Be sure you entered “D” to the right of the word “benefits” on line

20a.

Yes. Subtract line 8 from line 7 ........................................... 9.

10. Enter: $12,000 if married filing jointly; $9,000 if single, head of household, qualifying

widow(er), or married filing separately and you lived apart from your spouse for all of 2003 10.

11. Subtract line 10 from line 9. If zero or less, enter -0- ............................... 11.

12. Enter the smaller of line 9 or line 10 ........................................... 12.

13. Enter one-half of line 12 .................................................... 13.

14. Enter the smaller of line 2 or line 13 ........................................... 14.

15. Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- ........................... 15.

16. Add lines 14 and 15 ....................................................... 16.

17. Multiply line 1 by 85% (.85) ................................................. 17.

18. Taxable social security benefits. Enter the smaller of line 16 or line 17 ................ 18.

• Enter the amount from line 1 above on Form 1040, line 20a.

• Enter the amount from line 18 above on Form 1040, line 20b.

If part of your benefits are taxable for 2003 and they include benefits paid in 2003 that were for an

earlier year, you may be able to reduce the taxable amount. See Pub. 915 for details.

TIP

14,263

7,132

32,765

0

39,897

424

✔ 39,473

32,000

✔ 7,473

12,000

0

7,473

3,737

3,737

0

3,737

12,124

3,737

Social Security Benefits Worksheet.
Lesson 15

Military Segment M-15-1

FOREIGN EARNED INCOME

 EXCLUSION

Lesson 15

Military Segment

INTRODUCTION AND OBJECTIVES

This lesson will discuss the foreign earned income exclusion.

Certain taxpayers can exclude income earned in foreign countries. 

For 2003, the maximum exclusion amount is $80,000. However, 

the foreign earned income exclusion does not apply to wages and 

salaries of military and civilian employees of the U.S. Government. 

Employees of the U.S Government, include those who work at 

Armed Forces post exchanges, officers’ and enlisted personnel clubs, 

and embassy commissaries. Other foreign income earned by military personnel for their spouses may be eligible for the exclusion.

To qualify for the foreign earned income exclusion, the taxpayer’s 

tax home must be in a foreign country throughout your period of 

stay. This lesson will explain this requirement.

After completing this lesson, you should be able to:

■ Determine whether the taxpayer qualifies for the foreign earned 

income exclusion.

■ Calculate the foreign earned income exclusion. 

REQUIREMENTS TO QUALIFY FOR THE FOREIGN EARNED INCOME EXCLUSION

There are two requirements to qualify for the foreign earned 

income exclusion. First, the taxpayer must show that his or her tax

home is in a foreign country. (“Foreign country” does not include 

Puerto Rico, Guam, the Northern Mariana Islands, the Virgin 

Islands, or U.S. possessions such as America Samoa, Wake Island, 

the Midway Islands and Johnston Island.) The second requirement 

is that the taxpayer must meet either the bona fide residence 

test or the physical presence test.

Exercise 1

Miranda has lived in Puerto Rico since 1998. Is she eligible for the 

foreign earned income exclusion?

Answer 

The requirements are applied separately to each individual. If a 

husband and wife are each working overseas, each must meet both 

requirements, to apply the exclusion. If they do so, each is entitled 

to an exclusion of up to $80,000 (on qualified income) for 2003. 

(Remember military pay is not eligible for the exclusion.)
Lesson 15 M-15-2 Military Segment

Tax Home. To claim the foreign earned income exclusion, the 

taxpayer’s home must be in a foreign country. Generally, one’s tax 

home is the area of the taxpayer’s main place of business, employment or post of duty, regardless of where the taxpayer maintains 

his or her family home. If the taxpayer does not have a regular 

place of business because of the nature of the work, their tax home 

is the place where they regularly live.

Military Note: The tax home for military personnel is the permanent duty station, either land based or on a ship. This is true 

whether it is feasible or permissible for the taxpayer’s family to live 

with him or her. Generally, most military personnel and their 

dependents will not qualify for the Foreign Earned Income

Exclusion.

Example 1

John and Mary are both in the armed forces and have been permanently stationed in Germany since August 2001. Their tax home for 

2003 would be Germany.

Exercise 2

Alan has lived and worked in China since August 16, 1999. For 

2003, what country is his tax home?

Answer 

When the taxpayer has a tax home in the U.S. and goes overseas 

temporarily, or on business, the tax home has not changed. If the 

taxpayer is assigned overseas on business for an indefinite period, 

the tax home is overseas and the taxpayer may be eligible for the 

foreign earned income exclusion.

The law provides that the taxpayer will not be treated as temporarily away from home if the employment away from home exceeds 

one year. Therefore the person will generally be considered to have 

a tax home in a foreign country if the employment in the foreign 

country will be for more than one year. However for purposes of the 

foreign earned income exclusion a person will not be considered to 

have a tax home in a foreign country for any time during which his 

abode is in the United States.

DETERMINING THE REGULAR PLACE OF ABODE

Three questions are important in showing whether or not a U.S. 

home is the regular place of abode. The questions that you should 

ask the taxpayer are:

1. Did you use your home in the United States as a residence 

while you worked at your job in the United States just before 

going abroad to your new job, and did you continue to maintain 
Lesson 15

Military Segment M-15-3

work contacts, job seeking, leave of absence, ongoing business, 

etc.) in that area in the United States during the time you 

worked abroad?

2. Are your living expenses duplicated at the U.S. and foreign 

home because your work requires you to be away from your U.S. 

home?

3. Do you have a family member or members continuing to live 

at your U.S. home, or do you frequently use your U.S. home for 

lodging during the period you work abroad?

If the taxpayer cannot answer “yes” to at least two of these three 

questions, the taxpayer will be considered indefinitely assigned 

to the new location abroad. Thus, since the tax home is abroad, no 

expenses for travel, meals, or lodging while there are deductible. 

However, one may be able to exclude earnings from income under 

the foreign earned income exclusion rules.

If he/she realistically expects the job to last, and it does last, less 

than 1 year and that he/she will return to the U.S. home, and can 

answer “yes” to all three questions, the taxpayer is considered temporarily away from home. The taxpayer does not qualify for the 

foreign earned income exclusion, but may qualify to deduct awayfrom-home expenses.

If the taxpayer can answer “yes” to two of the questions, with the 

same expectation of job duration and return to the U.S. home, 

the location of the tax home depends on all the facts and circumstances.

Example 2

Henry is in the Armed Forces. He was assigned to a post in Japan 

in 2003. This assignment was for an indefinite period. Margaret, 

his wife, accompanied him to Japan and has foreign earned income. 

Their tax home for 2003 would be Japan.

Period of Stay. Another qualification for the exclusion is the 

length of time the taxpayer stays overseas. This requirement can 

be satisfied in one of two ways. 

The taxpayer must be:

1. A U.S. citizen or resident alien from a tax treaty country who is 

a bona fide resident of a foreign country (or countries) for an 

uninterrupted period that includes an entire tax year, or

2. A U.S. citizen or U.S. resident alien who is physically present in 

a foreign country or countries for at least 330 full days during 

any period of 12 consecutive months.
Lesson 15 M-15-4 Military Segment

Exercise 3

Jennifer is a U.S. citizen who has lived in Israel since October 

1, 2003. She expects to return to the U.S. in May, 2004. Does she 

meet either period of stay test?

Answer 

Bona Fide Resident Test. To meet the test, the taxpayer must 

show that he or she has set up permanent quarters in a foreign 

country. The period must be for an uninterrupted period that 

includes an entire tax year. Taking a brief trip to the U.S. will not 

prevent the taxpayer from being a bona fide resident, as long as the 

intention is clear to return to the foreign country.

Example 3

Jane is a military spouse who has lived in England since 1999. Her 

mother still lives in the U.S. Jane came to the U.S. for two weeks in 

2003 to be with her mother after she had surgery. Jane’s trip to the 

U.S. does not affect her status as a bona fide resident of a foreign 

country.

Physical Presence Test. The other test that may be met instead 

of the bona fide residence test is the physical presence test. To qualify, the taxpayer must be physically present in a foreign country 

330 full days during a period of twelve consecutive months.

In order for a day to count for the test, it must be a full day in a 

foreign country. When arriving from the U.S., or returning to the 

U.S., any day in which part of the time is spent in the U.S. or over 

international waters does not count as a qualifying day in a foreign 

country.

The taxpayer may move about from one place to another in a foreign country, or to another foreign country without losing full days. 

But if any part of the taxpayer’s travel is not within a foreign country or countries and takes 24 hours or more, the taxpayer will lose 

full days.

Example 4

The taxpayer leaves Southampton, England, by ship at 10:00 p.m. 

on July 6 and arrives in Lisbon at 6:00 a.m. on July 8. Since the 

trip takes more than 24 hours, the taxpayer loses as full days, July 

6, 7, and 8. If the taxpayer remains in Lisbon, the first full day is 

July 9.
Lesson 15

Military Segment M-15-5

Exercise 4

Shauntell is using the twelve months of 2003 to determine if she 

qualifies for the physical presence test. She arrived in Kenya on 

January 3, 2003 and worked there until August 12, 2003 when she 

returned to the U.S. for 6 weeks. On October 1, 2003 she returned 

to Kenya and worked there until she permanently returned to the 

U.S. on January 1, 2004. Does she meet the physical presence test 

for 2003?

Answer 

Figuring the 12 Month Period. Any 12-month period may be 

used if the 330 days in a foreign country fall within that period. 

If necessary, more than one period may be used, including periods 

that overlap. By using more than one period, it may be possible 

to meet the physical presence test for an entire stay, even though 

there may have been intervening visits to the U.S.

Waiver of Time Requirements. The minimum time requirements for period of stay may be waived, if the taxpayer is forced 

to leave a foreign country because of war, civil unrest, or similar 

adverse conditions in that country. The taxpayer must show that 

he/she could have met the minimum time requirements if it had 

not been for the adverse conditions.

QUALIFYING INCOME

To qualify for the exclusion, income must be earned income. 

Examples of earned income are salaries, wages, commissions and 

professional fees. Earned income does not include dividends, interest, capital gains, alimony, social security benefits, pensions or 

annuities. To qualify for the exclusion, the earned income must be 

for services (other than military or U.S. government) performed in 

a foreign country.

Amounts paid by the United States or its agencies to its employees 

do not qualify for the exclusion. This includes military pay and 

payment for such activities as post exchanges, commissaries, and 

officers clubs.

Example 5

Maria, a U.S. resident, is in the armed forces and has lived in 

Lisbon since 1999. Her military pay is not eligible for the foreign 

earned income exclusion. In her spare time, she is a self-employed

DJ in Lisbon and the surrounding area. The income from her selfemployment may qualify for the exclusion.

Source of earned income. The source of earned income is the 

place where the services are performed. To qualify for the exclusion, services must be performed in a foreign country. Where the 

payments come from for the service or where they are deposited is 

not a factor in the determining source of the income. If a taxpayer 
Lesson 15 M-15-6 Military Segment

works predominantly in a foreign country, but does some work in 

the U.S., an adjustment must be made to the total of foreign earned 

income.

Example 6

Charles Thompson works and lives in the Bahamas. After vacation, 

he worked 50 weeks in 2003. For one week, he attended a business 

meeting in Florida. 1/50 or 2% of his wages are not foreign earned 

income, because that week was spent working in Florida.

Exercise 5

Maurice is stationed in Germany. His only income is from his U.S. 

military salary. Does he qualify for the foreign earned income 

exclusion?

Answer 

Exercise 6

Juanita lives in Scotland. She is retired and her income consists of 

U.S. Social Security, a pension and several stock dividends. Does 

she qualify for the foreign earned income exclusion?

Answer 

Exercise 7

Jose and Kim live in a foreign country. Jose has wages from the 

U.S. military. Kim has wages from a bank that she works at in the 

foreign country. Do they have qualifying income for the foreign 

earned income exclusion?

Answer 

CHOOSING THE EXCLUSION

The foreign earned income exclusion is voluntary. (There are times 

when it may be to the taxpayer’s advantage to not claim the exclusion. An example is that a taxpayer may not claim the Earned 

Income Tax Credit, if foreign income is excluded.) The initial choice 

of the exclusion on Form 2555 or Form 2555EZ must be filed with 

a timely return (including extensions). Exceptions do apply that 

allow the initial choice to be made after a return is filed. Taxpayers 

who wish to take advantage of these exceptions should seek professional tax assistance.

The taxpayer may revoke the election for any tax year. When the 

exclusion is revoked, the taxpayer may not claim the exclusion 

again for the next five tax years without the approval of the IRS.
Lesson 15

Military Segment M-15-7

COMPLETING AND FILING FORM 2555 OR FORM 2555EZ

If the taxpayer is qualified to, and wishes to claim the foreign 

earned income exclusion, it is necessary to complete Form 2555 or 

2555EZ and attach it to Form 1040. The tax return should be filed 

with Internal Revenue Service Processing Campus, Philadelphia, 

PA, 19255.

To be able to use Form 2555EZ, the taxpayer must be a U.S. citizen 

or resident alien who has wages and salaries, but not self-employment income. The total foreign earned income must be $80,000 or 

less, and the person cannot be claiming any business or moving 

expenses. Taxpayers, who do not meet these restrictions, should file 

Form 2555 to claim the credit.

Example 7

Michael and his wife Melissa have been stationed in Hong Kong 

since 2001. Michael is employed by the armed forces. Melissa operates a home day care business. Their tax home is Hong Kong. They 

meet the physical presence test. Melissa wants to exclude her selfemployment income from U.S. taxation.

She will need to complete Form 2555 instead of Form 2555EZ, 

because her income is from self-employment.

Exercise 8

Assuming that the following taxpayers meet the period of stay 

test, should they file a Form 2555, or Form 2555EZ?

a. Mallory has $34,000 of foreign earned income. She has no 

other income. Which form should she file?

Answer 

b. Jacob has U.S. military wages and self-employment income he 

earned in a foreign country. Which form should he file?

Answer 

c. Ramie has $86,000 of foreign earned income. Which form 

should he file?

Answer 

Taxpayers, who are eligible to file Form 2555EZ, should complete 

all four sections of the form.

On the following two pages, you will find a blank copy of Form 

2555EZ for your reference.
Lesson 15 M-15-8 Military Segment

Draft as of

General Information

5/14/2003

OMB No. 1545-1326

Foreign Earned Income Exclusion Form 2555-EZ

Department of the Treasury

Internal Revenue Service  See separate instructions.  Attach to Form 1040.

Name shown on Form 1040 Your social security number

Your foreign address (including country) Your occupation

Employer’s name

For Paperwork Reduction Act Notice, see page 3 of separate instructions. Cat. No. 13272W Form 2555-EZ (2003)

4 5

6

9 Employer is (check any that apply):

A U.S. business

A foreign business

Other (specify) 

10a

If you answered “Yes,” enter the tax year for which the revocation was effective. 

b Of what country are you a citizen/national? 

Have you ever revoked the foreign earned income exclusion? Yes No

7 Employer’s U.S. address (including ZIP code) 8 Employer’s foreign address

● Are a U.S. citizen or a resident alien.

● Earned wages/salaries in a foreign country.

● Had total foreign earned income of

$80,000 or less.

● Do not have self-employment income.

● Do not have business/moving expenses. And You:

You May Use

This Form

If You:

b

c

a

b

c

● Do not claim the foreign housing

exclusion or deduction.

Part II

● Are filing a calendar year return that

covers a 12-month period.

11a List your tax home(s) during 2003 and date(s) established. 

If you filed Form 2555 or 2555-EZ after 1981, enter the last year you filed the form. 

If you did not file Form 2555 or 2555-EZ after 1981, check here  and go to line 11a now.

d

1 Bona Fide Residence Test

Yes No

Enter the date your bona fide residence began  , and ended (see instructions)  .

2 Physical Presence Test

Yes No

b

a

b

a

Tests To See If You Can Take the Foreign Earned Income Exclusion

Were you a bona fide resident of a foreign country or countries for a period that includes an entire tax year

(see page 2 of the instructions)?

Were you physically present in a foreign country or countries for at least 330 full days during—

● If you answered “Yes,” you meet this test. Fill in line 1b and then go to line 3.

● If you answered “No,” you do not meet this test. Go to line 2 to see if you meet the Physical Presence Test.

2003 or

any other period of 12 months in a row starting or ending in 2003?

● If you answered “Yes,” you meet this test. Fill in line 2b and then go to line 3.

● If you answered “No,” you do not meet this test. You cannot take the exclusion unless you meet the

Bona Fide Residence Test above.

The physical presence test is based on the 12-month period from  

● If you answered “No,” you cannot take the exclusion. Do not file this form.

Tax Home Test. Was your tax home in a foreign country or countries throughout your period of bona fide

residence or physical presence, whichever applies?



through  .

3

Yes No

● If you answered “Yes,” you can take the exclusion. Complete Part II below and then go to page 2.

Part I

Attachment

(99) Sequence No. 34A

2003

Exhibit 1 Form 2555EZ, page 1
Lesson 15

Military Segment M-15-9

Exhibit 2 Form 2555EZ, page 2

Draft as of

5/14/2003

Form 2555-EZ (2003) Page 2

$80,000 00

Enter the number of days in your qualifying period that fall within 2003

Did you enter 365 on line 14?

Multiply line 13 by line 15

 .

Enter, in U.S. dollars, the total foreign earned income you earned and received in 2003 (see

instructions). Be sure to include this amount on Form 1040, line 7

Foreign earned income exclusion. Enter the smaller of line 16 or line 17 here and in

parentheses on Form 1040, line 21. Next to the amount enter “2555-EZ.” On Form 1040, subtract

this amount from your income to arrive at total income on Form 1040, line 22 

18

13

14

15

16

17

Maximum foreign earned income exclusion 13

14

15

17

18

16

Part IV Figure Your Foreign Earned Income Exclusion

Enter “1.000.”

Part III

(d) Income earned in U.S. 

on business (attach computation)

(c) Number of days

in U.S. on business (a) Date arrived in U.S. (b) Date left U.S.

Days Present in the United States—Complete this part if you were in the

United States or its possessions during 2003.

12

 Divide line 14 by 365 and enter the result as

a decimal (rounded to at least three places).

Yes.

No.

days

Form 2555-EZ (2003)
Lesson 15 M-15-10 Military Segment

For those who must file Form 2555, the first section of the form is 

for general information, and must be completed by all taxpayers 

who claim the exclusion.

Taxpayers who claim the bona fide residence test must complete 

Part II of Form 2555. Taxpayers who qualify under the physical 

presence test must complete Part III.

Part IV, completed by all taxpayers, is where foreign earned income 

is listed. It must be completed in U.S. dollars. If the taxpayer has 

difficulty in converting income, IRS can provide exchange rates to 

be used. However, the taxpayer is not required to use only rates 

provided by the IRS or the federal government. Note that earned 

income includes not only wages and salaries but also non-cash 

income and allowances and reimbursements received by the taxpayer.

Military Note: Do not list military wages in this section; they are 

not considered foreign earned income.

Page 3 of the form is where the exclusion is computed. Taxpayers 

claiming only the basic exclusion fill out Parts V and VII. Most of 

the lines are self-explanatory. The concept of qualifying period is 

essential. For those qualifying under the bona fide residence test, 

this qualifying period is the period of actual residence. For the 

physical presence test, the qualifying period or periods is chosen 

by the taxpayer. Any period may be chosen as long as 330 days are 

spent in a foreign country during the period.

Military Note: Generally, armed forces personnel and their 

spouses will not qualify for the housing exclusion (the housing 

allowance is already considered non- taxable income).

On the following three pages, you will find a blank Form 2555 for 

your reference.
Lesson 15

Military Segment M-15-11

Exhibit 3 Form 2555, page 1

Draft as of

6/17/2003

OMB No. 1545-0067

Form 2555 Foreign Earned Income

Department of the Treasury

Internal Revenue Service

 See separate instructions.  Attach to Form 1040.

For Use by U.S. Citizens and Resident Aliens Only

Name shown on Form 1040 Your social security number

Your foreign address (including country) Your occupation

Employer’s name 

Employer’s U.S. address 

Employer’s foreign address 

Employer is (check

any that apply):

A foreign entity A U.S. company

Other (specify) 

Self

A foreign affiliate of a U.S. company

If, after 1981, you filed Form 2555 to claim either of the exclusions or Form 2555-EZ to claim the foreign earned income

exclusion, enter the last year you filed the form. 

Have you ever revoked either of the exclusions? Yes No

If you answered “Yes,” enter the type of exclusion and the tax year for which the revocation was effective. 

Did you maintain a separate foreign residence for your family because of adverse living conditions at your

tax home? See Second foreign household on page 3 of the instructions

If “Yes,” enter city and country of the separate foreign residence. Also, enter the number of days during your tax year that

you maintained a second household at that address. 

List your tax home(s) during your tax year and date(s) established. 

Next, complete either Part II or Part III. If an item does not apply, enter “NA.” If you do not give

the information asked for, any exclusion or deduction you claim may be disallowed.

Taxpayers Qualifying Under Bona Fide Residence Test (See page 2 of the instructions.)

10 Date bona fide residence began  , and ended 

11 Kind of living quarters in foreign country  Purchased house Rented house or apartment Rented room

Quarters furnished by employer

12a Did any of your family live with you abroad during any part of the tax year?

If “Yes,” who and for what period? 

Have you submitted a statement to the authorities of the foreign country where you claim bona fide residence

that you are not a resident of that country? (See instructions.)

13a

b Are you required to pay income tax to the country where you claim bona fide residence? (See instructions.)

If you answered “Yes” to 13a and “No” to 13b, you do not qualify as a bona fide resident. Do not complete the rest of

this part.

If you were present in the United States or its possessions during the tax year, complete columns (a)–(d) below. Do not

include the income from column (d) in Part IV, but report it on Form 1040.

14

(d) Income earned in

U.S. on business

(attach computation)

(c) Number of

days in U.S.

on business

(d) Income earned in

U.S. on business

(attach computation)

(c) Number of

days in U.S.

on business

(b) Date left

U.S.

(a) Date

arrived in U.S.

(b) Date left

U.S.

(a) Date

arrived in U.S.

15a List any contractual terms or other conditions relating to the length of your employment abroad. 

b Enter the type of visa under which you entered the foreign country. 

c Did your visa limit the length of your stay or employment in a foreign country? If “Yes,” attach explanation

Did you maintain a home in the United States while living abroad?

e If “Yes,” enter address of your home, whether it was rented, the names of the occupants, and their relationship

to you. 

For Paperwork Reduction Act Notice, see page 4 of separate instructions. Cat. No. 11900P Form 2555 (2003)

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No



3

4a

5

6a

c

8a

9

7

1 2

b

a

d

b

e

c

b

a

d

b c

d

d

b

Part I

Part II

General Information

b If you did not file Form 2555 or 2555-EZ after 1981 to claim either of the exclusions, check here  and go to line 7.

Of what country are you a citizen/national? 

Attachment

(99) Sequence No. 34

2003
Lesson 15 M-15-12 Military Segment

Exhibit 4 Form 2555, page 2

Draft as of

6/17/2003

Form 2555 (2003) Page 2

Taxpayers Qualifying Under Physical Presence Test (See page 2 of the instructions.)

16 The physical presence test is based on the 12-month period from  through 

17 Enter your principal country of employment during your tax year. 

If you traveled abroad during the 12-month period entered on line 16, complete columns (a)–(f) below. Exclude travel between

foreign countries that did not involve travel on or over international waters, or in or over the United States, for 24 hours or

more. If you have no travel to report during the period, enter “Physically present in a foreign country or countries for the entire

12-month period.” Do not include the income from column (f) below in Part IV, but report it on Form 1040.

18

(f) Income earned in U.S.

on business (attach

computation)

(e) Number of

days in U.S.

on business

(d) Full days

present in

country

(a) Name of country

(including U.S.) (b) Date arrived (c) Date left

All Taxpayers

Note: Enter on lines 19 through 23 all income, including noncash income, you earned and actually or constructively received during

your 2003 tax year for services you performed in a foreign country. If any of the foreign earned income received this tax year

was earned in a prior tax year, or will be earned in a later tax year (such as a bonus), see the instructions. Do not include

income from line 14, column (d), or line 18, column (f). Report amounts in U.S. dollars, using the exchange rates in effect

when you actually or constructively received the income.

If you are a cash basis taxpayer, report on Form 1040 all income you received in 2003, no matter when you performed

the service.

Amount 2003 Foreign Earned Income (in U.S. dollars)

19 Total wages, salaries, bonuses, commissions, etc. 19

20 Allowable share of income for personal services performed (see instructions):

a In a business (including farming) or profession 20a

b In a partnership. List partnership’s name and address and type of income. 

20b

21 Noncash income (market value of property or facilities furnished by employer—attach statement

showing how it was determined):

a Home (lodging) 21a

b Meals 21b

c Car 21c

d Other property or facilities. List type and amount.  

21d

22 Allowances, reimbursements, or expenses paid on your behalf for services you performed:

a Cost of living and overseas differential 22a

b Family 22b

c Education 22c

d Home leave 22d

e Quarters 22e

f For any other purpose. List type and amount. 

22f

g Add lines 22a through 22f 22g

23 Other foreign earned income. List type and amount. 

23

24 Add lines 19 through 21d, line 22g, and line 23 24

25 Total amount of meals and lodging included on line 24 that is excludable (see instructions) 25

Subtract line 25 from line 24. Enter the result here and on line 27 on page 3. This is your 2003

foreign earned income 

26

26

Part III

Part IV

Form 2555 (2003)
Lesson 15

Military Segment M-15-13

Exhibit 5 Form 2555, page 3

Draft as of

6/17/2003

Form 2555 (2003) Page 3

Taxpayers Claiming the Housing Exclusion and/or Deduction

28 Qualified housing expenses for the tax year (see instructions) 28

Number of days in your qualifying period that fall within your 2003 tax

year (see instructions)

29

29

30 Multiply $30.77 by the number of days on line 29. If 365 is entered on line 29, enter $11,233.00 here 30

31

Subtract line 30 from line 28. If the result is zero or less, do not complete the rest of this part

or any of Part IX

31

32 Enter employer-provided amounts (see instructions) 32

Divide line 32 by line 27. Enter the result as a decimal (rounded to at least three places), but do

not enter more than “1.000”

33

33

Housing exclusion. Multiply line 31 by line 33. Enter the result but do not enter more than the

amount on line 32. Also, complete Part VIII 

34

34

Note: The housing deduction is figured in Part IX. If you choose to claim the foreign earned

income exclusion, complete Parts VII and VIII before Part IX.

Taxpayers Claiming the Foreign Earned Income Exclusion

35 Maximum foreign earned income exclusion 35 $80,000 00

● All others, enter the number of days in your qualifying period that

fall within your 2003 tax year (see the instructions for line 29).

36

● Otherwise, divide line 36 by the number of days in your 2003 tax year and enter the result

as a decimal (rounded to at least three places).

37

38 Multiply line 35 by line 37 38

39 Subtract line 34 from line 27 39

40 Foreign earned income exclusion. Enter the smaller of line 38 or line 39. Also, complete Part VIII  40

Taxpayers Claiming the Housing Exclusion, Foreign Earned Income Exclusion, or Both

41 Add lines 34 and 40 41

Deductions allowed in figuring your adjusted gross income (Form 1040, line 34) that are allocable

to the excluded income. See instructions and attach computation

42

42

Subtract line 42 from line 41. Enter the result here and in parentheses on Form 1040, line 21.

Next to the amount enter “Form 2555.” On Form 1040, subtract this amount from your income

to arrive at total income on Form 1040, line 22 

43

43

Taxpayers Claiming the Housing Deduction—Complete this part only if (a) line 31 is more than line

34 and (b) line 27 is more than line 41.

44 Subtract line 34 from line 31 44

45 Subtract line 41 from line 27 45

46 Enter the smaller of line 44 or line 45 46

Note: If line 45 is more than line 46 and you could not deduct all of your 2002 housing deduction

because of the 2002 limit, use the worksheet on page 4 of the instructions to figure the

amount to enter on line 47. Otherwise, go to line 48.

47 Housing deduction carryover from 2002 (from worksheet on page 4 of the instructions) 47

48 Housing deduction. Add lines 46 and 47. Enter the total here and on Form 1040 to the left of

line 33. Next to the amount on Form 1040, enter “Form 2555.” Add it to the total adjustments

reported on that line  48

 .

 .

Part VIII

Part VII

Part VI

Part IX

Part V

36 ● If you completed Part VI, enter the number from line 29.

37 ● If line 36 and the number of days in your 2003 tax year (usually 365) are the same, enter “1.000.”

27

All Taxpayers

27 Enter the amount from line 26

Are you claiming the housing exclusion or housing deduction?

No. Go to Part VII.





Yes. Complete Part VI.

Form 2555 (2003)

days

days
Lesson 15 M-15-14 Military Segment

Although the exclusion may never be more than the foreign earned 

income, it may be less. The exclusion can be no more than $80,000. 

If the number of qualifying days in the tax year is less than 365, 

the $80,000 limit is lowered proportionally.

Example 8

Tina York is claiming the exclusion. Her qualifying period is March 

15, 2002 to March 14, 2003. On line 36 of Form 2555, Tina enters 

73 days because 73 days of her qualifying period fall in the 2003 

tax year.

On line 37, she divides 73 by 365, and enters the result, “.200.”

On line 38, $80,000 is multiplied by .200, which results in $16,000.”

Exhibit 6 Form 2555, lines 35-40 6/1

, p

Taxpayers Claiming the Foreign Earned Income Exclusion

35 Maximum foreign earned income exclusion 35 $80,000 00

● All others, enter the number of days in your qualifying period that

fall within your 2003 tax year (see the instructions for line 29).

36

● Otherwise, divide line 36 by the number of days in your 2003 tax year and enter the result

as a decimal (rounded to at least three places).

37

38 Multiply line 35 by line 37 38

39 Subtract line 34 from line 27 39

40 Foreign earned income exclusion. Enter the smaller of line 38 or line 39. Also, complete Part VIII  40

 .

Part VII

36 ● If you completed Part VI, enter the number from line 29.

37 ● If line 36 and the number of days in your 2003 tax year (usually 365) are the same, enter “1.000.”





73 days

200

$16,000.00

Regardless of how much foreign earned income Tina had, her exclusion can be no more than $16,000.

DEDUCTIONS ALLOCABLE TO EXCLUDED INCOME

In section VIII of Form 2555, the taxpayer is required to list the 

deductions allowed in figuring adjusted gross income that are 

allocable to the excluded income. To the extent a deduction that is 

allocable to the excluded income is claimed, the exclusion must be 

reduced by the deduction.

The three most common deductions that may affect the exclusion 

are self-employment tax, itemized deductions and moving

expenses.

1. Self-Employment Tax. The taxpayer must take all earned 

income into account in figuring self-employment tax, even 

though the income is exempt from income tax because of the foreign earned income exclusion.

An individual is allowed a deduction for one-half of self-employment tax on the Form 1040. This deduction is related to the operation of the business. If foreign earned income is excluded, the 

deduction for S.E. tax must be allocated to the excluded income. 

The amount allocated to the excluded income reduces the Foreign 

Earned Income exclusion allowed.
Lesson 15

Military Segment M-15-15

The following formula is used to determine the amount of the 

deduction allocable to excluded income:

Excluded Earned Income

Qualifying Earned Income

x Self-Employment Tax Deduction

(From Form 1040, Line 28)

When the qualifying earned income is fully excluded, none of the 

self-employment tax deduction is allowed; therefore the full amount 

of this deduction is put on line 42 of Form 2555. This will reduce 

your Foreign Earned Income exclusion by the amount of the deduction. However, the self-employment tax deduction is still entered on 

line 28 of Form 1040.

2. Itemized Deductions. The treatment for itemized deductions is somewhat different. In reporting itemized deductions 

on Schedule A ( Form 1040) that are wholly or partly allocable 

to excluded income, the taxpayer must reduce the gross deduction by the disallowed amount in arriving at the net deduction 

shown on Schedule A. Then the taxpayer attaches a statement 

showing how the deductible amount was figured and writes 

“Form 2555” in the upper right corner of Schedule A. The most 

common itemized deductions that are allocable to excluded 

foreign earned income are unreimbursed employee business

expenses. The same formula, as presented above, is used to 

determine the amounts allocable to the excluded foreign income.

3. Moving Expenses. The rules for deducting moving expenses 

allocable to excluded income are still more complex. ln the year 

of the move, if the taxpayer has at least 120 days of his qualifying period during the tax year, the moving expense is allocated 

solely to the year of the move. If the taxpayer has less than 

120 full days in the tax year, the moving expense is allocated to 

income in the year of the move, and the year after. Taxpayers 

affected by this provision may want to seek assistance from the 

IRS or a tax preparer.

After adjusting the exclusion for any deductions allocable to 

excluded income the net exclusion needs to be carried to Form 

1040. The amount from Form 2555 EZ line 18 or Form 2555 line 

43 is entered in parenthesis on Form 1040 line 21. It is subtracted 

from other sources of income.
Lesson 15 M-15-16 Military Segment

  SUMMING UP THIS LESSON  

The foreign earned income exclusion does not apply to income 

from the U.S. government, regardless of the tax home. The exclusion can be up to $80,000 for income earned in a foreign country. 

It is necessary to complete either Form 2555 or 2555EZ to claim 

the exclusion. 

In this lesson, we have discussed the basic examples of the exclusion. When a taxpayer has a more complex situation, he or she 

will need to seek professional tax assistance.
Lesson 15

Military Segment M-15-17

FOREIGN EARNED INCOME

 EXCLUSION ANSWERS TO EXERCISES

1. No, Puerto Rico is not considered a foreign country.

2. His 2003 tax home is China.

3. No.

4. No, she was not present in the foreign country for a full 330 

days.

5. No, U.S. military pay is not eligible.

6. No, only earned income is eligible.

7. Yes, Kim’s salary.

8. a. Form 2555EZ

b. Form 2555

c. Form 2555
Lesson 15 M-15-18 Military Segment

SUMMARY EXERCISES

1. List the two forms that the foreign earned income exclusion can 

be claimed on.

2. Is a taxpayer required to take the exclusion on foreign earned 

income?

3. Are military wages eligible for the foreign earned income exclusion?

4. Complete the form 2555EZ on the next two pages using the following information.

Robert (000-00-0001) and Sara (000-00-0002) Johnson (both U.S. 

citizens) have lived in Germany since August, 2002.Robert is 

employed by the U.S. Armed Forces. In 2003, Sara worked at a 

local bakery (Gulden’s, 349028 Gulden Lane, Munich, Germany) in 

Germany and earned the equivalent of $12,000. Robert and Sara 

do not consider themselves bona fide residents of Germany. During 

2003, they resided in Germany for the full year, except for a three 

day vacation period in France. Their address in Germany is 239084 

Marzolf Lane, Munich, Germany. They have never claimed the foreign earned income exclusion before.
Lesson 15

Military Segment M-15-19

Form 2555EZ, page 1

Draft as of

General Information

5/14/2003

OMB No. 1545-1326

Foreign Earned Income Exclusion Form 2555-EZ

Department of the Treasury

Internal Revenue Service  See separate instructions.  Attach to Form 1040.

Name shown on Form 1040 Your social security number

Your foreign address (including country) Your occupation

Employer’s name

For Paperwork Reduction Act Notice, see page 3 of separate instructions. Cat. No. 13272W Form 2555-EZ (2003)

4 5

6

9 Employer is (check any that apply):

A U.S. business

A foreign business

Other (specify) 

10a

If you answered “Yes,” enter the tax year for which the revocation was effective. 

b Of what country are you a citizen/national? 

Have you ever revoked the foreign earned income exclusion? Yes No

7 Employer’s U.S. address (including ZIP code) 8 Employer’s foreign address

● Are a U.S. citizen or a resident alien.

● Earned wages/salaries in a foreign country.

● Had total foreign earned income of

$80,000 or less.

● Do not have self-employment income.

● Do not have business/moving expenses. And You:

You May Use

This Form

If You:

b

c

a

b

c

● Do not claim the foreign housing

exclusion or deduction.

Part II

● Are filing a calendar year return that

covers a 12-month period.

11a List your tax home(s) during 2003 and date(s) established. 

If you filed Form 2555 or 2555-EZ after 1981, enter the last year you filed the form. 

If you did not file Form 2555 or 2555-EZ after 1981, check here  and go to line 11a now.

d

1 Bona Fide Residence Test

Yes No

Enter the date your bona fide residence began  , and ended (see instructions)  .

2 Physical Presence Test

Yes No

b

a

b

a

Tests To See If You Can Take the Foreign Earned Income Exclusion

Were you a bona fide resident of a foreign country or countries for a period that includes an entire tax year

(see page 2 of the instructions)?

Were you physically present in a foreign country or countries for at least 330 full days during—

● If you answered “Yes,” you meet this test. Fill in line 1b and then go to line 3.

● If you answered “No,” you do not meet this test. Go to line 2 to see if you meet the Physical Presence Test.

2003 or

any other period of 12 months in a row starting or ending in 2003?

● If you answered “Yes,” you meet this test. Fill in line 2b and then go to line 3.

● If you answered “No,” you do not meet this test. You cannot take the exclusion unless you meet the

Bona Fide Residence Test above.

The physical presence test is based on the 12-month period from  

● If you answered “No,” you cannot take the exclusion. Do not file this form.

Tax Home Test. Was your tax home in a foreign country or countries throughout your period of bona fide

residence or physical presence, whichever applies?



through  .

3

Yes No

● If you answered “Yes,” you can take the exclusion. Complete Part II below and then go to page 2.

Part I

Attachment

(99) Sequence No. 34A

2003
Lesson 15 M-15-20 Military Segment

Form 2555EZ, page 2

Draft as of

5/14/2003

Form 2555-EZ (2003) Page 2

$80,000 00

Enter the number of days in your qualifying period that fall within 2003

Did you enter 365 on line 14?

Multiply line 13 by line 15

 .

Enter, in U.S. dollars, the total foreign earned income you earned and received in 2003 (see

instructions). Be sure to include this amount on Form 1040, line 7

Foreign earned income exclusion. Enter the smaller of line 16 or line 17 here and in

parentheses on Form 1040, line 21. Next to the amount enter “2555-EZ.” On Form 1040, subtract

this amount from your income to arrive at total income on Form 1040, line 22 

18

13

14

15

16

17

Maximum foreign earned income exclusion 13

14

15

17

18

16

Part IV Figure Your Foreign Earned Income Exclusion

Enter “1.000.”

Part III

(d) Income earned in U.S. 

on business (attach computation)

(c) Number of days

in U.S. on business (a) Date arrived in U.S. (b) Date left U.S.

Days Present in the United States—Complete this part if you were in the

United States or its possessions during 2003.

12

 Divide line 14 by 365 and enter the result as

a decimal (rounded to at least three places).

Yes.

No.

days

Form 2555-EZ (2003)
Lesson 15

Military Segment M-15-21

FOREIGN EARNED INCOME

 EXCLUSION ANSWERS TO EXERCISES

ANSWERS TO SUMMARY EXERCISE

1. Form 2555 and Form 2555EZ.

2. No, it is voluntary.

3. No.

4. See the completed form on the next two pages.
Lesson 15 M-15-22 Military Segment

FOREIGN EARNED INCOME

 EXCLUSION ANSWERS TO EXERCISES

Form 2555EZ, page 1

Draft as of

General Information

5/14/2003

OMB No. 1545-1326

Foreign Earned Income Exclusion Form 2555-EZ

Department of the Treasury

Internal Revenue Service  See separate instructions.  Attach to Form 1040.

Name shown on Form 1040 Your social security number

Your foreign address (including country) Your occupation

Employer’s name

For Paperwork Reduction Act Notice, see page 3 of separate instructions. Cat. No. 13272W Form 2555-EZ (2003)

4 5

6

9 Employer is (check any that apply):

A U.S. business

A foreign business

Other (specify) 

10a

If you answered “Yes,” enter the tax year for which the revocation was effective. 

b Of what country are you a citizen/national? 

Have you ever revoked the foreign earned income exclusion? Yes No

7 Employer’s U.S. address (including ZIP code) 8 Employer’s foreign address

● Are a U.S. citizen or a resident alien.

● Earned wages/salaries in a foreign country.

● Had total foreign earned income of

$80,000 or less.

● Do not have self-employment income.

● Do not have business/moving expenses. And You:

You May Use

This Form

If You:

b

c

a

b

c

● Do not claim the foreign housing

exclusion or deduction.

Part II

● Are filing a calendar year return that

covers a 12-month period.

11a List your tax home(s) during 2003 and date(s) established. 

If you filed Form 2555 or 2555-EZ after 1981, enter the last year you filed the form. 

If you did not file Form 2555 or 2555-EZ after 1981, check here  and go to line 11a now.

d

1 Bona Fide Residence Test

Yes No

Enter the date your bona fide residence began  , and ended (see instructions)  .

2 Physical Presence Test

Yes No

b

a

b

a

Tests To See If You Can Take the Foreign Earned Income Exclusion

Were you a bona fide resident of a foreign country or countries for a period that includes an entire tax year

(see page 2 of the instructions)?

Were you physically present in a foreign country or countries for at least 330 full days during—

● If you answered “Yes,” you meet this test. Fill in line 1b and then go to line 3.

● If you answered “No,” you do not meet this test. Go to line 2 to see if you meet the Physical Presence Test.

2003 or

any other period of 12 months in a row starting or ending in 2003?

● If you answered “Yes,” you meet this test. Fill in line 2b and then go to line 3.

● If you answered “No,” you do not meet this test. You cannot take the exclusion unless you meet the

Bona Fide Residence Test above.

The physical presence test is based on the 12-month period from  

● If you answered “No,” you cannot take the exclusion. Do not file this form.

Tax Home Test. Was your tax home in a foreign country or countries throughout your period of bona fide

residence or physical presence, whichever applies?



through  .

3

Yes No

● If you answered “Yes,” you can take the exclusion. Complete Part II below and then go to page 2.

Part I

Attachment

(99) Sequence No. 34A

2003

Robert & Sara Johnson 000 00 0001

✔

✔

✔

✔

8/2002 12/31/03

239084 Marzolf Lane

Munich, Germany Bakery Sales

Gulden’s Bakery

349028 Gulden Lane

Munich, Germany

8/2000

239084 Marzolf Lane Munich, Germany
Lesson 15

Military Segment M-15-23

FOREIGN EARNED INCOME

 EXCLUSION ANSWERS TO EXERCISES

Form 2555EZ, page 2

Draft as of

5/14/2003

Form 2555-EZ (2003) Page 2

$80,000 00

Enter the number of days in your qualifying period that fall within 2003

Did you enter 365 on line 14?

Multiply line 13 by line 15

 .

Enter, in U.S. dollars, the total foreign earned income you earned and received in 2003 (see

instructions). Be sure to include this amount on Form 1040, line 7

Foreign earned income exclusion. Enter the smaller of line 16 or line 17 here and in

parentheses on Form 1040, line 21. Next to the amount enter “2555-EZ.” On Form 1040, subtract

this amount from your income to arrive at total income on Form 1040, line 22 

18

13

14

15

16

17

Maximum foreign earned income exclusion 13

14

15

17

18

16

Part IV Figure Your Foreign Earned Income Exclusion

Enter “1.000.”

Part III

(d) Income earned in U.S. 

on business (attach computation)

(c) Number of days

in U.S. on business (a) Date arrived in U.S. (b) Date left U.S.

Days Present in the United States—Complete this part if you were in the

United States or its possessions during 2003.

12

 Divide line 14 by 365 and enter the result as

a decimal (rounded to at least three places).

Yes.

No.

days

Form 2555-EZ (2003)

362

✔ 992

79,360 .00

12,000 .00

12,000 .00
Lesson 15 M-15-24 Military Segment

STUDENT NOTES
Lesson 16

Military Segment M-16-1

INTRODUCTION AND OBJECTIVES

This lesson will discuss some of the tax benefits that are available 

to Armed Services personnel serving in a combat zone. Service in 

the Persian Gulf area, the former Yugoslavia, Afghanistan and its 

airspace, and Yemen are eligible for combat zone tax treatment. In 

addition, U. S. military personnel located in the Federal Republic of 

Yugoslavia, Albania, the Adriatic Sea, and the northern Ionian Sea, 

including all of their air space in connection with the Kosovo operation, are eligible for combat zone tax treatment.

Members of the Armed Forces deployed overseas away from their 

permanent duty station in support of operations in a qualified hazardous duty area, but outside the qualified hazardous duty area, 

are treated as if they are in a combat zone solely for the purposes of 

the extension deadlines. These personnel are not entitled to other 

combat zone tax benefits. The IRS will not impose penalties or 

interest on members during an extension period.

After completing this lesson, you should be able to: 

1. Determine who qualifies for an extension of deadline. 

2. Identify special tax benefits that are available to persons who 

die in a combat zone or from a terrorist or military action. 

3. Explain how to file claims for tax forgiveness for these individuals.

EXTENSION OF DEADLINE

Members of the Armed Forces who served in a combat zone are 

allowed additional time to take care of tax matters. This extension also applies to any individual who is deployed from his or 

her permanent duty station in support of operations in a qualified 

hazardous duty area, or performing qualifying service outside the 

qualified hazardous duty area. The law provides that certain periods of time are disregarded when determining whether certain tax 

matters have been taken care of on time. For ease of understanding, this publication refers to these provisions as “extensions of 

deadlines. ” These deadline extensions should not be confused with 

other parts of the tax law that refer to extensions of time for performing acts. 

The deadline for filing tax returns, paying taxes, filing claims for 

refund, and taking other actions with the IRS is automatically 

extended if the taxpayer serves in the Armed Forces in a combat 

zone. The deadline for IRS to take certain actions, such as collection 

and examination actions, is also extended. 

TAX OPTIONS FOR COMBAT

ZONE PARTICIPANTS Lesson 16

Military Segment
Lesson 16 M-16-2 Military Segment

Additionally, if members of the Armed Forces are deployed overseas 

away from their permanent duty station in support of operations 

in a qualified hazardous duty area, but outside the qualified hazardous duty area, they also receive these extensions (but not other 

combat zone benefits). The deadline for IRS to take certain actions, 

such as collection and examination actions, is also extended. See 

Lesson 1 for the beginning dates for the Afghanistan area combat 

zone, the Kosovo area combat zone, the Persian Gulf area combat 

zone, and the qualified hazardous duty areas. 

The deadline for taking actions with the IRS is extended for 180 

days after the later of: 

1. The last day the taxpayer is in a combat zone/qualified hazardous duty area or have qualifying service outside of the combat 

zone/qualified hazardous duty area (or the last day the area 

qualifies as a combat zone or qualified hazardous duty area), or

2. The last day of any continuous qualified hospitalization (defined 

later)for injury from service in the combat zone/qualified hazardous duty area or while performing qualifying service outside 

of the combat zone/qualified hazardous duty area. 

In addition to the 180 days, the deadline is also extended by the 

number of days remaining for the member to take the action with 

the IRS when he/she entered a combat zone/qualified hazardous 

duty area (or began performing qualifying service outside the combat zone/qualified hazardous duty area). If a taxpayer entered the 

combat zone/qualified hazardous duty area (or began performing 

qualifying service outside the combat zone/qualified hazardous 

duty area)before the period of time to take the action began, the 

deadline is extended by the entire period of time he/she has to take 

the action. 

Example 1

Captain Margaret Jones entered Saudi Arabia on December 

1, 2001. She remained there through March 31, 2003, when she 

departed for the United States. She was not injured and did not 

return to the combat zone. The deadlines for filing Captain Jones’ 

2001, 2002, and 2003 returns are figured as follows. 

• The 2001 tax return. The deadline is January 10, 2004. This 

deadline is 285 days (180 plus 105) after Captain Jones’ last day 

in the combat zone (March 31, 2003). The 105 additional days 

are the number of days in the 3 1/2 month filing period that 

were left when she entered the combat zone (January 1 - April 

15, 2002). 

• The 2002 tax return. The deadline is January 10, 2004. The 

deadline is 285 days (180 plus 105) after Capt. Jones’ last day in 

the combat zone (March 31, 2003). 

• The 2003 tax return. The deadline is not extended because 

the 180-day extension period after March 31, 2003, ends on 

September 27, 2003, which is before the start of the filing period 

for her 2003 return (January 1 - April 15, 2004). 
Lesson 16

Military Segment M-16-3

Example 2

Petty Officer Leonard Brown’s ship entered the Persian Gulf on 

January 5, 2002. On February 15, 2002, Leonard was injured and 

was flown to a U. S. hospital. He remained in the hospital through 

April 20, 2003. The deadlines for filing Petty Officer Brown’s 2001, 

2002, and 2003 returns are figured as follows. 

• The 2001 tax return. The deadline is January 27, 2004. Petty 

Officer Brown has 280 days (180 plus 100) after his last day 

in the hospital (April 21, 2003) to file his 2001 return. The 100 

additional days are the number of days in the 3 1/2 month filing 

period that were left when he entered the combat zone (January 

5 - April 15). 

• The 2002 tax return. The deadline is January 27, 2004. Petty 

Officer Brown has 280 days (180 plus 100) after April 21, 2003, 

to file his 2002 tax return. The 100 additional days are the 

number of days in the 2003 filing period that were left when he 

entered the combat zone. 

• The 2003 tax return. The deadline is not extended because the 

180-day extension period after April 21, 2003, ends on October 

18, 2003, which is before the start of the filing period for his 

2003 return (January 1 - April 15, 2004). 

Example 3

You generally have 3 years from April 15, 1999, to file a claim for 

refund against your timely filed 1998 tax return. This means that 

your claim normally must be filed by April 15, 2002. However, 

if you served in a combat zone from November 1, 2001, through 

March 23, 2002, and were not injured, your deadline for filing 

that claim is extended 346 days (180 plus 166) after you leave the 

combat zone. This extends your deadline to March 4, 2003. The 166 

additional days are the number of days in the 3-year period for filing the refund claim that were left when you entered the combat 

zone on November 1 (November 1, 2001 - April 15, 2002). 

Missing status. Time in a missing status (missing in action or 

prisoner of war)counts as time in a combat zone or a qualified hazardous duty area. 

Support personnel. The deadline extension provision also applies 

if a taxpayer is serving in a combat zone or a qualified hazardous 

duty area in support of the Armed Forces. This includes Red Cross 

personnel, accredited correspondents, and civilian personnel acting 

under the direction of the Armed Forces in support of those forces. 

Qualified hospitalization. The hospitalization must be the result 

of an injury received while serving in a combat zone or a qualified 

hazardous duty area. Qualified hospitalization means: 

1. Any hospitalization outside the United States, and

2. Up to 5 years of hospitalization in the United States. 
Lesson 16 M-16-4 Military Segment

Actions Extended

The actions to which the deadline extension provision applies 

include: 

• Filing any return of income, estate, or gift tax (except employment and withholding taxes), 

• Paying any income, estate, or gift tax (except employment and 

withholding taxes), 

• Filing a petition with the Tax Court for redetermination of a 

deficiency or for review of a Tax Court decision, 

• Filing a claim for credit or refund of any tax, 

• Bringing suit for any claim for credit or refund, 

• Making a qualified retirement contribution to an IRA, 

• Allowing a credit or refund of any tax by IRS, 

• Assessment of any tax by the IRS, 

• Giving or making any notice or demand by the IRS for the payment of any tax or for any liability for any tax, 

• Collection by the IRS of any tax due, and

• Bringing suit by the United States for any tax due. 

If the IRS takes any actions covered by these provisions or sends 

the taxpayer a notice of examination before learning that they are 

entitled to an extension of the deadline, the taxpayer should contact their legal assistance office. No penalties or interest will be 

imposed for failure to file a return or pay taxes during the extension period. 

Spouses. Spouses of individuals who served in a combat zone are 

entitled to the same deadline extension with two exceptions. 

1. The extension does not apply to a spouse for any tax year beginning more than 2 years after the date the area ceases to be a 

combat zone. 

2. The extension does not apply to a spouse for any period the 

qualifying individual is hospitalized in the United States for 

injuries incurred in a combat zone. 

Not in a combat zone. Reservists called to active duty or regular 

military member who are not in a combat zone may still qualify to 

defer the payment of back taxes. To qualify, these individuals must: 

• Be serving their initial period of service and

• Show that their ability to pay the back taxes has been materially impaired. 

Initial period of service. The initial period of service is defined 

as the period of active duty following recall to active duty from an 

inactive reserve or National Guard unit. For regular military personnel, it is the period following induction or first enlistment in the 

Armed Forces or the first period of reenlistment for a person who 
Lesson 16

Military Segment M-16-5

has been out of the service for a year or more. For an officer, the 

initial period of service is limited to two years of active service after 

one of the above occurrences. 

Material impairment. To indicate material impairment, the 

taxpayer must show that his or her income dropped as a result of 

going into military service. 

Request for deferment. Military members who have a current 

payment agreement or who have received a notice requesting payment must make a written request for deferment to the IRS office 

where you have the agreement. 

Information needed. The request for deferment must include 

the member ’s name, social security number, monthly income and 

source of income before military service, current monthly income, 

military rank, date of entry into the military service, and date the 

member is eligible for discharge. Enclosing a copy of the military 

orders is helpful. 

The IRS will review each request and advise the taxpayer in writing of its decision. Should the taxpayer need further assistance, 

they can call the IRS at 1-800-829-1040 to discuss their situation. 

If the IRS grants the request for deferment, the taxpayer will be 

able to defer payment of back taxes until 6 months after the end of 

his/her initial period of service. 

DECEDENTS

Special tax forgiveness provisions apply to individuals who: 

• Die while serving in a combat zone or from wounds, disease, or 

injury incurred while serving in a combat zone, or

• Die from wounds or injury incurred in a terrorist or military 

action while a U. S. employee. 

Filing a Decedent Return

The personal representative (executor, administrator, or anyone 

who is in charge of the decedent ’s property)must file the final 

income tax return ( Form 1040)of the decedent for the year of death 

and any returns not filed for preceding years. A surviving spouse, 

under certain circumstances, may have to file the returns for the 

decedent. See Joint Return, later. 

Return for preceding year. If an individual died after the close 

of the tax year, but before the return for that year was filed, the 

return for the year just closed will not be the final return. The 

return for that year will be a regular return and the personal representative must file it. 

Example 4

Samantha Smith died on March 21, 2002, before filing her 2001 tax 

return. Her personal representative must file her 2001 return by 

April 15, 2002. Her final tax return is due April 15, 2003. 
Lesson 16 M-16-6 Military Segment

When and Where To File

The final income tax return is due at the same time the decedent ’s 

return would have been due had death not occurred. A final return 

for a decedent who was a calendar year taxpayer is generally due 

on April 15 following the year of death, regardless of when during 

that year death occurred. 

The tax return must be prepared on a form for the year of death 

regardless of when during the year death occurred. 

Generally, you must file the final income tax return of the decedent 

with the Internal Revenue Service center for the place where you 

live. A tax return for a decedent cannot be electronically filed. A 

paper tax return must be filed for the decedent. 

 Combat Zone Forgiveness

Federal income tax liability is forgiven for U. S. military personnel 

who die while serving in a combat zone or as a result of wounds, 

disease, or injury incurred while so serving. The forgiveness of tax 

applies for the year of death and for any prior year ending on or 

after the first day that the individual served in a combat zone in 

active service. Any forgiven tax liability that has already been paid 

will be refunded, and any unpaid tax liability at the date of death 

will be forgiven. 

This forgiveness provision also applies to a member of the Armed 

Forces serving outside the combat zone if the service: 

1. Was in direct support of military operations in the zone, and

2. Qualified the member for special military pay for duty subject to 

hostile fire or imminent danger. 

Missing status. The date of death for a member of the Armed 

Forces who was in a missing status (missing in action or prisoner of 

war)is the date his or her name is removed from missing status for 

military pay purposes. This is true even if death actually occurred 

earlier. 

Tax Forgiveness for Deaths Due to Military or Terroristic Actions

A decedent ’s income tax liability may be forgiven if his or her 

death was due to service in a combat zone or to military or terroristic actions. 

The Victims of Terrorism Tax Relief Act of 2001 provides tax relief 

for those injured or killed as a result of terrorist attacks, certain 

survivors of those killed as a result of terrorist attacks, and others 

who were affected by terrorist attacks. For information on that Act, 

see Publication 3920.
Lesson 16

Military Segment M-16-7

Military or Terroristic Actions

The decedent ’s income tax liability is forgiven if, at death, he or 

she was a military or civilian employee of the United States who 

died because of wounds or injury incurred: 

• While a U. S. employee, and

• In a military or terroristic action. 

For tax years ending after September 10, 2001, tax liability is forgiven for an individual who dies from wounds or injury incurred 

while a U. S. employee in a terroristic or military action regardless 

of where the action occurred.

The forgiveness applies to the tax year in which death occurred and 

for any prior tax year in the period beginning with the year before 

the year in which the wounds or injury occurred. 

Military or terroristic action defined. A military or terroristic 

action means the following. 

• Any terroristic activity that most of the evidence indicates was 

directed against the United States or any of its allies. 

• Any military action involving the U. S. Armed Forces and resulting from violence or aggression against the United States or any 

of its allies, or the threat of such violence or aggression. 

Military action does not include training exercises. Any multinational force in which the United States is participating is treated 

as an ally of the United States. 

Claims for Credit or Refund

If any of these tax-forgiveness situations applies to a prior year tax, 

any tax paid for which the period for filing a claim has not ended 

will be credited or refunded. If any tax is still due, it will be canceled. The normal period for filing a claim for credit or refund is 3 

years after the return was filed or 2 years after the tax was paid, 

whichever is later. 

If death occurred in a combat zone or from wounds, disease, or 

injury incurred in a combat zone, the period for filing the claim is 

extended by: 

• The amount of time served in the combat zone (including any 

period in which the individual was in missing status), plus

• The period of continuous qualified hospitalization for injury 

from service in the combat zone, if any, plus

• The next 180 days. 

• Qualified hospitalization means any hospitalization outside the 

United States and any hospitalization in the United States of 

not more than 5 years. 
Lesson 16 M-16-8 Military Segment

Filing a claim. Use the following procedures to file a claim. 

• File Form 1040, 1040A, or 1040EZ if an income tax return 

has not been filed for the tax year. Form W-2, Wage and Tax 

Statement, must accompany all returns. 

• File Form 1040X if an income tax return has been filed. A separate Form 1040X must be filed for each year in question. 

These returns and claims must be filed with the Internal Revenue 

Service, P. O. Box 4053, Woburn, MA 01888. 

All returns and claims must be identified by writing “Enduring 

Freedom—KIA,” “Kosovo Operation—KIA,” “Desert Storm—KIA,” 

or “Former Yugoslavia—KIA” in bold letters on the top of page 

1 of the return or claim. On Forms 1040 and 1040X, the phrase 

“Enduring Freedom—KIA,” “Kosovo Operation — KIA,” “Desert 

Storm—KIA,” or “Former Yugoslavia—KIA” must be written on the 

line for total tax. If the individual was killed in a terroristic or military action outside the United States, put “KITA” on the front of the 

return and on the line for total tax.

An attachment should accompany any return or claim that includes 

a computation of the decedent ’s tax liability before any amount is 

forgiven and the amount that is to be forgiven. For joint returns, 

see Joint returns, later. 

Necessary documents. The following documents must accompany 

all returns and claims for refund. For returns and claims relating to individuals who died as a result of a terrorist attack, see 

Publication 3920. 

• Form 1310, Statement of Person Claiming Refund Due a 

Deceased Taxpayer.

• A certification from the Department of Defense or the 

Department of State that the death was due to a military or terroristic action. 

For military employees and civilian employees of the Department 

of Defense, certification must be made by that department on Form 

DOD 1300, Report of Casualty. For other civilian employees who die 

as a result of wounds or injury incurred outside the United States, 

certification must be a letter signed by the Director General of the 

Foreign Service, Department of State, or his/her delegate. The certification must include the individual ’s name and social security 

number, the date of injury, the date of death, and a statement that 

the individual died as the result of a military or terroristic action 

outside the United States and was an employee of the United 

States at the date of injury and at the date of death. 

If the certification has been received, but you do not have enough 

tax information to file a timely claim for refund, file Form 1040X. 

Attach Form 1310 and a statement that an amended claim will be 

filed as soon as the required tax information is available. 
Lesson 16

Military Segment M-16-9

Joint returns. Only the decedent’s part of the joint income tax 

liability is eligible for the refund or tax forgiveness. To determine 

the part for the decedent, the person filing the claim must complete 

the following steps: 

1. Figure the income tax for which the decedent would have been 

liable if a separate return had been filed. 

2. Figure the income tax for which the spouse would have been 

liable as if a separate return had been filed. 

3. Multiply the joint tax liability by a fraction. The top number of 

the fraction is the amount in (1)above. The bottom number of 

the fraction is the total of (1)and (2). 

The amount in (3)is the decedent ’s tax liability that is eligible for 

the refund or tax forgiveness. If a taxpayer is unable to complete 

this process, he or she should attach a statement of all income and 

deductions indicating the part that belongs to each spouse. The IRS 

will make the proper allocation. 

Residents of community property states. If the member of the 

Armed Forces was domiciled in a community property state and 

the spouse reported half the military pay on a separate return, the 

spouse can get a refund of taxes paid on his or her share of the pay 

for the years involved. The forgiveness of unpaid tax on the military pay would also apply to the half owed by the spouse for the 

years involved. 

Exercise 1

Major Joe Wells entered Afghanistan on 6 January 2003. He 

remained there through 7 April 2003, when he departed for the 

United States. He was not injured and did not return to the combat zone.

What is the deadline for filing Major Wells’ 2002 tax return?

Answer
Lesson 16 M-16-10 Military Segment

Reserved for 2003 Calendar.

Exercise 2

Mr. Tim Morris, a civilian employee of the United States, died in 

2004 as a result of injuries he suffered during a terrorist attack in 

2002.

What years are Mr. Morris’ income liabilities forgiven?

Answer
Lesson 16

Military Segment M-16-11

TAX BENEFITS FOR COMBAT

ZONE PARTICIPANTS ANSWERS TO EXERCISES

Lesson 16

Military Segment

Exercise 1– The 2003 tax return. The deadline is 12 January 

2005. The deadline is 280 days (180 plus 100) after 

Major West’s last day in the combat zone (7 April 

2003). The 100 additional days are the number of days 

in the 3 1/2 month filing period that were left when he 

entered the combat zone (6 January - 15 April 2003). 

Exercise 2– 2001-2004

  SUMMING UP THIS LESSON  

In this lesson you have learned that: 

 The deadline for filing tax returns, paying taxes, and taking 

other actions with the Internal Revenue Service is automatically extended if an individual serves in a combat zone.

 The income tax liability of a member of the Armed Forces is 

forgiven if a member dies as a result of service in a combat 

zone or from a terrorist or military action outside the United 

States.

 The terrorist or military action forgiveness also applies to an 

individual who is a U.S. employee at death and who dies from 

wounds or injury incurred while a U.S. employee in a terrorist or military action regardless of where the action occurred.
Lesson 16 M-16-12 Military Segment

STUDENT NOTES
Lesson 17

Military Segment M-17-1

INTRODUCTION AND OBJECTIVES

This lesson will discuss the importance of “alien” status in determining federal income tax reporting requirements for Armed 

Forces personnel. Publication 519, U.S. Tax Guide for Aliens is a 

major source of information on this subject.

After completing this lesson, you should be able to:

1. Determine whether an alien should file a resident, non-resident, 

or dual-status tax return. 

2. Determine what sources of income an alien must report on his 

or her return. 

3. Explain the special choice that permits a nonresident alien 

spouse of a U. S. citizen or resident to be treated as a resident 

alien and file a joint return. 

4. Determine the use for an ITIN for undocumented aliens. 

5. Explain the process for securing a social security number for 

children born abroad. 

NONRESIDENT ALIENS

A nonresident alien is an individual who is not a citizen or resident 

of the United States. A nonresident alien generally must pay tax 

only on income received from sources within the United States. If 

the income is connected with conducting a trade or business in the 

United States, the income (after allowable deductions) is taxed at 

regular U. S. tax rates. If other income from U. S. sources is not connected with conducting a trade or business in the United States, it 

is taxed at a flat 30%(or lower treaty) rate. For example, Survivor 

Benefit Plan payments made to a nonresident alien surviving 

spouse may be subject to a 30%withholding (or lower treaty) rate. 

In either case, the nonresident alien must file a Form 1040NR, U. S. 

Nonresident Alien Income Tax Return.

 ALIENS Lesson 17

Military Segment
Lesson 17 M-17-2 Military Segment

RESIDENT ALIENS

An alien may qualify as a U. S. resident for tax purposes by meeting either the green card test or the substantial presence test for the 

calendar year. 

Green card test. An alien is a resident for tax purposes if he or 

she is a lawful permanent resident of the United States (holder of a 

green card) at any time during the calendar year. However, see the 

discussion on Dual-Status Aliens, later. 

Substantial presence test. If the alien does not meet the green 

card test, the alien may still be a U. S. resident for tax purposes if 

the substantial presence test for the calendar year is met. To meet 

this test, the alien must have been physically present in the United 

States for at least 31 days during 2003 and for a total of at least 

183 days in 2003, 2002, and 2001. 

When you count the days for the substantial presence test, count:

1. All the days the alien was present in 2003, 

2. One-third of the days present in 2002, and

3. One-sixth of the days present in 2001. 

Example

Ana Garcia was present in the United States for several years. She 

believes that she can qualify for the substantial presence test. Ana 

was here from December 1 through December 31 of 2003. She was 

present in the U. S. all of 2002. In 2001, she stayed in the United 

States from June 1 through December 31. Here’s how to figure if 

Ana meets the substantial presence test:

YEAR MULTIPLY BY DAYS PRESENT TOTAL

2003 1 31 = 31

2002 1/3 365 = 122

2001 1/6 214 = 36

 189

Since Ana was present in the United States at least 31 days in 

2003 and at least 183 days during the current and last two years, 

she meets the test in 2003 to qualify as a resident of the U. S. 

Exceptions. For purposes of counting days for the substantial 

presence test, there are exceptions for regular commuters from 

Canada or Mexico, persons in transit through the United States, 

persons who are unable to leave because of becoming ill while in 

the United States, diplomats, employees of international organizations, teachers, trainees, and students. Also, the substantial presence test does not apply if the alien was present in the United 

ALERT

The Social Security 

Administration does 

not issue social security numbers (SSNs) 

to nonresident aliens 

unless they have legal 

permission to work in 

the United States. SSNs 

will be issued to lawful 

permanent residents.
Lesson 17

Military Segment M-17-3

States for fewer than 183 days during 2003 and establishes that he 

or she has a closer connection to a foreign country. Publication 519 

has more details on these exceptions. 

First-year choice. If the alien does not meet the green card test 

or the substantial presence test for 2002 or 2003, and did not 

choose to be treated as a resident for part of 2001, but will meet 

the substantial presence test for 2004, he or she can choose to be 

treated as a U. S. resident for part of 2003. To make this choice, he 

or she must have been:

1. Present in the U. S. for at least 31 consecutive days in 2003, 

and

2. Present in the U. S. for at least 75%of the days beginning with 

the first day of the 31-day period in (1) and ending with the last 

day of 2003. 

The taxpayer should be referred to Publication 519 for complete 

details concerning this special first-year choice. This choice, once 

made, cannot be revoked without the consent of the Internal 

Revenue Service. 

Resident aliens generally are taxed on their worldwide income, the 

same as U. S. citizens. Resident aliens use the same tax forms as 

U.S. citizens. 

DUAL-STATUS ALIENS

An alien may be both a nonresident and resident alien during the 

same tax year. The most common dual-status tax years are the 

years of arrival and departure. Dual-status aliens are taxed on 

income from all sources for the part of the year they are resident 

aliens. They are taxed only on income from U. S. sources for the 

time they are nonresident aliens. They must file Form 1040 and 

mark it “Dual Status Return” if they are resident aliens on the 

last day of the tax year. If they are nonresident aliens at the end 

of the year, they must file Form 1040NR and mark it “Dual Status 

Return.” In either case, , they must attach a separate statement 

to explain their income and compute the tax for the other part of 

their dual-status year. Dual-status aliens must either itemize their 

allowable deductions or claim zero deductions because they cannot 

use the standard deduction. 
Lesson 17 M-17-4 Military Segment

Exercise 1

Sgt. Zapata is stationed in Korea and is married to a Korean 

citizen. Sgt. and Mrs. Zapata came to the United States for a 3-

week visit and returned to his post of duty in Korea. Mrs. Zapata 

entered the United States on a non-immigrant visa. 

a. What is Mrs. Zapata’s U. S. alien status?

Answer

b. If the Zapatas moved to the United States in June 2003 and 

Mrs. Zapata got a green card, what would Mrs. Zapata’s U. S. 

alien status be for 2003?

Answer

Exercise 2

Karen is a British citizen and a U. S. resident alien (green card 

holder). She married Lt. Trimble, a U. S. citizen, who has a permanent residence in New York. The Trimbles moved to Germany 

in 2002 for a 2-year tour of duty. They plan to return to New York 

when his duty ends. Karen earned $12, 000 a year working for a 

German employer while they were stationed in Germany. 

a. If Lt. Trimble files a separate return, does Karen have to file a 

U. S. federal tax return?

Answer

b. If the Trimbles were divorced in 2003 and Karen gave up her 

green card and moved to England, what would her U. S. alien 

status be for 2003?

Answer

UNDOCUMENTED (ILLEGAL) ALIENS

Undocumented aliens who meet the substantial presence test are 

considered resident aliens for tax purposes. They are not eligible 

for an SSN because they have no legal work authorization. These 

aliens should apply for an ITIN; however, the ITIN does not give 

them permission to work. 

A common scenario is that the undocumented alien “acquires” 

(buys, trades etc.) an SSN to provide to their employer. The 

employer hires the alien and gives them a W-2 at the end of the 

year with the invalid SSN. The alien then files a tax return with 
Lesson 17

Military Segment M-17-5

their ITIN listed as their identification number. This causes a processing problem for the IRS. The refund will most likely be held 

until the issue can be resolved. 

If the spouse of a U. S. citizen or resident is an illegal resident 

alien, he/she should have an ITIN. 

CHILDREN BORN ABROAD

Military families living overseas who experience the birth of a child 

in a host nation hospital or “off base on the economy” should check 

with their base legal office or U. S. embassy officials for exact procedures for securing the Report of Birth Abroad. This document 

serves as proof of citizenship and can be used in the future. To 

formally register the birth of a child born abroad, the U. S. citizen 

parent or parents should bring the child to the Embassy/Consulate 

office along with:

• An original of the child’s birth certificate

• The parent’s marriage certificate

• Any divorce (original) decree or death certificate from any previous marriage

• Cash or bank check to pay the fee (usually $65) 

Parents should also apply for a passport for their child at the same 

time as the Report of Birth. Along with your application for Report 

of Birth and passport, it is also advisable to request the form to 

apply for an SSN for the child. The Social Security International 

Office in Baltimore, MD assigns an SSN. The SSN will be mailed 

directly to the taxpayer. The process takes several months. But 

without an SSN the parents will NOT be able to claim the EITC 

even if all of the other prerequisites are met.

ALIEN MILITARY PERSONNEL

As a general rule, most alien enlistees in the Armed Forces are 

resident aliens. This would almost certainly be true of an alien who 

has lived in the United States before enlistment. In peacetime, 

the enlistment requirements of the Armed Services state that no 

person may enlist unless that person is a citizen or has been lawfully admitted to the United States for permanent residence under 

the immigration laws. These two factors, voluntary enlistment and 

admittance for permanent residence, are usually enough to classify 

an alien enlistee as a resident alien. The United States has treaty 

agreements with certain nations that allow a very limited number of their citizens to retain their nonresident alien status. Alien 

enlistees in this category should seek advice from their base legal 

officer. Other aliens who are present in the United States merely 

because of military assignment and who have a residence outside 

the United States are nonresident aliens. 
Lesson 17 M-17-6 Military Segment

CHOICE TO TREAT NONRESIDENT SPOUSE AS A RESIDENT

A nonresident alien spouse may choose to be treated as a resident 

alien if all the following conditions are met. 

1. The nonresident alien spouse must be married to a U. S. citizen 

or resident alien at the end of the tax year. 

2. Both spouses must choose to treat the alien spouse as a resident 

alien. 

3. One of the spouses must be a U. S. citizen or resident alien on 

the last day of the tax year. 

How to Make the Choice

A statement signed by both spouses must be attached to their joint 

return for the first tax year for which the choice applies. The statement should contain:

1. A declaration that one spouse was a nonresident alien and the 

other spouse was a U. S. citizen or resident alien on the last day 

of their tax year and that the nonresident alien spouse chooses 

to be treated as a U. S. resident for the entire tax year, and

2. The name, address, and social security number of each spouse. 

If the nonresident alien spouse is not eligible to get a social 

security number, he or she should file Form W-7, Application for 

IRS Individual Taxpayer Identification Number.

Caution. Once the choice is made, the worldwide income of the 

nonresident alien spouse is subject to U. S. tax. If the nonresident alien spouse has substantial foreign income, there may be no 

advantage to making the choice. 

Ending the Choice

Once made, this choice applies to all later tax years unless one of 

the following situations occurs. 

■ Revocation—Either spouse may revoke the choice for any tax 

year if both the choice and the revocation are made by the due 

date for filing the tax return for that tax year. 

■ Death—The death of either spouse will end the choice. This 

ordinarily begins with the first year following the year in which 

the spouse died. If the spouse who survived is a U. S. citizen or 

resident and is entitled to the joint return rates as a surviving 

spouse, the choice will not end until the close of the last year for 

which these joint rates may be used. 

■ Legal separation—A legal separation under a decree of divorce 

or separate maintenance will end the choice beginning January 

1 of the tax year in which the legal separation occurs. 
Lesson 17

Military Segment M-17-7

■ Inadequate records—The Internal Revenue Service can end the 

choice for any year that either spouse fails to keep adequate tax 

records, to provide adequate access to those records, or to supply 

other information reasonably necessary to determine the correct 

income tax liability. 

If the choice is ended for any of these reasons, neither spouse can 

make a choice for any future tax year. For example, divorced individuals who previously made the choice and later remarry cannot 

make another choice. 

Choice Not Made

If the choice is not made:

1. The nonresident alien spouse cannot file a joint return. 

2. The nonresident alien spouse is generally not eligible for certain 

credits, such as the earned income credit or the education credits. 

3. The spouse who is a U. S. citizen or resident may claim an 

exemption for the nonresident alien spouse if the nonresident 

alien has no gross income for U. S. tax purposes and is not 

another taxpayer’s dependent. Check the box on line 6b of Form 

1040 or Form 1040A and write “NRA” to the right of the word 

“spouse.”

4. The nonresident alien spouse does not have to file a federal 

income tax return if he or she had no U. S. source income. He or 

she does not have to report any income from sources outside the 

United States so long as he or she remains a nonresident alien. 

Questions concerning alien status and the special choice can be 

complex. Further information can be found in Publication 519. 
Lesson 17 M-17-8 Military Segment

Exercise 3

Stephen Rowan is a Navy officer who resides in New York and is 

on duty in Japan. He has $30, 000 in taxable income for the year. 

His wife, to whom he has been married for 3 years, is a Japanese 

citizen who has never visited the United States. She earned 

$5,000 from employment in Japan during the year. 

a. Is he required to file a U. S. income tax return?

Answer

b. Is Mrs. Rowan required to file a U. S. income tax return?

Answer

c. Can the Rowans file a joint return?

Answer

  SUMMING UP THIS LESSON  

Questions of alien status can be difficult. To find answers to their 

questions and to learn whether they qualify for the option to 

treat the nonresident spouse as a U.S. resident, military personnel should see Publication 519, visit their base legal office, or call 

the IRS at 1-800-829-1040.
Lesson 17

Military Segment M-17-9

 ALIENS ANSWERS TO EXERCISES

1. a. Nonresident alien

b. Dual-status alien

2. a. Yes. She is a resident alien. 

b. Dual-status alien

3. a. Yes

 b. No

c. Yes. They can make the choice, but they should figure their 

 tax both ways to determine which option is best for them.

Lesson 17

International Segment
Lesson 17 M-17-10 Military Segment

STUDENT NOTES
Lesson 18

International Segment I-18-1

INTRODUCTION AND OBJECTIVES

This lesson will discuss what “home leave expenses” can be 

deducted by U.S. taxpayers traveling to their home in the United 

States under orders from the head of Foreign Affairs agency.

After completing this lesson, you should be able to: 

1. Determine who is eligible for home leave expenses.

2. Determine what expenses are deductible.

 HOME LEAVE

Section 903 of the Foreign Service Act of 1980 provides that the 

head of a Foreign Affairs Agency may order a member of the 

Service who is a citizen of the United States to take home leave 

upon completion of 18 months of continuous service abroad; and 

shall so order as soon as possible after completion of 3 years of 

continuous service abroad.The intent of this legislation is to “reAmericanize ” foreign service employees..

Because members of the foreign service are required by law to take 

a leave of absence,they are allowed to deduct amounts paid for 

travel,meals,and lodging while on home leave as employee business

expenses.The taxpayers who are eligible for this leave will deduct 

these expenses on a Form 2106 just like an employee that is conducting business away from the home.

As with all deductible employee business expenses,records and 

receipts must be maintained to support the deductions that are 

taken.The deductible expenses are those we discussed in the previous lesson and these expenses are subject to the same limitations.

Any expenses paid for on behalf of a foreign service member’s family are personal expenses and therefore are not deductible.

 HOME LEAVE Lesson 18

International Segment
Lesson 18 I-18-2 International Segment

  SUMMING UP THIS LESSON  

 Taxpayers who are U.S. citizens and members of the foreign 

service can deduct travel, meals and lodging expenses, while 

on home leave, as employee business expenses by using Form 

2106.

 Expenses incurred by members of the family are personal 

expenses and therefore they are not deductible.

SUMMARY EXERCISE

1. Larry Lee is a foreign service employee. He has been stationed 

in a foreign country for 3 years and comes back to the United 

States for 4 weeks on home leave. His family accompanies 

him.He incurred expenses for travel of $1,500; meals $850; 

and lodging $1,400. His family incurred expenses for travel of 

$2,500; meals $1,700; and lodging $2,200 Larry was reimbursed 

$450 for his travel to and from his post of duty and did not show 

it as income. (Larry rented a car. He did not use his own car.)

a. Is Larry eligible for a home leave deduction? Yes or No.

b. Can Larry deduct the expenses that this family members 

incur? Yes or No.

c. Complete Form 2106.
Lesson 18

International Segment I-18-3

Form 2106, page 1

Draft as of

6/10/2003

OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including

lodging, airplane, car rental, etc. Do not include meals and

entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 65% (.65) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

For Paperwork Reduction Act Notice, see instructions. Cat. No. 11700N Form 2106 (2003)

Part I

(99)

2003
Lesson 18 I-18-4 International Segment

Lesson 18 ANSWERS TO EXERCISES HOME LEAVE

International Segment

1. a. Yes

b. No

c. See completed Form 2106
Lesson 18

International Segment I-18-5

 HOME LEAVE ANSWERS TO EXERCISES Lesson 18

International Segment

Form 2106, page 1

Draft as of

6/10/2003

OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including

lodging, airplane, car rental, etc. Do not include meals and

entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 65% (.65) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

For Paperwork Reduction Act Notice, see instructions. Cat. No. 11700N Form 2106 (2003)

Part I

(99)

2003

Larry Lee Foreign Service

2,900.00

850.00

2,900.00 850.00

450.00

2,450.00 850.00

2,450.00 425.00

2,875.00
Lesson 18 I-18-6 International Segment

STUDENT NOTES
Appendix A-1

APPENDIX

INTEGRATED TRAINING

MODULE 1

Objectives

After completing this module you should be able to:

■ Open and create a new tax return.

■ Complete the main information sheet for this 

module in TaxWise.

■ Identify and enter pertinent taxpayer information 

into the return.

■ Determine the qualifications for the single filing 

status.

■ Define wages and input a Form W-2 using the 

software.

■ Determine taxable and non-taxable interest income 

and input applicable information from Form 1099-

INT.

■ Identify Unemployment Compensation and input a 

Form 1099-G. 

■ Define the Educators Expense adjustment and 

input applicable information for the calculation of 

the adjustment.

■ Define the qualifications for the “Student Loan 

Interest” adjustment and input applicable 

information for the calculation of the adjustment.

■ Know the qualifications for an IRA contribution and 

input applicable information.

■ Define early withdrawal penalty.

■ Identify who qualifies for the “Credit for Qualified 

Retirement Savings Contribution” and input 

applicable information.

■ Identify proper procedures for finishing the return.

Appendix 
A-2 Appendix

APPENDIX

Taxpayer Profile

Taxpayer Name James Fairmont

TP SSN XXX-XX-XXXX

Spouse Name

SP SSN

Street Address 76 Fisk Ave

City, State, Zip Your City State and Zip Code

Phone Number (412) 555-1212

Date of birth TP 03/10/1979

Date of birth Spouse

Occupation TP 3rd Grade Teacher

 SP

Blind? TP No

SP

Donate to Presidential Fund?

TP No

SP

Filing Status Single

Can be claimed as dependent by someone

else? TP No

SP

State Return Info (Yes or No) No

Direct Deposit Yes

Bank Routing Number 112200001

Account number 987123

Other considerations:

He tells you he spent $537.26 on classroom supplies.

He meets the 900 hour teaching requirement.

He is repaying a student loan and received a statement from his 

loan institution showing he paid $235.87 in interest.

He made a traditional IRA contribution of $450.
Appendix A-3

APPENDIX

Documents taxpayer gives you:

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

Form W-2 Sunshine School District

123456

xx-xxxxxxx $6,432.67 $432.28

$0.00 $0.00

$6,432.67 $93.23

Sunshine School District

45 North Third Street

Your City, State, and Zip Code

James Fairmont

76 Fisk Ave.

Your City, State, and Zip Code

xx-xxxxxxx $6,432.67 $795.43

$435.87

x

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

123456 at www.irs.gov.

xx-xxxxxxx $2,226.15 $203.12

$2,226.15 $139.02

$2,226.15 $32.38

Kathy’s Restaurant

10 Franklin St.

Your City, State, and Zip Code

James Fairmont

76 Fisk Ave.

Your City, State, and Zip Code

xx-xxxxxxx $2,226.15 $160.34

Form W-2 Kathy’s Restaurant

D
A-4 Appendix

APPENDIX

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0120 1 Unemployment compensation

Certain

Government

Payments

$

State or local income tax

refunds, credits, or offsets 2

$

PAYER’S Federal identification number RECIPIENT’S identification number 3 Box 2 amount is for tax year 4 Federal income tax withheld

$

RECIPIENT’S name 6 Taxable grants

$

Street address (including apt. no.) 7 Agriculture payments

$

City, state, and ZIP code

Account number (optional)

Form 1099-G Department of the Treasury - Internal Revenue Service

Copy B

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

For Recipient

Form 1099-G

5

8 Box 2 is trade or

business income 

2003 Division of Employment Security

290 West 4th St.

Your City, State and Zip Code

1,340.00

xx-xxxxxxx xxx-xx-xxxx 80.98

James Fairmont

76 Fisk Ave

Your City, State, and Zip Code

Form 1099-G

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0112 Payer’s RTN (optional)

Interest Income

PAYER’S Federal identification number RECIPIENT’S identification number 1 Interest income not included in box 3

$

Early withdrawal penalty Interest on U.S. Savings

Bonds and Treas. obligations

RECIPIENT’S name 2 3

$ $

Street address (including apt. no.) 4 Federal income tax withheld

$

Foreign country or U.S.

possession

City, state, and ZIP code 6 Foreign tax paid 7

Account number (optional)

$

Form 1099-INT Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-INT

5 Investment expenses

$

2003 First Bank

99 W. 48th St.

Your City, State, Zip Code

xx-xxxxxxx xxx-xx-xxxx

James Fairmont

76 Fisk Ave

Your City, State, Zip Code

147.48

19.68

Form 1099-INT
Appendix A-5

APPENDIX

INTEGRATED TRAINING

Module 2

Objectives

After completing this module you should be able to:

■ Create a new tax return by completing the main information 

sheet for this module in TaxWise.

■ Determine the qualifications for head of household and married 

filing separately filing status.

■ Use the 5 tests for dependents, to determine dependency status.

■ Determine who is eligible for the credit for child and dependent 

care expenses.

■ Use the EIC eligibility requirements, to determine an EIC qualifying child.

■ Determine who is eligible for the child tax credit. 

■ Input applicable information from Form 1099-DIV.

■ Determine who can use Schedule C-EZ and complete Schedule 

C-EZ and Schedule SE.

■ Complete Form 2441.

■ Complete the Child Tax Credit Worksheet.

■ Complete the EIC Worksheet

■ Explain the benefits of AEIC and review where AEIC is 

reported on Form 1040 or Form 1040A.

■ Identify proper procedures for finishing the return.

■ Complete Form 8880.
A-6 Appendix

APPENDIX

Taxpayer Profile

Taxpayer Name Betsy Curry

TP SSN XXX-XX-XXXX

Spouse Name

SP SSN

Street Address 614 Howard Ave

City, State, Zip Your City State and Zip Code

Phone Number 402-555-1212

Date of birth TP 08/23/1969

Date of birth Spouse

Occupation TP Executive Assistant

 SP

Blind? TP No

SP

Donate to Presidential Fund?

TP Yes

SP

Filing status Head of Household

Can be claimed as dependent by someone

else? TP No

SP

State Return Info (Yes or No) No

Direct Deposit

Bank Routing Number xxxxxxxxx

Account number xxxxxxx

Other Members of Household

Name Date of

Birth

SSN or

ITIN

Relationship Citizenship # of Months

in Home

Mary Curry 07/21/1994 xxx-xx-xxxx Daughter U.S. 12

James Curry 08/24/1997 xxx-xx-xxxx Son U.S. 12

Other considerations:

Betsy is divorced and keeps up a main home for herself and her 

children.

She provides 100% of her children’s support.

Both children lived with her for the entire year.

Betsy has a small word processing business (Code: 561900) which 

she runs out of her home. Her gross income was $4,850. Her total 

expenses for materials were $363 and she has written records for 
Appendix A-7

APPENDIX

1,200 business miles and 9,000 other miles on her only car. Her car 

was put into business use on January 1, 2002. Her business takes 

up only a very small area in her home and she uses her computer 

mainly for personal use. She elects to take the standard mileage 

rate.

Betsy’s neighbor, Mary King, cares for her two children after school. 

Betsy paid $1,750 for each child during 2003. Mary’s SSN is xxxxx-xxxx and her address is 628 Howard Ave., Your City, State, and 

Zip Code.

Documents taxpayer gives you:

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov. 123456

xx-xxxxxxx $14,834.56 $1,739.86

State of Nebraska

1345 South 10th Street

Omaha, Nebraska 68104

$17,834.56 $1,106.00

$17,834.56 $259.00

$1,000.00 $1,000.00

$2,000.00

x Betsy Curry

7614 Howard Ave.

Your City, State, Zip Code

xx-xxxxxxx $14,834.56

Form W-2, State of Nebraska

D

xxx-xx-xxxx
A-8 Appendix

APPENDIX

2003 Form 1099-DIV

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no.

RECIPIENT’S identification

number

PAYER’S Federal identification

number

RECIPIENT’S name

Street address (including apt. no.)

City, state, and ZIP code

Account number (optional)

Dividends and

Distributions

Form 1099-DIV (keep for your records) Department of the Treasury - Internal Revenue Service

Copy B

This is important

tax information

and is being

furnished to the

Internal Revenue

Service. If you

are required to

file a return, a

negligence

penalty or other

sanction may be

imposed on you

if this income is

taxable and the

IRS determines

that it has not

been reported.

For Recipient

Unrecap. Sec. 1250 gain

1a Total ordinary dividends OMB No. 1545-0110

$

1b Qualified dividends

$

2a Total capital gain distr. Post-May 5 capital gain distr.

2c

Collectibles (28%) gain

Qualified 5-year gain 2d

$ $

2e Section 1202 gain 2f

$

3

5 Investment expenses

Noncash liquidation

distributions

Cash liquidation 9

distributions

8

$

$

2b

$ $

Nontaxable distributions

Form 1099-DIV

$

6 7

2003

$

Foreign tax paid Foreign country or U.S. possession

$

$

4 Federal income tax withheld

$

ABC Corporation

3333 North Tenth Street

Your City, State, Zip Code

54.00

xx-xxxxxxx xxx-xx-xxxx

Betsy Curry

614 Howard Ave.

Your City, State, Zip Code
Appendix A-9

APPENDIX

INTEGRATED TRAINING

Module 3

Objectives

After completing this module you should be able to:

■ Create a new tax return by completing the main information 

sheet for this module in TaxWise.

■ Determine the qualifications for married filing jointly and qualifying widower filing status.

■ Determine basis and capital gain/loss on sale of stock.

■ Determine if IRA distributions are taxable, nontaxable, or 

partly taxable and calculate the taxable portion.

■ Determine if retirement income is taxable and calculate the taxable portion. 

■ Distinguish between taxable and nontaxable social security benefits and calculate the taxable portion. 

■ Identify how other types of income are reported.

■ Determine the qualifications for the tuition and fees deduction.

■ Determine the qualifications for the education credits.

■ Determine the most advantageous method for reporting tuition 

and fees.

■ Determine which items are allowed when itemizing deductions.

■ Know where to report estimated tax payments.

■ Determine if the estimated tax penalty applies. 
A-10 Appendix

APPENDIX

Taxpayer Profile

Taxpayer Name Don Hillsdale

TP SSN XXX-XX-XXXX

Spouse Name Sarah Wilson

SP SSN xxx-xx-xxxx

Street Address 129 Pembroke Ave.

City, State, Zip Your City, State, Zip 

Code

Phone Number 402-555-1212

Date of birth TP 03/12/1932

Date of birth Spouse 12/21/1940

Occupation TP Retired

 SP Housewife

Blind? TP No

SP No

Donate to Presidential Fund?

TP Yes

SP No

Filing Status MFJ

Can be claimed as dependent by someone

else? TP No

SP No

State Return Info (Yes or No)

Direct Deposit

Bank Routing Number xxxxxxxxx

Account number xxxxxxxxxxxxx

Other Members of Household

Name Date of

Birth

SSN or

ITIN

Relationship Citizenship # of Months

in Home

Betty Wilson 05/23/1983 xxx-xx-xxxx Granddaughter U.S. 12

Other considerations:

• Don paid $1,350 for tuition and fees to the local college for his 

granddaughter’s education. She is a junior and a full-time student.

• Don and Sarah’s previous year tax liability was $2,011.
Appendix A-11

APPENDIX

• Sarah provided the following information on the sale of stock.

Company # of Shares Purchase 

Date

Per Share

Basis

Sale Date Per Share

Sales Price

ABC Co. 100 05/28/1985 48.00 05/30/2003 55.00

XYZ Co. 100 11/05/2002 32.00 04/10/2003 49.00

• Don and Sarah had the following expenses for the year:

 Medical insurance $2,250

 Medical travel 500 miles

 Dental bills $275

 New glasses $165

 Prescription drugs $1,263

 Over the counter medication $120

 Church donations $1,000

 Donation to neighbor whose

 house burnt $100

 Other charities (cash) $82

 Clothing to Salvation Army $327

 Home mortgage interest $3,175

 City real estate tax $550

 County real estate tax $1,721

 Car license fee $35

 Personal property tax $817

 Gambling losses $1,500

• Don made the following estimated tax payments:

 04/12/2003 $200

 06/15/2003 $200

 09/10/2003 $200

 01/15/2004 $200

• Don and Sarah had $200 of their previous year’s tax refund 

applied to this year’s taxes.
A-12 Appendix

APPENDIX

Documents taxpayer gives you:

Form 1099-R, Emerson Utility

Employee contributions

or insurance premiums

CORRECTED (if checked)

PAYER’S name, street address, city, state, and ZIP code 1 Gross distribution Distributions From

Pensions, Annuities,

Retirement or

Profit-Sharing

Plans, IRAs,

Insurance

Contracts, etc.

$

2a Taxable amount

$

Total

distribution

Taxable amount

not determined

2b

RECIPIENT’S identification

number

PAYER’S Federal identification

number

3 Capital gain (included

in box 2a)

4 Federal income tax

withheld

$ $

RECIPIENT’S name Net unrealized

appreciation in

employer’s securities

5 6

$ $

Distribution

code(s)

Street address (including apt. no.) 7 8 Other

%

City, state, and ZIP code

Account number (optional) 10 State tax withheld 11 State/Payer’s state no.

$

13 Local tax withheld 14 Name of locality

$

Form 1099-R Department of the Treasury - Internal Revenue Service

12

15

State distribution

Local distribution

$

Copy B

Report this

income on your

Federal tax

return. If this

form shows

Federal income

tax withheld in

box 4, attach

this copy to

your return.

This information is

being furnished to

the Internal

Revenue Service.

$

$

$

$ $

$

OMB No. 1545-0119

Your percentage of total

distribution

9a

%

Form 1099-R

9b Total employee contributions

$

IRA/

SEP/

SIMPLE

2003 Emerson Utilities

555 East 10th St.

Your City, State, Zip Code

31,562.00

31,562.00

xx-xxxxxxx xxx-xx-xxxx 1,250.00

Don Hillsdale

129 Pembroke Ave

Your City, State Zip Code

7

Form 1099-R, First Security

Employee contributions

or insurance premiums

CORRECTED (if checked)

PAYER’S name, street address, city, state, and ZIP code 1 Gross distribution Distributions From

Pensions, Annuities,

Retirement or

Profit-Sharing

Plans, IRAs,

Insurance

Contracts, etc.

$

2a Taxable amount

$

Total

distribution

Taxable amount

not determined

2b

RECIPIENT’S identification

number

PAYER’S Federal identification

number

3 Capital gain (included

in box 2a)

4 Federal income tax

withheld

$ $

RECIPIENT’S name Net unrealized

appreciation in

employer’s securities

5 6

$ $

Distribution

code(s)

Street address (including apt. no.) 7 8 Other

%

City, state, and ZIP code

Account number (optional) 10 State tax withheld 11 State/Payer’s state no.

$

13 Local tax withheld 14 Name of locality

$

Form 1099-R Department of the Treasury - Internal Revenue Service

12

15

State distribution

Local distribution

$

Copy B

Report this

income on your

Federal tax

return. If this

form shows

Federal income

tax withheld in

box 4, attach

this copy to

your return.

This information is

being furnished to

the Internal

Revenue Service.

$

$

$

$ $

$

OMB No. 1545-0119

Your percentage of total

distribution

9a

%

Form 1099-R

9b Total employee contributions

$

IRA/

SEP/

SIMPLE

2003 First Security

895 West Whittier

Your City, State, Zip Code

2,252.00

2,252.00

xx-xxxxxxx xxx-xx-xxxx 225.00

Don Hillsdale

129 Pembroke Ave

Your City, State Zip Code

7 ✘
Appendix A-13

APPENDIX

3232 CORRECTED

OMB No. 1545-0238 PAYER’S name 1 Gross winnings 2 Federal income tax withheld

Street address 3 Type of wager 4 Date won

Certain

Gambling

Winnings

City, state, and ZIP code 5 Transaction 6 Race

Federal identification number 7 Winnings from identical wagers 8 Cashier

For Privacy Act and

Paperwork Reduction Act

Notice, see the 2003

General Instructions for

Forms 1099, 1098, 5498,

and W-2G.

WINNER’S name 9 Winner’s taxpayer identification no. 10 Window

Street address (including apt. no.) 11 First I.D. 12 Second I.D.

City, state, and ZIP code 13 State/Payer’s state identification no. 14 State income tax withheld

File with Form 1096.

Under penalties of perjury, I declare that, to the best of my knowledge and belief, the name, address, and taxpayer identification number that I have furnished

correctly identify me as the recipient of this payment and any payments from identical wagers, and that no other person is entitled to any part of these payments. Copy A

Signature  Date 

Form W-2G Cat. No. 10138V Department of the Treasury - Internal Revenue Service

For Internal Revenue

Service Center

Form W-2G

Telephone number

2003

Form W-2G

Form 1099-DIV

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no.

RECIPIENT’S identification

number

PAYER’S Federal identification

number

RECIPIENT’S name

Street address (including apt. no.)

City, state, and ZIP code

Account number (optional)

Dividends and

Distributions

Form 1099-DIV (keep for your records) Department of the Treasury - Internal Revenue Service

Copy B

This is important

tax information

and is being

furnished to the

Internal Revenue

Service. If you

are required to

file a return, a

negligence

penalty or other

sanction may be

imposed on you

if this income is

taxable and the

IRS determines

that it has not

been reported.

For Recipient

Unrecap. Sec. 1250 gain

1a Total ordinary dividends OMB No. 1545-0110

$

1b Qualified dividends

$

2a Total capital gain distr. Post-May 5 capital gain distr.

2c

Collectibles (28%) gain

Qualified 5-year gain 2d

$ $

2e Section 1202 gain 2f

$

3

5 Investment expenses

Noncash liquidation

distributions

Cash liquidation 9

distributions

8

$

$

2b

$ $

Nontaxable distributions

Form 1099-DIV

$

6 7

2003

$

Foreign tax paid Foreign country or U.S. possession

$

$

4 Federal income tax withheld

$

ABC Securities

3333 North Tenth Street

Your City, State, Zip Code

1,236.00 1,000.00

xx-xxxxxxx xxx-xx-xxxx 236.00

124.00

Sarah Wilson

129 Pembroke Ave.

Your City, State, Zip Code

ABC Casino

2233 N. 33rd St.

Your City, State, Zip Code

Sarah Wilson

129 Pembroke Ave.

Your City, State, Zip Code

$1,500.00

Slots 3 31 2003

XXX-XX-XXXX
A-14 Appendix

APPENDIX

Form 1099-SSA

Draft as of

09/01/2003

FORM SSA-1099 – SOCIAL SECURITY BENEFIT STATEMENT

2003 ● PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME.

● SEE THE REVERSE FOR MORE INFORMATION.

Box 1. Name Box 2. Beneficiary’s Social Security Number

Box 3. Benefits Paid in 2003 Box 4. Benefits Repaid to SSA in 2003 Box 5. Net Benefits for 2003 (Box 3 minus Box 4)

DESCRIPTION OF AMOUNT IN BOX 3 DESCRIPTION OF AMOUNT IN BOX 4

Box 7. Address

Box 8. Claim Number (Use this number if you need to contact SSA.)

Form SSA-1099-SM (1-2004) DO NOT RETURN THIS FORM TO SSA OR IRS

Box 6. Voluntary Federal Income Tax Withholding

Don Hillsdale xxx-xx-xxxx

12,240.00 12,240.00

0

129 Pembroke Ave

Your City, State, Zip Code
Appendix A-15

APPENDIX

INTEGRATED TRAINING

Module 4

Wage Earner Objectives

After completing this module you should be able to:

■ Identify when Individual Taxpayer Identification Numbers are 

required.

■ Define multiple support as it applies to dependent exemptions.

■ Determine when and how tip income is reported.

■ Determine when scholarship and fellowship grants are taxable.

■ Determine when state and local tax refunds are taxable.

■ Distinguish between alimony and child support and identify 

where to report the receipt of alimony.

■ Identify where alimony payments are reported.

■ Identify where jury duty payments returned to an employer are 

reported.

■ Explain foreign tax credit and mortgage interest credit.

Pension Earner Objectives

After completing this module you should be able to:

■ Determine when a gain from the sale of a home is reported.

■ Determine when Coverdell ESAs are taxable.

■ Determine the qualifications for the credit for the elderly and 

disabled.

MILITARY OBJECTIVES

After completing this module you should be able to:

■ Know when an Armed Forces member can be claimed as a 

dependent on someone else’s return.

■ Know the special rule for claiming Head of Household when 

married to a non-resident alien.

■ Know how to calculate the taxable wages for a member of the 

Armed Forces who receives medical separation pay.

■ Know which states have community property laws.

■ Know when a person is required to report a net profit or loss 

from self-employment using a Schedule C or Schedule C-EZ.

■ Know when a person is required to complete a Schedule E to 

report rental income and expenses.

■ Know the filing deadline extensions for people outside the U.S. 

and those in a combat zone.
A-16 Appendix

APPENDIX

■ Know how the military thrift savings plan is treated for tax purposes.

■ Know who qualifies for the foreign income exclusion and how to 

calculate it.
Appendix A-17

APPENDIX

Module 5

Objectives

After completing this module you will be able to:

■ Complete the Main Information Sheet and all other information 

covered in previous modules.

■ Determine the effect on income for personnel assigned to a 

“Combat Zone”.

■ Determine other benefits for personnel in a designated “Combat 

Zone”.

■ Determine qualified moving expenses and input applicable 

information for the calculation of the adjustment.

■ Determine qualifying miscellaneous expenses for military personnel that can be listed as itemized deductions.

Taxpayer Profile

Taxpayer Name MSgt Mary Bennett

TP SSN xxx-xx-xxxx

Spouse Name Gary Bennett

SP SSN xxx-xx-xxxx

Street Address 345 Lake Huron Place

City, State, Zip Your City, State, Zip Code

Phone Number 852-555-1212

Date of birth TP 11/24/1967

Date of birth Spouse 01/30/1965

Occupation TP Air Force Lab Tech

 SP Nurse

Blind? TP No

SP No

Donate to Presidential Fund? TP Yes

SP Yes

Filing Status Married Filing Jointly

Can be claimed as dependent by someone

else? TP No

SP No

State Return Info (Yes or No) No

Direct Deposit

Bank Routing Number xxxxxxxxx

Account number xxxxxxx
A-18 Appendix

APPENDIX

Other Members of Household

Name Date of

Birth

SSN or

ITIN

Relationship Citizenship # Months

in Home

Terri Bennett 09/06/1992 xxx-xx-xxxx Daughter U.S. 12

Jason Bennett 01/27/1998 xxx-xx-xxxx Son U.S. 12

Kyle Bennett 07/18/2000 xxx-xx-xxxx Son U.S. 12

Other considerations:

Mary was stationed in Afghanistan in a combat zone from March 5, 

2003 to September 2, 2003.

While in the combat zone she earned wages of $23,394, BAH of 

$13,545, Separation Allowance of $1750, Hazardous Duty Pay of 

$1050, and Imminent Danger/Hostile Fire pay of $1575.

Mary reenlisted while in the combat zone and received a $20,000 

reenlistment bonus.

Mary has an allotment of $1000 a month coming out of her check 

that is sent to her mother. This allotment pays for more than half 

of the cost of support for her mother and her 14 year old brother 

who lives with her mother in Mississippi. Her mother receives $650 

a month social security benefits for minor children. This is the only 

other income their household receives.

Name Date of

Birth

SSN or

ITIN

Relationship Citizenship # Months

in Home

Nancy Taft 05/23/1949 xxx-xx-xxxx Mother U.S. 0

Jeffery Taft 09/15/1989 xxx-xx-xxxx Brother U.S. 0

Mary and Gary have the following expenses. They are not sure if 

they can itemize.

Home mortgage interest $9,368

Real Estate Taxes $2,245

New roof to replace leaking roof: $4,200

Donated clothes FMV: $422

Church donations $1,000

Military uniform cleaning expenses: $ 969 (local policy pro-

 hibits wearing of all 

 military uniforms off- 

 duty; Mary receives a 

 clothing allowance of 

 $342 a year)

Nurse uniform cleaning expenses: $653 

Periodicals: $124 AMA Journal of

 Medicine,

 $18 Woodworking,
Appendix A-19

APPENDIX

 $22 Nursing Reporter,

 $28 Air Force Times,

 $23 Quilter’s 

 Newsletter

Nurses union dues for Gary $360

Gary and Mary moved from Louisiana to Virginia in January 2003 

and had the following DITY move expenses:

 $2,300 U-Haul Rental,

 $280 Lodging 2 nights

 $215 meals enroute

 1175 miles

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

XX-XXXXXXX $13,767.84

$33,040.80

$5,369.92

$33,040.80

$2,048.48

$479.09

Department of Defense

Your City, State, Zip Code

Mary Bennett

345 Lake Huron Place

Your City, State, Zip Code

xxx-xx-xxxx

xx-xxxxxxx $13,767.84 $1,521.85

✘
A-20 Appendix

APPENDIX

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

xx-xxxxxxx $2,219.36

$2,219.36

$688.00

$2,219.36

$137.00

$32.18

Department of Defense

Your City, State, Zip Code

Mary Bennett

345 Lake Huron Place

Your City, State, Zip Code

xxx-xx-xxxx

xx-xxxxxxx $2,219.36 $0.00

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

XX-XXXXXXX $15,320.00

$15,320.00

$1,637.00

$15,320.00

$949.84

$222.14

City Hospital

#1 Hospital Plaza

Your City, State, Zip Code

Gary Bennett

345 Lake Huron Place

Your City, State, Zip Code

xxx-xx-xxxx

xx-xxxxxxx $15,320.00 $750.96

✘
Appendix A-21

APPENDIX

CORRECTED (if checked)

PAYER’S name, street address, city, state, ZIP code, and telephone no. OMB No. 1545-0112 Payer’s RTN (optional)

Interest Income

PAYER’S Federal identification number RECIPIENT’S identification number 1 Interest income not included in box 3

$

Early withdrawal penalty Interest on U.S. Savings

Bonds and Treas. obligations

RECIPIENT’S name 2 3

$ $

Street address (including apt. no.) 4 Federal income tax withheld

$

Foreign country or U.S.

possession

City, state, and ZIP code 6 Foreign tax paid 7

Account number (optional)

$

Form 1099-INT Department of the Treasury - Internal Revenue Service

Copy B

For Recipient

This is important tax

information and is

being furnished to the

Internal Revenue

Service. If you are

required to file a return,

a negligence penalty or

other sanction may be

imposed on you if this

income is taxable and

the IRS determines that

it has not been

reported.

(keep for your records)

Form 1099-INT

5 Investment expenses

$

2003

871.00

First Federal Credit Union

8500 Baylor Ave

Your City, State, Zip Code

xxx-xx-xxxx xx-xxxxxxx

Gary and Mary Bennett

345 Lake Huron Place

Your City, State, Zip Code
A-22 Appendix

APPENDIX

MODULE 6

Objectives

After completing this module you will be able to:

■ Complete the Main Information Sheet and all other information 

covered in previous modules.

■ Determine the correct filing status.

■ Determine dependency status of all persons in the household.

Taxpayer Profile

Taxpayer Name PFC Joe Wells

TP SSN xxx-xx-xxxx

Spouse Name Lee Wells

SP SSN 923-76-xxxx (ITIN)

Street Address 4433 Sterling Avenue

City, State, Zip Your City, State, Zip Code

Phone Number 512-555-1212

Date of birth TP 02/04/1977

Date of birth Spouse 04/18/1979

Occupation TP Soldier

 SP Housewife

Blind? TP No

SP No

Donate to Presidential Fund?

TP Yes

SP Yes

Filing Status Married Filing Jointly

Can be claimed as dependent by someone

else? TP No

SP No

State Return Info (Yes or No) No

Direct Deposit

Bank Routing Number xxxxxxxxx

Account number xxxxxxxx
Appendix A-23

APPENDIX

Other Members of Household

Name Date of

Birth

SSN or

ITIN

Relationship Citizenship # Months

in Home

Jung Ling 05/16/2000 923-76-xxxx Step-son Korea 12

Myung Joe 08/24/2003 xxx-xx-xxxx Daughter U.S. 12

Other considerations:

Joe and Lee lived in Korea till November 20, 2003.

Lee is not a U.S. citizen but they agree to file a joint return.

Jung Ling is Lee’s son from a previous marriage. Joe has not 

legally adopted Jung Ling.

Joe received military benefits that include Hostile Fire Pay, 

Imminent Danger pay, Basic Allowance for Housing, and Basic 

Allowance for Subsistence.

1

Control number

Retirement

plan

Third-party

sick pay

Statutory

employee

6

2

Employer’s name, address, and ZIP code

7 Allocated tips

Advance EIC payment

8

9 10

Wages, tips, other compensation Federal income tax withheld

Social security wages Social security tax withheld

11 12a

Employer’s state ID number

3 4

Employer identification number

Medicare wages and tips

Social security tips

13

5

Employee’s social security number

Employee’s first name and initial Nonqualified plans

Medicare tax withheld

15

14

16 17

Other

18

Employee’s address and ZIP code

State State wages, tips, etc. State income tax Locality name

Copy B To Be Filed with Employee’s FEDERAL Tax Return.

This information is being furnished to the Internal Revenue Service.

Department of the Treasury—Internal Revenue Service

Form

Dependent care benefits

See instructions for box 12

a

b

c

d

e

f

W-2 Wage and Tax

Statement 20 30

OMB No. 1545-0008

Last name C

o

d

e

12b

C

o

d

e

12c

C

o

d

e

Local wages, tips, etc. 19 Local income tax 20

12d

C

o

d

e

Safe, accurate,

FAST! Use

Visit the IRS Web Site

at www.irs.gov.

xx-xxxxxxx $19,246.88

$19,246.88

$2,369.32

$19,246.88

$1,193.30

$279.08

Department of Defense

Joe Wells

4433 Sterling Avenue

Your City, State, Zip Code

xxx-xx-xxxx

✘
A-24 Appendix

APPENDIX

STUDENT NOTES
Appendix B-1

APPENDIX

STUDENT NOTES
B-2 Appendix

APPENDIX

STUDENT NOTES
Appendix B-3

APPENDIX

STUDENT NOTES
B-4 Appendix

APPENDIX

STUDENT NOTES
Appendix C C-1

APPENDIX

EIC TABLES Appendix C 

Draft as of

08/14/2003

(Continued on page 51)

2003 Earned Income Credit (EIC) Table

At least But less than

Two

children

Your credit is—

One

child

And your filing status is—

Caution. This is not a tax table.

1. To find your credit, read

down the “At least – But less

than” columns and find the

line that includes the amount

you were told to look up from

your EIC Worksheet.

Your credit is—

No

children

If the amount you are

looking up from the

worksheet is—

2. Then, go to the column

that includes your filing status

and the number of qualifying

children you have. Enter the

credit from that column on

your EIC Worksheet.

Example. If your filing

status is single, you have one

qualifying child, and the amount

you are looking up from your

EIC Worksheet is $2,455, you

would enter $842.

$1 $50 $2 $9 $10

50 100 6 26 30

100 150 10 43 50

150 200 13 60 70

200 250 17 77 90

250 300 21 94 110

300 350 25 111 130

350 400 29 128 150

400 450 33 145 170

450 500 36 162 190

500 550 40 179 210

550 600 44 196 230

600 650 48 213 250

650 700 52 230 270

700 750 55 247 290

750 800 59 264 310

800 850 63 281 330

850 900 67 298 350

900 950 71 315 370

950 1,000 75 332 390

1,000 1,050 78 349 410

1,050 1,100 82 366 430

1,100 1,150 86 383 450

1,150 1,200 90 400 470

1,200 1,250 94 417 490

1,250 1,300 98 434 510

1,300 1,350 101 451 530

1,350 1,400 105 468 550

1,400 1,450 109 485 570

1,450 1,500 113 502 590

1,500 1,550 117 519 610

1,550 1,600 120 536 630

1,600 1,650 124 553 650

1,650 1,700 128 570 670

1,700 1,750 132 587 690

1,750 1,800 136 604 710

1,800 1,850 140 621 730

1,850 1,900 143 638 750

1,900 1,950 147 655 770

1,950 2,000 151 672 790

2,000 2,050 155 689 810

2,050 2,100 159 706 830

2,100 2,150 163 723 850

2,150 2,200 166 740 870

2,200 2,250 170 757 890

2,250 2,300 174 774 910

2,300 2,350 178 791 930

2,350 2,400 182 808 950

2,400 2,450 186 825 970

2,450 2,500

2,500 2,550

2,550 2,600

2,600 2,650

2,650 2,700

2,700 2,750

2,750 2,800

2,800 2,850

2,850 2,900

2,900 2,950

2,950 3,000

3,000 3,050

3,050 3,100

3,100 3,150

3,150 3,200

3,200 3,250

3,250 3,300

3,300 3,350

3,350 3,400

3,400 3,450

3,450 3,500

3,500 3,550

3,550 3,600

3,600 3,650

3,650 3,700

3,700 3,750

3,750 3,800

3,800 3,850

3,850 3,900

3,900 3,950

3,950 4,000

4,000 4,050

4,050 4,100

4,100 4,150

4,150 4,200

4,200 4,250

4,250 4,300

4,300 4,350

4,350 4,400

$2 $9 $10

186 825 970

At least But less than Your credit is— Your credit is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

Two

children

One

child

And your filing status is—

No

children

If the amount you are

looking up from the

worksheet is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

At least But less than

Two

children

Your credit is—

One

child

And your filing status is—

No

children

If the amount you are

looking up from the

worksheet is—

Single, head of household,

or qualifying widow(er) and

you have—

2,400 2,450 186 825 970

2,450 2,500 189 842 990

4,400 4,450

4,450 4,500

4,500 4,550

4,550 4,600

4,600 4,650

4,650 4,700

4,700 4,750

4,750 4,800

6 26 30

10 43 50

13 60 70

17 77 90

21 94 110

25 111 130

29 128 150

33 145 170

36 162 190

40 179 210

44 196 230

48 213 250

52 230 270

55 247 290

59 264 310

63 281 330

67 298 350

71 315 370

75 332 390

78 349 410

82 366 430

86 383 450

90 400 470

94 417 490

98 434 510

101 451 530

105 468 550

109 485 570

113 502 590

117 519 610

120 536 630

124 553 650

128 570 670

132 587 690

136 604 710

140 621 730

143 638 750

147 655 770

151 672 790

155 689 810

159 706 830

163 723 850

166 740 870

170 757 890

174 774 910

178 791 930

182 808 950

189 842 990

193 859 1,010

197 876 1,030

201 893 1,050

205 910 1,070

208 927 1,090

212 944 1,110

216 961 1,130

220 978 1,150

224 995 1,170

228 1,012 1,190

231 1,029 1,210

235 1,046 1,230

239 1,063 1,250

243 1,080 1,270

247 1,097 1,290

251 1,114 1,310

254 1,131 1,330

258 1,148 1,350

262 1,165 1,370

266 1,182 1,390

270 1,199 1,410

273 1,216 1,430

277 1,233 1,450

281 1,250 1,470

285 1,267 1,490

289 1,284 1,510

293 1,301 1,530

296 1,318 1,550

300 1,335 1,570

304 1,352 1,590

308 1,369 1,610

312 1,386 1,630

316 1,403 1,650

319 1,420 1,670

323 1,437 1,690

327 1,454 1,710

331 1,471 1,730

335 1,488 1,750

339 1,505 1,770

342 1,522 1,790

346 1,539 1,810

350 1,556 1,830

354 1,573 1,850

358 1,590 1,870

361 1,607 1,890

365 1,624 1,910

189 842 990

193 859 1,010

197 876 1,030

201 893 1,050

205 910 1,070

208 927 1,090

212 944 1,110

216 961 1,130

220 978 1,150

224 995 1,170

228 1,012 1,190

231 1,029 1,210

235 1,046 1,230

239 1,063 1,250

243 1,080 1,270

247 1,097 1,290

251 1,114 1,310

254 1,131 1,330

258 1,148 1,350

262 1,165 1,370

266 1,182 1,390

270 1,199 1,410

273 1,216 1,430

277 1,233 1,450

281 1,250 1,470

285 1,267 1,490

289 1,284 1,510

293 1,301 1,530

296 1,318 1,550

300 1,335 1,570

304 1,352 1,590

308 1,369 1,610

312 1,386 1,630

316 1,403 1,650

319 1,420 1,670

323 1,437 1,690

327 1,454 1,710

331 1,471 1,730

335 1,488 1,750

339 1,505 1,770

342 1,522 1,790

346 1,539 1,810

350 1,556 1,830

354 1,573 1,850

358 1,590 1,870

361 1,607 1,890

365 1,624 1,910

4,800 4,850 369 1,641 1,930

4,850 4,900

4,900 4,950

4,950 5,000

5,000 5,050

5,050 5,100

5,100 5,150

5,150 5,200

5,200 5,250

5,250 5,300

5,300 5,350

5,350 5,400

5,400 5,450

5,450 5,500

5,500 5,550

5,550 5,600

5,600 5,650

5,650 5,700

5,700 5,750

5,750 5,800

5,800 5,850

5,850 5,900

5,900 5,950

5,950 6,000

369 1,641 1,930

373 1,658 1,950

377 1,675 1,970

382 1,692 1,990

382 1,709 2,010

382 1,726 2,030

382 1,743 2,050

382 1,760 2,070

382 1,777 2,090

382 1,794 2,110

382 1,811 2,130

382 1,828 2,150

382 1,845 2,170

382 1,862 2,190

382 1,879 2,210

382 1,896 2,230

382 1,913 2,250

382 1,930 2,270

382 1,947 2,290

382 1,964 2,310

382 1,981 2,330

382 1,998 2,350

382 2,015 2,370

382 2,032 2,390

373 1,658 1,950

377 1,675 1,970

382 1,692 1,990

382 1,709 2,010

382 1,726 2,030

382 1,743 2,050

382 1,760 2,070

382 1,777 2,090

382 1,794 2,110

382 1,811 2,130

382 1,828 2,150

382 1,845 2,170

382 1,862 2,190

382 1,879 2,210

382 1,896 2,230

382 1,913 2,250

382 1,930 2,270

382 1,947 2,290

382 1,964 2,310

382 1,981 2,330

382 1,998 2,350

382 2,015 2,370

382 2,032 2,390
C-2 Appendix C

APPENDIX

Draft as of

08/14/2003

2003 Earned Income Credit (EIC) Table—Continued (Caution. This is not a tax table.)

(Continued on page 52)

6,000 6,050

6,050 6,100

6,100 6,150

6,150 6,200

6,200 6,250

6,250 6,300

6,300 6,350

6,350 6,400

6,400 6,450

6,450 6,500

6,500 6,550

6,550 6,600

6,600 6,650

6,650 6,700

6,700 6,750

6,750 6,800

6,800 6,850

6,850 6,900

6,900 6,950

6,950 7,000

7,000 7,050

7,050 7,100

7,100 7,150

7,150 7,200

7,200 7,250

7,250 7,300

7,300 7,350

7,350 7,400

7,400 7,450

7,450 7,500

7,500 7,550

7,550 7,600

7,600 7,650

7,650 7,700

7,700 7,750

7,750 7,800

7,800 7,850

7,850 7,900

7,900 7,950

7,950 8,000

8,000 8,050

8,050 8,100

8,100 8,150

8,150 8,200

8,200 8,250

8,250 8,300

8,300 8,350

8,350 8,400

8,400 8,450

8,450 8,500

8,500 8,550

8,550 8,600

8,600 8,650

8,650 8,700

8,700 8,750

8,750 8,800

8,800 8,850

8,850 8,900

8,900 8,950

8,950 9,000

9,000 9,050

9,050 9,100

9,100 9,150

9,150 9,200

9,200 9,250

9,250 9,300

9,300 9,350

9,350 9,400

9,400 9,450

9,450 9,500

9,500 9,550

9,550 9,600

9,600 9,650

9,650 9,700

9,700 9,750

9,750 9,800

9,800 9,850

9,850 9,900

9,900 9,950

9,950 10,000

10,000 10,050

10,050 10,100

10,100 10,150

10,150 10,200

10,200 10,250

10,250 10,300

10,300 10,350

10,350 10,400

At least But less than

Two

children

Your credit is—

One

child

And your filing status is—

Your credit is—

No

children

If the amount you are

looking up from the

worksheet is—

At least But less than Your credit is— Your credit is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

Two

children

One

child

And your filing status is—

No

children

If the amount you are

looking up from the

worksheet is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

382 2,049 2,410

382 2,066 2,430

382 2,083 2,450

382 2,100 2,470

382 2,117 2,490

382 2,134 2,510

382 2,151 2,530

382 2,168 2,550

382 2,185 2,570

382 2,202 2,590

382 2,219 2,610

382 2,236 2,630

382 2,253 2,650

382 2,270 2,670

382 2,287 2,690

382 2,304 2,710

382 2,321 2,730

382 2,338 2,750

382 2,355 2,770

382 2,372 2,790

382 2,389 2,810

382 2,406 2,830

382 2,423 2,850

382 2,440 2,870

382 2,457 2,890

379 2,474 2,910

375 2,491 2,930

371 2,508 2,950

368 2,525 2,970

364 2,547 2,990

360 2,547 3,010

356 2,547 3,030

352 2,547 3,050

348 2,547 3,070

345 2,547 3,090

341 2,547 3,110

337 2,547 3,130

333 2,547 3,150

329 2,547 3,170

326 2,547 3,190

322 2,547 3,210

318 2,547 3,230

314 2,547 3,250

310 2,547 3,270

306 2,547 3,290

303 2,547 3,310

299 2,547 3,330

295 2,547 3,350

291 2,547 3,370

287 2,547 3,390

283 2,547 3,410

280 2,547 3,430

276 2,547 3,450

272 2,547 3,470

268 2,547 3,490

264 2,547 3,510

260 2,547 3,530

257 2,547 3,550

253 2,547 3,570

249 2,547 3,590

245 2,547 3,610

241 2,547 3,630

238 2,547 3,650

234 2,547 3,670

230 2,547 3,690

226 2,547 3,710

222 2,547 3,730

218 2,547 3,750

215 2,547 3,770

211 2,547 3,790

207 2,547 3,810

203 2,547 3,830

199 2,547 3,850

195 2,547 3,870

192 2,547 3,890

188 2,547 3,910

184 2,547 3,930

180 2,547 3,950

176 2,547 3,970

173 2,547 3,990

169 2,547 4,010

165 2,547 4,030

161 2,547 4,050

157 2,547 4,070

153 2,547 4,090

150 2,547 4,110

146 2,547 4,130

142 2,547 4,150

382 2,049 2,410

382 2,066 2,430

382 2,083 2,450

382 2,100 2,470

382 2,117 2,490

379 2,134 2,510

375 2,151 2,530

371 2,168 2,550

368 2,185 2,570

364 2,202 2,590

360 2,219 2,610

356 2,236 2,630

352 2,253 2,650

348 2,270 2,670

345 2,287 2,690

341 2,304 2,710

337 2,321 2,730

333 2,338 2,750

329 2,355 2,770

326 2,372 2,790

322 2,389 2,810

318 2,406 2,830

314 2,423 2,850

310 2,440 2,870

306 2,457 2,890

303 2,474 2,910

299 2,491 2,930

295 2,508 2,950

291 2,525 2,970

287 2,547 2,990

283 2,547 3,010

280 2,547 3,030

276 2,547 3,050

272 2,547 3,070

268 2,547 3,090

264 2,547 3,110

260 2,547 3,130

257 2,547 3,150

253 2,547 3,170

249 2,547 3,190

245 2,547 3,210

241 2,547 3,230

238 2,547 3,250

234 2,547 3,270

230 2,547 3,290

226 2,547 3,310

222 2,547 3,330

218 2,547 3,350

215 2,547 3,370

211 2,547 3,390

207 2,547 3,410

203 2,547 3,430

199 2,547 3,450

195 2,547 3,470

192 2,547 3,490

188 2,547 3,510

184 2,547 3,530

180 2,547 3,550

176 2,547 3,570

173 2,547 3,590

169 2,547 3,610

165 2,547 3,630

161 2,547 3,650

157 2,547 3,670

153 2,547 3,690

150 2,547 3,710

146 2,547 3,730

142 2,547 3,750

138 2,547 3,770

134 2,547 3,790

130 2,547 3,810

127 2,547 3,830

123 2,547 3,850

119 2,547 3,870

115 2,547 3,890

111 2,547 3,910

107 2,547 3,930

104 2,547 3,950

100 2,547 3,970

96 2,547 3,990

92 2,547 4,010

88 2,547 4,030

85 2,547 4,050

81 2,547 4,070

77 2,547 4,090

73 2,547 4,110

69 2,547 4,130

65 2,547 4,150

10,400 10,450

10,450 10,500

10,500 10,550

10,550 10,600

10,600 10,650

10,650 10,700

10,700 10,750

10,750 10,800

10,800 10,850

10,850 10,900

10,900 10,950

10,950 11,000

11,000 11,050

11,050 11,100

11,100 11,150

11,150 11,200

11,200 11,250

11,250 11,300

11,300 11,350

11,350 11,400

11,400 11,450

11,450 11,500

11,500 11,550

11,550 11,600

11,600 11,650

11,650 11,700

11,700 11,750

11,750 11,800

11,800 11,850

11,850 11,900

11,900 11,950

11,950 12,000

12,000 12,050

12,050 12,100

12,100 12,150

12,150 12,200

12,200 12,250

12,250 13,750

13,750 13,800

13,800 13,850

13,850 13,900

13,900 13,950

13,950 14,000

14,000 14,050

14,050 14,100

14,100 14,150

14,150 14,200

14,200 14,250

14,250 14,300

14,300 14,350

14,350 14,400

138 2,547 4,170

134 2,547 4,190

130 2,547 4,204

127 2,547 4,204

123 2,547 4,204

119 2,547 4,204

115 2,547 4,204

111 2,547 4,204

107 2,547 4,204

104 2,547 4,204

100 2,547 4,204

96 2,547 4,204

92 2,547 4,204

88 2,547 4,204

85 2,547 4,204

81 2,547 4,204

77 2,547 4,204

73 2,547 4,204

69 2,547 4,204

65 2,547 4,204

62 2,547 4,204

58 2,547 4,204

54 2,547 4,204

50 2,547 4,204

46 2,547 4,204

42 2,547 4,204

39 2,547 4,204

35 2,547 4,204

31 2,547 4,204

27 2,547 4,204

23 2,547 4,204

20 2,547 4,204

16 2,547 4,204

12 2,547 4,204

8 2,547 4,204

4 2,547 4,204

* 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

62 2,547 4,170

58 2,547 4,190

54 2,547 4,204

50 2,547 4,204

46 2,547 4,204

42 2,547 4,204

39 2,547 4,204

35 2,547 4,204

31 2,547 4,204

27 2,547 4,204

23 2,547 4,204

20 2,547 4,204

16 2,547 4,204

12 2,547 4,204

8 2,547 4,204

4 2,547 4,204

* 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,539 4,195

0 2,531 4,184

0 2,523 4,173

0 2,515 4,163

0 2,507 4,152

0 2,499 4,142

0 2,491 4,131

0 2,483 4,121

0 2,475 4,110

0 2,467 4,100

0 2,460 4,089

0 2,452 4,079

0 2,444 4,068

*If the amount you are looking up from the worksheet is at least $11,200 ($12,200 if married filing jointly) but less than $11,230 ($12,230 if married filing jointly), your

credit is $1. Otherwise, you cannot take the credit.

14,400 14,450 0 2,436 4,058 0 2,547 4,204
Appendix C C-3

APPENDIX

Draft as of

08/14/2003

2003 Earned Income Credit (EIC) Table—Continued (Caution. This is not a tax table.)

(Continued on page 53)

At least But less than

Two

children

Your credit is—

One

child

And your filing status is—

Your credit is—

No

children

If the amount you are

looking up from the

worksheet is—

At least But less than Your credit is— Your credit is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

Two

children

One

child

And your filing status is—

No

children

If the amount you are

looking up from the

worksheet is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

14,450 14,500 0 2,428 4,047

14,500 14,550 0 2,420 4,037

14,550 14,600 0 2,412 4,026

14,600 14,650 0 2,404 4,016

14,650 14,700 0 2,396 4,005

14,700 14,750 0 2,388 3,994

14,750 14,800 0 2,380 3,984

14,800 14,850 0 2,372 3,973

14,850 14,900 0 2,364 3,963

14,900 14,950 0 2,356 3,952

14,950 15,000 0 2,348 3,942

15,000 15,050 0 2,340 3,931

15,050 15,100 0 2,332 3,921

15,100 15,150 0 2,324 3,910

15,150 15,200 0 2,316 3,900

15,200 15,250 0 2,308 3,889

15,250 15,300 0 2,300 3,879

15,300 15,350 0 2,292 3,868

15,350 15,400 0 2,284 3,858

15,400 15,450 0 2,276 3,847

15,450 15,500 0 2,268 3,837

15,500 15,550 0 2,260 3,826

15,550 15,600 0 2,252 3,815

15,600 15,650 0 2,244 3,805

15,650 15,700 0 2,236 3,794

15,700 15,750 0 2,228 3,784

15,750 15,800 0 2,220 3,773

15,800 15,850 0 2,212 3,763

15,850 15,900 0 2,204 3,752

15,900 15,950 0 2,196 3,742

15,950 16,000 0 2,188 3,731

16,000 16,050 0 2,180 3,721

16,050 16,100 0 2,172 3,710

16,100 16,150 0 2,164 3,700

16,150 16,200 0 2,156 3,689

16,200 16,250 0 2,148 3,679

16,250 16,300 0 2,140 3,668

16,300 16,350 0 2,132 3,657

16,350 16,400 0 2,124 3,647

16,400 16,450 0 2,116 3,636

16,450 16,500 0 2,108 3,626

16,500 16,550 0 2,100 3,615

16,550 16,600 0 2,092 3,605

16,600 16,650 0 2,084 3,594

16,650 16,700 0 2,076 3,584

16,700 16,750 0 2,068 3,573

16,750 16,800 0 2,060 3,563

16,800 16,850 0 2,052 3,552

16,850 16,900 0 2,044 3,542

16,900 16,950 0 2,036 3,531

16,950 17,000 0 2,028 3,521

17,000 17,050 0 2,020 3,510

17,050 17,100 0 2,012 3,500

17,100 17,150 0 2,004 3,489

17,150 17,200 0 1,996 3,478

17,200 17,250 0 1,988 3,468

17,250 17,300 0 1,980 3,457

17,300 17,350 0 1,972 3,447

17,350 17,400 0 1,964 3,436

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,547 4,204

0 2,539 4,195

0 2,531 4,184

0 2,523 4,173

0 2,515 4,163

0 2,507 4,152

0 2,499 4,142

0 2,491 4,131

0 2,483 4,121

0 2,475 4,110

0 2,467 4,100

0 2,460 4,089

0 2,452 4,079

0 2,444 4,068

0 2,436 4,058

0 2,428 4,047

0 2,420 4,037

0 2,412 4,026

0 2,404 4,016

0 2,396 4,005

0 2,388 3,994

0 2,380 3,984

0 2,372 3,973

0 2,364 3,963

0 2,356 3,952

0 2,348 3,942

0 2,340 3,931

0 2,332 3,921

0 2,324 3,910

0 2,316 3,900

0 2,308 3,889

0 2,300 3,879

0 2,292 3,868

0 2,284 3,858

0 2,276 3,847

0 2,268 3,837

0 2,260 3,826

0 2,252 3,815

0 2,244 3,805

0 2,236 3,794

0 2,228 3,784

0 2,220 3,773

0 2,212 3,763

0 2,204 3,752

0 2,196 3,742

0 2,188 3,731

0 2,180 3,721

0 2,172 3,710

0 2,164 3,700

0 2,156 3,689

0 2,148 3,679

0 2,140 3,668

0 2,132 3,657

0 2,124 3,647

0 2,547 4,204

17,400 17,450 0

17,450 17,500

17,500 17,550

17,550 17,600

17,600 17,650

17,650 17,700

17,700 17,750

17,750 17,800

17,800 17,850

17,850 17,900

17,900 17,950

17,950 18,000

18,000 18,050

18,050 18,100

18,100 18,150

18,150 18,200

18,200 18,250

18,250 18,300

18,300 18,350

18,350 18,400

18,400 18,450

18,450 18,500

18,500 18,550

18,550 18,600

18,600 18,650

18,650 18,700

18,700 18,750

18,750 18,800

18,800 18,850

18,850 18,900

18,900 18,950

18,950 19,000

19,000 19,050

19,050 19,100

19,100 19,150

19,150 19,200

19,200 19,250

19,250 19,300

19,300 19,350

19,350 19,400

19,400 19,450

19,450 19,500

19,500 19,550

19,550 19,600

19,600 19,650

19,650 19,700

19,700 19,750

19,750 19,800

19,800 19,850

19,850 19,900

19,900 19,950

19,950 20,000

20,000 20,050

20,050 20,100

20,100 20,150

20,150 20,200

20,200 20,250

20,250 20,300

20,300 20,350

20,350 20,400

20,400 20,450

20,450 20,500

20,500 20,550

20,550 20,600

20,600 20,650

20,650 20,700

20,700 20,750

20,750 20,800

20,800 20,850

20,850 20,900

20,900 20,950

20,950 21,000

21,000 21,050

21,050 21,100

21,100 21,150

21,150 21,200

21,200 21,250

21,250 21,300

21,300 21,350

21,350 21,400

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

2,116 3,636

0 2,108 3,626

0 2,100 3,615

0 2,092 3,605

0 2,084 3,594

0 2,076 3,584

0 2,068 3,573

0 2,060 3,563

0 2,052 3,552

0 2,044 3,542

0 2,036 3,531

0 2,028 3,521

0 2,020 3,510

0 2,012 3,500

0 2,004 3,489

0 1,996 3,478

0 1,988 3,468

0 1,980 3,457

0 1,972 3,447

0 1,964 3,436

0 1,956 3,426

0 1,948 3,415

0 1,940 3,405

0 1,932 3,394

0 1,924 3,384

0 1,916 3,373

0 1,908 3,363

0 1,900 3,352

0 1,892 3,342

0 1,884 3,331

0 1,876 3,321

0 1,868 3,310

0 1,860 3,299

0 1,852 3,289

0 1,844 3,278

0 1,836 3,268

0 1,828 3,257

0 1,820 3,247

0 1,812 3,236

0 1,804 3,226

0 1,796 3,215

0 1,788 3,205

0 1,780 3,194

0 1,772 3,184

0 1,764 3,173

0 1,756 3,163

0 1,748 3,152

0 1,740 3,142

0 1,732 3,131

0 1,724 3,120

0 1,716 3,110

0 1,708 3,099

0 1,700 3,089

0 1,692 3,078

0 1,684 3,068

0 1,676 3,057

0 1,668 3,047

0 1,661 3,036

0 1,653 3,026

0 1,645 3,015

0 1,637 3,005

0 1,629 2,994

0 1,621 2,984

0 1,613 2,973

0 1,605 2,963

0 1,597 2,952

0 1,589 2,941

0 1,581 2,931

0 1,573 2,920

0 1,565 2,910

0 1,557 2,899

0 1,549 2,889

0 1,541 2,878

0 1,533 2,868

0 1,525 2,857

0 1,517 2,847

0 1,509 2,836

0 1,501 2,826

0 1,493 2,815

0 1,485 2,805

1,956 3,426

1,948 3,415

1,940 3,405

1,932 3,394

1,924 3,384

1,916 3,373

1,908 3,363

1,900 3,352

1,892 3,342

1,884 3,331

1,876 3,321

1,868 3,310

1,860 3,299

1,852 3,289

1,844 3,278

1,836 3,268

1,828 3,257

1,820 3,247

1,812 3,236

1,804 3,226

1,796 3,215

1,788 3,205

1,780 3,194

1,772 3,184

1,764 3,173

1,756 3,163

1,748 3,152

1,740 3,142

1,732 3,131

1,724 3,120

1,716 3,110

1,708 3,099

1,700 3,089

1,692 3,078

1,684 3,068

1,676 3,057

1,668 3,047

1,661 3,036

1,653 3,026

1,645 3,015

1,637 3,005

1,629 2,994

1,621 2,984

1,613 2,973

1,605 2,963

1,597 2,952

1,589 2,941

1,581 2,931

1,573 2,920

1,565 2,910

1,557 2,899

1,549 2,889

1,541 2,878

1,533 2,868

1,525 2,857

1,517 2,847

1,509 2,836

1,501 2,826

1,493 2,815

1,485 2,805

1,477 2,794

1,469 2,784

1,461 2,773

1,453 2,762

1,445 2,752

1,437 2,741

1,429 2,731

1,421 2,720

1,413 2,710

1,405 2,699

1,397 2,689

1,389 2,678

1,381 2,668

1,373 2,657

1,365 2,647

1,357 2,636

1,349 2,626

1,341 2,615

1,333 2,604

1,325 2,594

21,400 21,450 0 0 1,477 2,794 1,317 2,583
C-4 Appendix C

APPENDIX

Draft as of

08/14/2003

2003 Earned Income Credit (EIC) Table—Continued (Caution. This is not a tax table.)

(Continued on page 54)

21,450 21,500

21,500 21,550

21,550 21,600

21,600 21,650

21,650 21,700

21,700 21,750

21,750 21,800

21,800 21,850

21,850 21,900

21,900 21,950

21,950 22,000

22,000 22,050

22,050 22,100

22,100 22,150

22,150 22,200

22,200 22,250

22,250 22,300

22,300 22,350

22,350 22,400

22,400 22,450

22,450 22,500

22,500 22,550

22,550 22,600

22,600 22,650

22,650 22,700

22,700 22,750

22,750 22,800

22,800 22,850

22,850 22,900

22,900 22,950

22,950 23,000

At least But less than

Two

children

Your credit is—

One

child

And your filing status is—

Your credit is—

No

children

If the amount you are

looking up from the

worksheet is—

At least But less than Your credit is— Your credit is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

Two

children

One

child

And your filing status is—

No

children

If the amount you are

looking up from the

worksheet is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0 1,469 2,784

0 1,461 2,773

0 1,453 2,762

0 1,445 2,752

0 1,437 2,741

0 1,429 2,731

0 1,421 2,720

0 1,413 2,710

0 1,405 2,699

0 1,397 2,689

0 1,389 2,678

0 1,381 2,668

0 1,373 2,657

0 1,365 2,647

0 1,357 2,636

0 1,349 2,626

0 1,341 2,615

0 1,333 2,604

0 1,325 2,594

0 1,317 2,583

0 1,309 2,573

0 1,301 2,562

0 1,293 2,552

0 1,285 2,541

0 1,277 2,531

0 1,269 2,520

0 1,261 2,510

0 1,253 2,499

0 1,245 2,489

0 1,237 2,478

0 1,229 2,468

1,309 2,573

1,301 2,562

1,293 2,552

1,285 2,541

1,277 2,531

1,269 2,520

1,261 2,510

1,253 2,499

1,245 2,489

1,237 2,478

1,229 2,468

1,221 2,457

1,213 2,447

1,205 2,436

1,197 2,425

1,189 2,415

1,181 2,404

1,173 2,394

1,165 2,383

1,157 2,373

1,149 2,362

1,141 2,352

1,133 2,341

1,125 2,331

1,117 2,320

1,109 2,310

1,101 2,299

1,093 2,289

1,085 2,278

1,077 2,268

1,069 2,257

23,000 23,050

23,050 23,100

23,100 23,150

23,150 23,200

23,200 23,250

23,250 23,300

23,300 23,350

23,350 23,400

23,400 23,450

23,450 23,500

23,500 23,550

23,550 23,600

23,600 23,650

23,650 23,700

23,700 23,750

23,750 23,800

23,800 23,850

23,850 23,900

23,900 23,950

23,950 24,000

24,000 24,050

24,050 24,100

24,100 24,150

24,150 24,200

24,200 24,250

24,250 24,300

24,300 24,350

24,350 24,400

24,400 24,450

24,450 24,500

24,500 24,550

24,550 24,600

24,600 24,650

24,650 24,700

24,700 24,750

24,750 24,800

24,800 24,850

24,850 24,900

24,900 24,950

24,950 25,000

25,000 25,050

25,050 25,100

25,100 25,150

25,150 25,200

25,200 25,250

25,250 25,300

25,300 25,350

25,350 25,400

25,400 25,450

25,450 25,500

25,500 25,550

25,550 25,600

25,600 25,650

25,650 25,700

25,700 25,750

25,750 25,800

25,800 25,850 0

25,850 25,900

25,900 25,950

25,950 26,000

26,000 26,050

26,050 26,100

26,100 26,150

26,150 26,200

26,200 26,250

26,250 26,300

26,300 26,350

26,350 26,400

26,400 26,450

26,450 26,500

26,500 26,550

26,550 26,600

26,600 26,650

26,650 26,700

26,700 26,750

26,750 26,800

26,800 26,850

26,850 26,900

26,900 26,950

26,950 27,000

27,000 27,050

27,050 27,100

27,100 27,150

27,150 27,200

27,200 27,250

27,250 27,300

27,300 27,350

27,350 27,400

27,400 27,450

27,450 27,500

27,500 27,550

27,550 27,600

27,600 27,650

27,650 27,700

27,700 27,750

27,750 27,800

27,800 27,850

27,850 27,900

27,900 27,950

27,950 28,000

28,000 28,050

28,050 28,100

28,100 28,150

28,150 28,200

28,200 28,250

28,250 28,300

28,300 28,350

28,350 28,400

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0 1,221 2,457

0 1,213 2,447

0 1,205 2,436

0 1,197 2,425

0 1,189 2,415

0 1,181 2,404

0 1,173 2,394

0 1,165 2,383

0 1,157 2,373

0 1,149 2,362

0 1,141 2,352

0 1,133 2,341

0 1,125 2,331

0 1,117 2,320

0 1,109 2,310

0 1,101 2,299

0 1,093 2,289

0 1,085 2,278

0 1,077 2,268

0 1,069 2,257

0 1,061 2,246

0 1,053 2,236

0 1,045 2,225

0 1,037 2,215

0 1,029 2,204

0 1,021 2,194

0 1,013 2,183

0 1,005 2,173

0 997 2,162

0 989 2,152

0 981 2,141

0 973 2,131

0 965 2,120

0 957 2,110

0 949 2,099

0 941 2,089

0 933 2,078

0 925 2,067

0 917 2,057

0 909 2,046

0 901 2,036

0 893 2,025

0 885 2,015

0 877 2,004

0 869 1,994

0 862 1,983

0 854 1,973

0 846 1,962

0 838 1,952

0 830 1,941

0 822 1,931

0 814 1,920

0 806 1,910

0 798 1,899

0 790 1,888

0 782 1,878

774 1,867

0 766 1,857

0 758 1,846

0 750 1,836

0 742 1,825

0 734 1,815

0 726 1,804

0 718 1,794

0 710 1,783

0 702 1,773

0 694 1,762

0 686 1,752

0 678 1,741

0 670 1,731

0 662 1,720

0 654 1,709

0 646 1,699

0 638 1,688

0 630 1,678

0 622 1,667

0 614 1,657

0 606 1,646

0 598 1,636

0 590 1,625

0 582 1,615

0 574 1,604

0 566 1,594

0 558 1,583

0 550 1,573

0 542 1,562

0 534 1,551

0 526 1,541

0 518 1,530

0 510 1,520

0 502 1,509

0 494 1,499

0 486 1,488

0 478 1,478

0 470 1,467

0 462 1,457

0 454 1,446

0 446 1,436

0 438 1,425

0 430 1,415

0 422 1,404

0 414 1,394

0 406 1,383

0 398 1,372

0 390 1,362

0 382 1,351

0 374 1,341

0 366 1,330

1,061 2,246

1,053 2,236

1,045 2,225

1,037 2,215

1,029 2,204

1,021 2,194

1,013 2,183

1,005 2,173

997 2,162

989 2,152

981 2,141

973 2,131

965 2,120

957 2,110

949 2,099

941 2,089

933 2,078

925 2,067

917 2,057

909 2,046

901 2,036

893 2,025

885 2,015

877 2,004

869 1,994

862 1,983

854 1,973

846 1,962

838 1,952

830 1,941

822 1,931

814 1,920

806 1,910

798 1,899

790 1,888

782 1,878

774 1,867

766 1,857

758 1,846

750 1,836

742 1,825

734 1,815

726 1,804

718 1,794

710 1,783

702 1,773

694 1,762

686 1,752

678 1,741

670 1,731

662 1,720

654 1,709

646 1,699

638 1,688

630 1,678

622 1,667

614 1,657

606 1,646

598 1,636

590 1,625

582 1,615

574 1,604

566 1,594

558 1,583

550 1,573

542 1,562

534 1,551

526 1,541

518 1,530

510 1,520

502 1,509

494 1,499

486 1,488

478 1,478

470 1,467

462 1,457

454 1,446

446 1,436

438 1,425

430 1,415

422 1,404

414 1,394

406 1,383

398 1,372

390 1,362

382 1,351

374 1,341

366 1,330

358 1,320

350 1,309

342 1,299

334 1,288

326 1,278

318 1,267

310 1,257

302 1,246

294 1,236

286 1,225

278 1,215

270 1,204

262 1,193

254 1,183

246 1,172

238 1,162

230 1,151

222 1,141

214 1,130

206 1,120

28,400 28,450 0 0 358 1,320 198 1,109
Appendix C C-5

APPENDIX

Draft as of

08/14/2003

28,450 28,500

28,500 28,550

28,550 28,600

0

0

0

0 350 1,309

0 342 1,299

0 334 1,288

190 1,099

182 1,088

174 1,078

2003 Earned Income Credit (EIC) Table—Continued (Caution. This is not a tax table.)

**If the amount you are looking up from the worksheet is at least $29,650 ($30,650 if married filing jointly) but less than $29,666 ($30,666 if married filing jointly), your

credit is $1. Otherwise, you cannot take the credit.

28,600 28,650 0

28,650 28,700 0

28,700 28,750 0

28,750 28,800 0

28,800 28,850 0

28,850 28,900 0

28,900 28,950 0

28,950 29,000 0

29,000 29,050 0

29,050 29,100 0

29,100 29,150 0

29,150 29,200 0

29,200 29,250 0

29,250 29,300 0

29,300 29,350 0

29,350 29,400 0

29,400 29,450 0

29,450 29,500 0

29,500 29,550 0

29,550 29,600 0

29,600 29,650 0

29,650 29,700 0

29,700 29,750 0

29,750 29,800 0

29,800 29,850 0

29,850 29,900 0

29,900 29,950 0

29,950 30,000 0

30,000 30,050 0

30,050 30,100 0

30,100 30,150 0

30,150 30,200 0

30,200 30,250 0

30,250 30,300 0

30,300 30,350 0

30,350 30,400 0

30,400 30,450 0

30,450 30,500 0

30,500 30,550 0

30,550 30,600 0

30,600 30,650 0

30,650 30,700 0

30,700 30,750 0

30,750 30,800 0

30,800 30,850 0

30,850 30,900 0

30,900 30,950 0

30,950 31,000 0

31,000 31,050 0

31,050 31,100 0

31,100 31,150 0

31,150 31,200 0

31,200 31,250 0

31,250 31,300 0

31,300 31,350 0

31,350 31,400 0

31,400 31,450 0 0

31,450 31,500 0 0

31,500 31,550 0 0

31,550 31,600 0 0

31,600 31,650 0 0

31,650 31,700 0 0

31,700 31,750 0 0

31,750 31,800 0 0

31,800 31,850 0 0

31,850 31,900 0 0

31,900 31,950 0 0

31,950 32,000 0 0

32,000 32,050 0 0

32,050 32,100 0 0

32,100 32,150 0 0

32,150 32,200 0 0

32,200 32,250 0 0

32,250 32,300 0 0

32,300 32,350 0 0

32,350 32,400 0 0

32,400 32,450 0 0

32,450 32,500 0 0

32,500 32,550 0 0

32,550 32,600 0 0

32,600 32,650 0 0

32,650 32,700 0 0

32,700 32,750 0 0

32,750 32,800 0 0

32,800 32,850 0 0

32,850 32,900 0 0

32,900 32,950 0 0

32,950 33,000 0 0

33,000 33,050 0 0

33,050 33,100 0 0

33,100 33,150 0 0

33,150 33,200 0 0

33,200 33,250 0 0

33,250 33,300 0 0

33,300 33,350 0 0

33,350 33,400 0 0

33,400 33,450 0 0

33,450 33,500 0 0

33,500 33,550 0 0

33,550 33,600 0 0

33,600 33,650 0 0

33,650 33,700 0 0

33,700 33,750 0 0

33,750 33,800 0 0

33,800 33,850 0 0

33,850 33,900 0 0

33,900 33,950 0 0

33,950 34,000 0 0

34,000 34,050 0 0

34,050 34,100 0 0

34,100 34,150 0 0

34,150 34,200 0 0

At least But less than

Two

children

Your credit is—

One

child

And your filing status is—

Your credit is—

No

children

If the amount you are

looking up from the

worksheet is—

At least But less than Your credit is— Your credit is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

Two

children

One

child

And your filing status is—

No

children

If the amount you are

looking up from the

worksheet is—

Single, head of household,

or qualifying widow(er) and

you have—

Married filing jointly and

you have—

Two

children

One

child

No

children

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0

0

0

0

0

0

0

0

0

0

00 0 0 0

***If the amount you are looking up from the worksheet is at least $33,650 but less than $33,692, your credit is $4. Otherwise, you cannot take the credit.

326 1,278

318 1,267

310 1,257

302 1,246

294 1,236

286 1,225

278 1,215

270 1,204

262 1,193

254 1,183

246 1,172

238 1,162

230 1,151

222 1,141

214 1,130

206 1,120

198 1,109

190 1,099

182 1,088

174 1,078

166 1,067

158 1,057

150 1,046

142 1,036

134 1,025

126 1,014

118 1,004

110 993

102 983

94 972

86 962

78 951

70 941

63 930

55 920

47 909

39 899

31 888

23 878

15 867

7 857

** 846

0 835

0 825

0 814

0 804

0 793

0 783

0 772

0 762

0 751

0 741

0 730

0 720

0 709

0 699

688

678

667

656

646

635

625

614

604

593

583

572

562

551

541

530

520

509

498

488

477

467

456

446

435

425

414

404

393

383

372

362

351

341

330

319

309

298

288

277

267

256

246

235

225

214

204

193

183

172

162

151

140

130

119

109

98

34,250 34,300 0 0 88

34,300 34,350 0 0 77

34,350 34,400 0 0 67

34,400 34,450 0 0 56

34,450 34,500 0 0 46

34,500 34,550 0 0 35

34,550 34,600 0 0 25

34,600 34,650 0 0 14

34,650 34,692 00 4

34,200 34,250

166 1,067

158 1,057

150 1,046

142 1,036

134 1,025

126 1,014

118 1,004

110 993

102 983

94 972

86 962

78 951

70 941

63 930

55 920

47 909

39 899

31 888

23 878

15 867

7 857

** 846

0 835

0 825

0 814

0 804

0 793

0 783

0 772

0 762

0 751

0 741

0 730

0 720

0 709

0 699

0 688

0 678

0 667

0 656

0 646

0 635

0 625

0 614

0 604

0 593

0 583

0 572

0 562

0 551

0 541

0 530

0 520

0 509

0 498

0 488

477

467

456

446

435

425

414

404

393

383

372

362

351

341

330

319

309

298

288

277

267

256

246

235

225

214

204

193

183

172

162

151

140

130

119

109

98

88

77

67

56

46

35

25

14

***

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

34,692 or more 0 0 0 00 0
C-6 Appendix C

APPENDIX

STUDENT NOTES
Appendix D D-1

APPENDIX

 TAX TABLES Appendix D 

Draft as of

08/14/2003

2003

Tax Table

Use if your taxable income is less than $100,000.

If $100,000 or more, use the Tax Rate Schedules.

Example. Mr. and Mrs. Brown are filing a joint return. Their

taxable income on line 40 of Form 1040 is $25,300. First,

they find the $25,300–25,350 income line. Next, they find

the column for married filing jointly and read down the

column. The amount shown where the income line and filing

status column meet is $3,099. This is the tax amount they

should enter on line 41 of their Form 1040.

If line 40

(taxable

income) is— And you are—

At

least

But

less

than

Single Married

filing

jointly

*

Married

filing

separately

Head

of a

household

Your tax is—

If line 40

(taxable

income) is— And you are—

At

least

But

less

than

Single Married

filing

jointly

*

Married

filing

separately

Head

of a

household

Your tax is—

If line 40

(taxable

income) is— And you are—

At

least

But

less

than

Single Married

filing

jointly

*

Married

filing

separately

Head

of a

household

Your tax is—

* This column must also be used by a qualifying widow(er).

(Continued on page 64)

At

least

But

less

than

Single Married

filing

jointly

*

Married

filing

separately

Head

of a

household

Your tax is—

25,200

25,250

25,300

25,350

3,434

3,441

3,449

3,456

Sample Table

25,250

25,300

25,350

25,400

3,084

3,091

3,099

3,106

3,434

3,441

3,449

3,456

3,284

3,291

3,299

3,306

1,000

2,000

3,000

4,000

0 5 00 00

5 15 11 11

15 25 22 22

25 50 44 44

50 75 66 66

75 100 99 99

100 125 11 11 11 11

125 150 14 14 14 14

150 175 16 16 16 16

175 200 19 19 19 19

200 225 21 21 21 21

225 250 24 24 24 24

250 275 26 26 26 26

275 300 29 29 29 29

300 325 31 31 31 31

325 350 34 34 34 34

350 375 36 36 36 36

375 400 39 39 39 39

400 425 41 41 41 41

425 450 44 44 44 44

450 475 46 46 46 46

475 500 49 49 49 49

500 525 51 51 51 51

525 550 54 54 54 54

550 575 56 56 56 56

575 600 59 59 59 59

600 625 61 61 61 61

625 650 64 64 64 64

650 675 66 66 66 66

675 700 69 69 69 69

700 725 71 71 71 71

725 750 74 74 74 74

750 775 76 76 76 76

775 800 79 79 79 79

800 825 81 81 81 81

825 850 84 84 84 84

850 875 86 86 86 86

875 900 89 89 89 89

900 925 91 91 91 91

925 950 94 94 94 94

950 975 96 96 96 96

975 1,000 99 99 99 99

1,000 1,025 101 101 101 101

1,025 1,050 104 104 104 104

1,050 1,075 106 106 106 106

1,075 1,100 109 109 109 109

1,100 1,125 111 111 111 111

1,125 1,150 114 114 114 114

1,150 1,175 116 116 116 116

1,175 1,200 119 119 119 119

1,200 1,225 121 121 121 121

1,225 1,250 124 124 124 124

1,250 1,275 126 126 126 126

1,275 1,300 129 129 129 129

1,300 1,325 131 131 131 131

1,325 1,350 134 134 134 134

1,350 1,375 136 136 136 136

1,375 1,400 139 139 139 139

1,400 1,425 141 141 141 141

1,425 1,450 144 144 144 144

1,450 1,475 146 146 146 146

1,475 1,500 149 149 149 149

1,500 1,525 151 151 151 151

1,525 1,550 154 154 154 154

1,550 1,575 156 156 156 156

1,575 1,600 159 159 159 159

1,600 1,625 161 161 161 161

1,625 1,650 164 164 164 164

1,650 1,675 166 166 166 166

1,675 1,700 169 169 169 169

1,700 1,725 171 171 171 171

1,725 1,750 174 174 174 174

1,750 1,775 176 176 176 176

1,775 1,800 179 179 179 179

1,800 1,825 181 181 181 181

1,825 1,850 184 184 184 184

1,850 1,875 186 186 186 186

1,875 1,900 189 189 189 189

1,900 1,925 191 191 191 191

1,925 1,950 194 194 194 194

1,950 1,975 196 196 196 196

1,975 2,000 199 199 199 199

2,000 2,025 201 201 201 201

2,025 2,050 204 204 204 204

2,050 2,075 206 206 206 206

2,075 2,100 209 209 209 209

2,100 2,125 211 211 211 211

2,125 2,150 214 214 214 214

2,150 2,175 216 216 216 216

2,175 2,200 219 219 219 219

2,200 2,225 221 221 221 221

2,225 2,250 224 224 224 224

2,250 2,275 226 226 226 226

2,275 2,300 229 229 229 229

2,300 2,325 231 231 231 231

2,325 2,350 234 234 234 234

2,350 2,375 236 236 236 236

2,375 2,400 239 239 239 239

2,400 2,425 241 241 241 241

2,425 2,450 244 244 244 244

2,450 2,475 246 246 246 246

2,475 2,500 249 249 249 249

2,500 2,525 251 251 251 251

2,525 2,550 254 254 254 254

2,550 2,575 256 256 256 256

2,575 2,600 259 259 259 259

2,600 2,625 261 261 261 261

2,625 2,650 264 264 264 264

2,650 2,675 266 266 266 266

2,675 2,700 269 269 269 269

2,700 2,725 271 271 271 271

2,725 2,750 274 274 274 274

2,750 2,775 276 276 276 276

2,775 2,800 279 279 279 279

2,800 2,825 281 281 281 281

2,825 2,850 284 284 284 284

2,850 2,875 286 286 286 286

2,875 2,900 289 289 289 289

2,900 2,925 291 291 291 291

2,925 2,950 294 294 294 294

2,950 2,975 296 296 296 296

2,975 3,000 299 299 299 299

3,000 3,050 303 303 303 303

3,050 3,100 308 308 308 308

3,100 3,150 313 313 313 313

3,150 3,200 318 318 318 318

3,200 3,250 323 323 323 323

3,250 3,300 328 328 328 328

3,300 3,350 333 333 333 333

3,350 3,400 338 338 338 338

3,400 3,450 343 343 343 343

3,450 3,500 348 348 348 348

3,500 3,550 353 353 353 353

3,550 3,600 358 358 358 358

3,600 3,650 363 363 363 363

3,650 3,700 368 368 368 368

3,700 3,750 373 373 373 373

3,750 3,800 378 378 378 378

3,800 3,850 383 383 383 383

3,850 3,900 388 388 388 388

3,900 3,950 393 393 393 393

3,950 4,000 398 398 398 398

4,000 4,050 403 403 403 403

4,050 4,100 408 408 408 408

4,100 4,150 413 413 413 413

4,150 4,200 418 418 418 418

4,200 4,250 423 423 423 423

4,250 4,300 428 428 428 428

4,300 4,350 433 433 433 433

4,350 4,400 438 438 438 438

4,400 4,450 443 443 443 443

4,450 4,500 448 448 448 448

4,500 4,550 453 453 453 453

4,550 4,600 458 458 458 458

4,600 4,650 463 463 463 463

4,650 4,700 468 468 468 468

4,700 4,750 473 473 473 473

4,750 4,800 478 478 478 478

4,800 4,850 483 483 483 483

4,850 4,900 488 488 488 488

4,900 4,950 493 493 493 493

4,950 5,000 498 498 498 498
D-2 Appendix D

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 65)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

5,000 5,050 503 503 503 503

5,050 5,100 508 508 508 508

5,100 5,150 513 513 513 513

5,150 5,200 518 518 518 518

5,200 5,250 523 523 523 523

5,250 5,300 528 528 528 528

5,300 5,350 533 533 533 533

5,350 5,400 538 538 538 538

5,400 5,450 543 543 543 543

5,450 5,500 548 548 548 548

5,500 5,550 553 553 553 553

5,550 5,600 558 558 558 558

5,600 5,650 563 563 563 563

5,650 5,700 568 568 568 568

5,700 5,750 573 573 573 573

5,750 5,800 578 578 578 578

5,800 5,850 583 583 583 583

5,850 5,900 588 588 588 588

5,900 5,950 593 593 593 593

5,950 6,000 598 598 598 598

6,000 6,050 603 603 603 603

6,050 6,100 608 608 608 608

6,100 6,150 613 613 613 613

6,150 6,200 618 618 618 618

6,200 6,250 623 623 623 623

6,250 6,300 628 628 628 628

6,300 6,350 633 633 633 633

6,350 6,400 638 638 638 638

6,400 6,450 643 643 643 643

6,450 6,500 648 648 648 648

6,500 6,550 653 653 653 653

6,550 6,600 658 658 658 658

6,600 6,650 663 663 663 663

6,650 6,700 668 668 668 668

6,700 6,750 673 673 673 673

6,750 6,800 678 678 678 678

6,800 6,850 683 683 683 683

6,850 6,900 688 688 688 688

6,900 6,950 693 693 693 693

6,950 7,000 698 698 698 698

7,000 7,050 704 703 704 703

7,050 7,100 711 708 711 708

7,100 7,150 719 713 719 713

7,150 7,200 726 718 726 718

7,200 7,250 734 723 734 723

7,250 7,300 741 728 741 728

7,300 7,350 749 733 749 733

7,350 7,400 756 738 756 738

7,400 7,450 764 743 764 743

7,450 7,500 771 748 771 748

7,500 7,550 779 753 779 753

7,550 7,600 786 758 786 758

7,600 7,650 794 763 794 763

7,650 7,700 801 768 801 768

7,700 7,750 809 773 809 773

7,750 7,800 816 778 816 778

7,800 7,850 824 783 824 783

7,850 7,900 831 788 831 788

7,900 7,950 839 793 839 793

7,950 8,000 846 798 846 798

8,000 8,050 854 803 854 803

8,050 8,100 861 808 861 808

8,100 8,150 869 813 869 813

8,150 8,200 876 818 876 818

8,200 8,250 884 823 884 823

8,250 8,300 891 828 891 828

8,300 8,350 899 833 899 833

8,350 8,400 906 838 906 838

8,400 8,450 914 843 914 843

8,450 8,500 921 848 921 848

8,500 8,550 929 853 929 853

8,550 8,600 936 858 936 858

8,600 8,650 944 863 944 863

8,650 8,700 951 868 951 868

8,700 8,750 959 873 959 873

8,750 8,800 966 878 966 878

8,800 8,850 974 883 974 883

8,850 8,900 981 888 981 888

8,900 8,950 989 893 989 893

8,950 9,000 996 898 996 898

9,000 9,050 1,004 903 1,004 903

9,050 9,100 1,011 908 1,011 908

9,100 9,150 1,019 913 1,019 913

9,150 9,200 1,026 918 1,026 918

9,200 9,250 1,034 923 1,034 923

9,250 9,300 1,041 928 1,041 928

9,300 9,350 1,049 933 1,049 933

9,350 9,400 1,056 938 1,056 938

9,400 9,450 1,064 943 1,064 943

9,450 9,500 1,071 948 1,071 948

9,500 9,550 1,079 953 1,079 953

9,550 9,600 1,086 958 1,086 958

9,600 9,650 1,094 963 1,094 963

9,650 9,700 1,101 968 1,101 968

9,700 9,750 1,109 973 1,109 973

9,750 9,800 1,116 978 1,116 978

9,800 9,850 1,124 983 1,124 983

9,850 9,900 1,131 988 1,131 988

9,900 9,950 1,139 993 1,139 993

9,950 10,000 1,146 998 1,146 998

10,000 10,050 1,154 1,003 1,154 1,004

10,050 10,100 1,161 1,008 1,161 1,011

10,100 10,150 1,169 1,013 1,169 1,019

10,150 10,200 1,176 1,018 1,176 1,026

10,200 10,250 1,184 1,023 1,184 1,034

10,250 10,300 1,191 1,028 1,191 1,041

10,300 10,350 1,199 1,033 1,199 1,049

10,350 10,400 1,206 1,038 1,206 1,056

10,400 10,450 1,214 1,043 1,214 1,064

10,450 10,500 1,221 1,048 1,221 1,071

10,500 10,550 1,229 1,053 1,229 1,079

10,550 10,600 1,236 1,058 1,236 1,086

10,600 10,650 1,244 1,063 1,244 1,094

10,650 10,700 1,251 1,068 1,251 1,101

10,700 10,750 1,259 1,073 1,259 1,109

10,750 10,800 1,266 1,078 1,266 1,116

10,800 10,850 1,274 1,083 1,274 1,124

10,850 10,900 1,281 1,088 1,281 1,131

10,900 10,950 1,289 1,093 1,289 1,139

10,950 11,000 1,296 1,098 1,296 1,146

11,000 11,050 1,304 1,103 1,304 1,154

11,050 11,100 1,311 1,108 1,311 1,161

11,100 11,150 1,319 1,113 1,319 1,169

11,150 11,200 1,326 1,118 1,326 1,176

11,200 11,250 1,334 1,123 1,334 1,184

11,250 11,300 1,341 1,128 1,341 1,191

11,300 11,350 1,349 1,133 1,349 1,199

11,350 11,400 1,356 1,138 1,356 1,206

11,400 11,450 1,364 1,143 1,364 1,214

11,450 11,500 1,371 1,148 1,371 1,221

11,500 11,550 1,379 1,153 1,379 1,229

11,550 11,600 1,386 1,158 1,386 1,236

11,600 11,650 1,394 1,163 1,394 1,244

11,650 11,700 1,401 1,168 1,401 1,251

11,700 11,750 1,409 1,173 1,409 1,259

11,750 11,800 1,416 1,178 1,416 1,266

11,800 11,850 1,424 1,183 1,424 1,274

11,850 11,900 1,431 1,188 1,431 1,281

11,900 11,950 1,439 1,193 1,439 1,289

11,950 12,000 1,446 1,198 1,446 1,296

12,000 12,050 1,454 1,203 1,454 1,304

12,050 12,100 1,461 1,208 1,461 1,311

12,100 12,150 1,469 1,213 1,469 1,319

12,150 12,200 1,476 1,218 1,476 1,326

12,200 12,250 1,484 1,223 1,484 1,334

12,250 12,300 1,491 1,228 1,491 1,341

12,300 12,350 1,499 1,233 1,499 1,349

12,350 12,400 1,506 1,238 1,506 1,356

12,400 12,450 1,514 1,243 1,514 1,364

12,450 12,500 1,521 1,248 1,521 1,371

12,500 12,550 1,529 1,253 1,529 1,379

12,550 12,600 1,536 1,258 1,536 1,386

12,600 12,650 1,544 1,263 1,544 1,394

12,650 12,700 1,551 1,268 1,551 1,401

12,700 12,750 1,559 1,273 1,559 1,409

12,750 12,800 1,566 1,278 1,566 1,416

12,800 12,850 1,574 1,283 1,574 1,424

12,850 12,900 1,581 1,288 1,581 1,431

12,900 12,950 1,589 1,293 1,589 1,439

12,950 13,000 1,596 1,298 1,596 1,446

13,000 13,050 1,604 1,303 1,604 1,454

13,050 13,100 1,611 1,308 1,611 1,461

13,100 13,150 1,619 1,313 1,619 1,469

13,150 13,200 1,626 1,318 1,626 1,476

13,200 13,250 1,634 1,323 1,634 1,484

13,250 13,300 1,641 1,328 1,641 1,491

13,300 13,350 1,649 1,333 1,649 1,499

13,350 13,400 1,656 1,338 1,656 1,506

13,400 13,450 1,664 1,343 1,664 1,514

13,450 13,500 1,671 1,348 1,671 1,521

13,500 13,550 1,679 1,353 1,679 1,529

13,550 13,600 1,686 1,358 1,686 1,536

13,600 13,650 1,694 1,363 1,694 1,544

13,650 13,700 1,701 1,368 1,701 1,551

13,700 13,750 1,709 1,373 1,709 1,559

13,750 13,800 1,716 1,378 1,716 1,566

13,800 13,850 1,724 1,383 1,724 1,574

13,850 13,900 1,731 1,388 1,731 1,581

13,900 13,950 1,739 1,393 1,739 1,589

13,950 14,000 1,746 1,398 1,746 1,596
Appendix D D-3

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 66)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

14,000 14,050 1,754 1,404 1,754 1,604

14,050 14,100 1,761 1,411 1,761 1,611

14,100 14,150 1,769 1,419 1,769 1,619

14,150 14,200 1,776 1,426 1,776 1,626

14,200 14,250 1,784 1,434 1,784 1,634

14,250 14,300 1,791 1,441 1,791 1,641

14,300 14,350 1,799 1,449 1,799 1,649

14,350 14,400 1,806 1,456 1,806 1,656

14,400 14,450 1,814 1,464 1,814 1,664

14,450 14,500 1,821 1,471 1,821 1,671

14,500 14,550 1,829 1,479 1,829 1,679

14,550 14,600 1,836 1,486 1,836 1,686

14,600 14,650 1,844 1,494 1,844 1,694

14,650 14,700 1,851 1,501 1,851 1,701

14,700 14,750 1,859 1,509 1,859 1,709

14,750 14,800 1,866 1,516 1,866 1,716

14,800 14,850 1,874 1,524 1,874 1,724

14,850 14,900 1,881 1,531 1,881 1,731

14,900 14,950 1,889 1,539 1,889 1,739

14,950 15,000 1,896 1,546 1,896 1,746

15,000 15,050 1,904 1,554 1,904 1,754

15,050 15,100 1,911 1,561 1,911 1,761

15,100 15,150 1,919 1,569 1,919 1,769

15,150 15,200 1,926 1,576 1,926 1,776

15,200 15,250 1,934 1,584 1,934 1,784

15,250 15,300 1,941 1,591 1,941 1,791

15,300 15,350 1,949 1,599 1,949 1,799

15,350 15,400 1,956 1,606 1,956 1,806

15,400 15,450 1,964 1,614 1,964 1,814

15,450 15,500 1,971 1,621 1,971 1,821

15,500 15,550 1,979 1,629 1,979 1,829

15,550 15,600 1,986 1,636 1,986 1,836

15,600 15,650 1,994 1,644 1,994 1,844

15,650 15,700 2,001 1,651 2,001 1,851

15,700 15,750 2,009 1,659 2,009 1,859

15,750 15,800 2,016 1,666 2,016 1,866

15,800 15,850 2,024 1,674 2,024 1,874

15,850 15,900 2,031 1,681 2,031 1,881

15,900 15,950 2,039 1,689 2,039 1,889

15,950 16,000 2,046 1,696 2,046 1,896

16,000 16,050 2,054 1,704 2,054 1,904

16,050 16,100 2,061 1,711 2,061 1,911

16,100 16,150 2,069 1,719 2,069 1,919

16,150 16,200 2,076 1,726 2,076 1,926

16,200 16,250 2,084 1,734 2,084 1,934

16,250 16,300 2,091 1,741 2,091 1,941

16,300 16,350 2,099 1,749 2,099 1,949

16,350 16,400 2,106 1,756 2,106 1,956

16,400 16,450 2,114 1,764 2,114 1,964

16,450 16,500 2,121 1,771 2,121 1,971

16,500 16,550 2,129 1,779 2,129 1,979

16,550 16,600 2,136 1,786 2,136 1,986

16,600 16,650 2,144 1,794 2,144 1,994

16,650 16,700 2,151 1,801 2,151 2,001

16,700 16,750 2,159 1,809 2,159 2,009

16,750 16,800 2,166 1,816 2,166 2,016

16,800 16,850 2,174 1,824 2,174 2,024

16,850 16,900 2,181 1,831 2,181 2,031

16,900 16,950 2,189 1,839 2,189 2,039

16,950 17,000 2,196 1,846 2,196 2,046

17,000 17,050 2,204 1,854 2,204 2,054

17,050 17,100 2,211 1,861 2,211 2,061

17,100 17,150 2,219 1,869 2,219 2,069

17,150 17,200 2,226 1,876 2,226 2,076

17,200 17,250 2,234 1,884 2,234 2,084

17,250 17,300 2,241 1,891 2,241 2,091

17,300 17,350 2,249 1,899 2,249 2,099

17,350 17,400 2,256 1,906 2,256 2,106

17,400 17,450 2,264 1,914 2,264 2,114

17,450 17,500 2,271 1,921 2,271 2,121

17,500 17,550 2,279 1,929 2,279 2,129

17,550 17,600 2,286 1,936 2,286 2,136

17,600 17,650 2,294 1,944 2,294 2,144

17,650 17,700 2,301 1,951 2,301 2,151

17,700 17,750 2,309 1,959 2,309 2,159

17,750 17,800 2,316 1,966 2,316 2,166

17,800 17,850 2,324 1,974 2,324 2,174

17,850 17,900 2,331 1,981 2,331 2,181

17,900 17,950 2,339 1,989 2,339 2,189

17,950 18,000 2,346 1,996 2,346 2,196

18,000 18,050 2,354 2,004 2,354 2,204

18,050 18,100 2,361 2,011 2,361 2,211

18,100 18,150 2,369 2,019 2,369 2,219

18,150 18,200 2,376 2,026 2,376 2,226

18,200 18,250 2,384 2,034 2,384 2,234

18,250 18,300 2,391 2,041 2,391 2,241

18,300 18,350 2,399 2,049 2,399 2,249

18,350 18,400 2,406 2,056 2,406 2,256

18,400 18,450 2,414 2,064 2,414 2,264

18,450 18,500 2,421 2,071 2,421 2,271

18,500 18,550 2,429 2,079 2,429 2,279

18,550 18,600 2,436 2,086 2,436 2,286

18,600 18,650 2,444 2,094 2,444 2,294

18,650 18,700 2,451 2,101 2,451 2,301

18,700 18,750 2,459 2,109 2,459 2,309

18,750 18,800 2,466 2,116 2,466 2,316

18,800 18,850 2,474 2,124 2,474 2,324

18,850 18,900 2,481 2,131 2,481 2,331

18,900 18,950 2,489 2,139 2,489 2,339

18,950 19,000 2,496 2,146 2,496 2,346

19,000 19,050 2,504 2,154 2,504 2,354

19,050 19,100 2,511 2,161 2,511 2,361

19,100 19,150 2,519 2,169 2,519 2,369

19,150 19,200 2,526 2,176 2,526 2,376

19,200 19,250 2,534 2,184 2,534 2,384

19,250 19,300 2,541 2,191 2,541 2,391

19,300 19,350 2,549 2,199 2,549 2,399

19,350 19,400 2,556 2,206 2,556 2,406

19,400 19,450 2,564 2,214 2,564 2,414

19,450 19,500 2,571 2,221 2,571 2,421

19,500 19,550 2,579 2,229 2,579 2,429

19,550 19,600 2,586 2,236 2,586 2,436

19,600 19,650 2,594 2,244 2,594 2,444

19,650 19,700 2,601 2,251 2,601 2,451

19,700 19,750 2,609 2,259 2,609 2,459

19,750 19,800 2,616 2,266 2,616 2,466

19,800 19,850 2,624 2,274 2,624 2,474

19,850 19,900 2,631 2,281 2,631 2,481

19,900 19,950 2,639 2,289 2,639 2,489

19,950 20,000 2,646 2,296 2,646 2,496

20,000 20,050 2,654 2,304 2,654 2,504

20,050 20,100 2,661 2,311 2,661 2,511

20,100 20,150 2,669 2,319 2,669 2,519

20,150 20,200 2,676 2,326 2,676 2,526

20,200 20,250 2,684 2,334 2,684 2,534

20,250 20,300 2,691 2,341 2,691 2,541

20,300 20,350 2,699 2,349 2,699 2,549

20,350 20,400 2,706 2,356 2,706 2,556

20,400 20,450 2,714 2,364 2,714 2,564

20,450 20,500 2,721 2,371 2,721 2,571

20,500 20,550 2,729 2,379 2,729 2,579

20,550 20,600 2,736 2,386 2,736 2,586

20,600 20,650 2,744 2,394 2,744 2,594

20,650 20,700 2,751 2,401 2,751 2,601

20,700 20,750 2,759 2,409 2,759 2,609

20,750 20,800 2,766 2,416 2,766 2,616

20,800 20,850 2,774 2,424 2,774 2,624

20,850 20,900 2,781 2,431 2,781 2,631

20,900 20,950 2,789 2,439 2,789 2,639

20,950 21,000 2,796 2,446 2,796 2,646

21,000 21,050 2,804 2,454 2,804 2,654

21,050 21,100 2,811 2,461 2,811 2,661

21,100 21,150 2,819 2,469 2,819 2,669

21,150 21,200 2,826 2,476 2,826 2,676

21,200 21,250 2,834 2,484 2,834 2,684

21,250 21,300 2,841 2,491 2,841 2,691

21,300 21,350 2,849 2,499 2,849 2,699

21,350 21,400 2,856 2,506 2,856 2,706

21,400 21,450 2,864 2,514 2,864 2,714

21,450 21,500 2,871 2,521 2,871 2,721

21,500 21,550 2,879 2,529 2,879 2,729

21,550 21,600 2,886 2,536 2,886 2,736

21,600 21,650 2,894 2,544 2,894 2,744

21,650 21,700 2,901 2,551 2,901 2,751

21,700 21,750 2,909 2,559 2,909 2,759

21,750 21,800 2,916 2,566 2,916 2,766

21,800 21,850 2,924 2,574 2,924 2,774

21,850 21,900 2,931 2,581 2,931 2,781

21,900 21,950 2,939 2,589 2,939 2,789

21,950 22,000 2,946 2,596 2,946 2,796

22,000 22,050 2,954 2,604 2,954 2,804

22,050 22,100 2,961 2,611 2,961 2,811

22,100 22,150 2,969 2,619 2,969 2,819

22,150 22,200 2,976 2,626 2,976 2,826

22,200 22,250 2,984 2,634 2,984 2,834

22,250 22,300 2,991 2,641 2,991 2,841

22,300 22,350 2,999 2,649 2,999 2,849

22,350 22,400 3,006 2,656 3,006 2,856

22,400 22,450 3,014 2,664 3,014 2,864

22,450 22,500 3,021 2,671 3,021 2,871

22,500 22,550 3,029 2,679 3,029 2,879

22,550 22,600 3,036 2,686 3,036 2,886

22,600 22,650 3,044 2,694 3,044 2,894

22,650 22,700 3,051 2,701 3,051 2,901

22,700 22,750 3,059 2,709 3,059 2,909

22,750 22,800 3,066 2,716 3,066 2,916

22,800 22,850 3,074 2,724 3,074 2,924

22,850 22,900 3,081 2,731 3,081 2,931

22,900 22,950 3,089 2,739 3,089 2,939

22,950 23,000 3,096 2,746 3,096 2,946
D-4 Appendix D

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 67)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,000

23,000 23,050 3,104 2,754 3,104 2,954

23,050 23,100 3,111 2,761 3,111 2,961

23,100 23,150 3,119 2,769 3,119 2,969

23,150 23,200 3,126 2,776 3,126 2,976

23,200 23,250 3,134 2,784 3,134 2,984

23,250 23,300 3,141 2,791 3,141 2,991

23,300 23,350 3,149 2,799 3,149 2,999

23,350 23,400 3,156 2,806 3,156 3,006

23,400 23,450 3,164 2,814 3,164 3,014

23,450 23,500 3,171 2,821 3,171 3,021

23,500 23,550 3,179 2,829 3,179 3,029

23,550 23,600 3,186 2,836 3,186 3,036

23,600 23,650 3,194 2,844 3,194 3,044

23,650 23,700 3,201 2,851 3,201 3,051

23,700 23,750 3,209 2,859 3,209 3,059

23,750 23,800 3,216 2,866 3,216 3,066

23,800 23,850 3,224 2,874 3,224 3,074

23,850 23,900 3,231 2,881 3,231 3,081

23,900 23,950 3,239 2,889 3,239 3,089

23,950 24,000 3,246 2,896 3,246 3,096

24,000 24,050 3,254 2,904 3,254 3,104

24,050 24,100 3,261 2,911 3,261 3,111

24,100 24,150 3,269 2,919 3,269 3,119

24,150 24,200 3,276 2,926 3,276 3,126

24,200 24,250 3,284 2,934 3,284 3,134

24,250 24,300 3,291 2,941 3,291 3,141

24,300 24,350 3,299 2,949 3,299 3,149

24,350 24,400 3,306 2,956 3,306 3,156

24,400 24,450 3,314 2,964 3,314 3,164

24,450 24,500 3,321 2,971 3,321 3,171

24,500 24,550 3,329 2,979 3,329 3,179

24,550 24,600 3,336 2,986 3,336 3,186

24,600 24,650 3,344 2,994 3,344 3,194

24,650 24,700 3,351 3,001 3,351 3,201

24,700 24,750 3,359 3,009 3,359 3,209

24,750 24,800 3,366 3,016 3,366 3,216

24,800 24,850 3,374 3,024 3,374 3,224

24,850 24,900 3,381 3,031 3,381 3,231

24,900 24,950 3,389 3,039 3,389 3,239

24,950 25,000 3,396 3,046 3,396 3,246

25,000 25,050 3,404 3,054 3,404 3,254

25,050 25,100 3,411 3,061 3,411 3,261

25,100 25,150 3,419 3,069 3,419 3,269

25,150 25,200 3,426 3,076 3,426 3,276

25,200 25,250 3,434 3,084 3,434 3,284

25,250 25,300 3,441 3,091 3,441 3,291

25,300 25,350 3,449 3,099 3,449 3,299

25,350 25,400 3,456 3,106 3,456 3,306

25,400 25,450 3,464 3,114 3,464 3,314

25,450 25,500 3,471 3,121 3,471 3,321

25,500 25,550 3,479 3,129 3,479 3,329

25,550 25,600 3,486 3,136 3,486 3,336

25,600 25,650 3,494 3,144 3,494 3,344

25,650 25,700 3,501 3,151 3,501 3,351

25,700 25,750 3,509 3,159 3,509 3,359

25,750 25,800 3,516 3,166 3,516 3,366

25,800 25,850 3,524 3,174 3,524 3,374

25,850 25,900 3,531 3,181 3,531 3,381

25,900 25,950 3,539 3,189 3,539 3,389

25,950 26,000 3,546 3,196 3,546 3,396

26,000 26,050 3,554 3,204 3,554 3,404

26,050 26,100 3,561 3,211 3,561 3,411

26,100 26,150 3,569 3,219 3,569 3,419

26,150 26,200 3,576 3,226 3,576 3,426

26,200 26,250 3,584 3,234 3,584 3,434

26,250 26,300 3,591 3,241 3,591 3,441

26,300 26,350 3,599 3,249 3,599 3,449

26,350 26,400 3,606 3,256 3,606 3,456

26,400 26,450 3,614 3,264 3,614 3,464

26,450 26,500 3,621 3,271 3,621 3,471

26,500 26,550 3,629 3,279 3,629 3,479

26,550 26,600 3,636 3,286 3,636 3,486

26,600 26,650 3,644 3,294 3,644 3,494

26,650 26,700 3,651 3,301 3,651 3,501

26,700 26,750 3,659 3,309 3,659 3,509

26,750 26,800 3,666 3,316 3,666 3,516

26,800 26,850 3,674 3,324 3,674 3,524

26,850 26,900 3,681 3,331 3,681 3,531

26,900 26,950 3,689 3,339 3,689 3,539

26,950 27,000 3,696 3,346 3,696 3,546

27,000 27,050 3,704 3,354 3,704 3,554

27,050 27,100 3,711 3,361 3,711 3,561

27,100 27,150 3,719 3,369 3,719 3,569

27,150 27,200 3,726 3,376 3,726 3,576

27,200 27,250 3,734 3,384 3,734 3,584

27,250 27,300 3,741 3,391 3,741 3,591

27,300 27,350 3,749 3,399 3,749 3,599

27,350 27,400 3,756 3,406 3,756 3,606

27,400 27,450 3,764 3,414 3,764 3,614

27,450 27,500 3,771 3,421 3,771 3,621

27,500 27,550 3,779 3,429 3,779 3,629

27,550 27,600 3,786 3,436 3,786 3,636

27,600 27,650 3,794 3,444 3,794 3,644

27,650 27,700 3,801 3,451 3,801 3,651

27,700 27,750 3,809 3,459 3,809 3,659

27,750 27,800 3,816 3,466 3,816 3,666

27,800 27,850 3,824 3,474 3,824 3,674

27,850 27,900 3,831 3,481 3,831 3,681

27,900 27,950 3,839 3,489 3,839 3,689

27,950 28,000 3,846 3,496 3,846 3,696

28,000 28,050 3,854 3,504 3,854 3,704

28,050 28,100 3,861 3,511 3,861 3,711

28,100 28,150 3,869 3,519 3,869 3,719

28,150 28,200 3,876 3,526 3,876 3,726

28,200 28,250 3,884 3,534 3,884 3,734

28,250 28,300 3,891 3,541 3,891 3,741

28,300 28,350 3,899 3,549 3,899 3,749

28,350 28,400 3,906 3,556 3,906 3,756

28,400 28,450 3,916 3,564 3,916 3,764

28,450 28,500 3,929 3,571 3,929 3,771

28,500 28,550 3,941 3,579 3,941 3,779

28,550 28,600 3,954 3,586 3,954 3,786

28,600 28,650 3,966 3,594 3,966 3,794

28,650 28,700 3,979 3,601 3,979 3,801

28,700 28,750 3,991 3,609 3,991 3,809

28,750 28,800 4,004 3,616 4,004 3,816

28,800 28,850 4,016 3,624 4,016 3,824

28,850 28,900 4,029 3,631 4,029 3,831

28,900 28,950 4,041 3,639 4,041 3,839

28,950 29,000 4,054 3,646 4,054 3,846

29,000 29,050 4,066 3,654 4,066 3,854

29,050 29,100 4,079 3,661 4,079 3,861

29,100 29,150 4,091 3,669 4,091 3,869

29,150 29,200 4,104 3,676 4,104 3,876

29,200 29,250 4,116 3,684 4,116 3,884

29,250 29,300 4,129 3,691 4,129 3,891

29,300 29,350 4,141 3,699 4,141 3,899

29,350 29,400 4,154 3,706 4,154 3,906

29,400 29,450 4,166 3,714 4,166 3,914

29,450 29,500 4,179 3,721 4,179 3,921

29,500 29,550 4,191 3,729 4,191 3,929

29,550 29,600 4,204 3,736 4,204 3,936

29,600 29,650 4,216 3,744 4,216 3,944

29,650 29,700 4,229 3,751 4,229 3,951

29,700 29,750 4,241 3,759 4,241 3,959

29,750 29,800 4,254 3,766 4,254 3,966

29,800 29,850 4,266 3,774 4,266 3,974

29,850 29,900 4,279 3,781 4,279 3,981

29,900 29,950 4,291 3,789 4,291 3,989

29,950 30,000 4,304 3,796 4,304 3,996

30,000 30,050 4,316 3,804 4,316 4,004

30,050 30,100 4,329 3,811 4,329 4,011

30,100 30,150 4,341 3,819 4,341 4,019

30,150 30,200 4,354 3,826 4,354 4,026

30,200 30,250 4,366 3,834 4,366 4,034

30,250 30,300 4,379 3,841 4,379 4,041

30,300 30,350 4,391 3,849 4,391 4,049

30,350 30,400 4,404 3,856 4,404 4,056

30,400 30,450 4,416 3,864 4,416 4,064

30,450 30,500 4,429 3,871 4,429 4,071

30,500 30,550 4,441 3,879 4,441 4,079

30,550 30,600 4,454 3,886 4,454 4,086

30,600 30,650 4,466 3,894 4,466 4,094

30,650 30,700 4,479 3,901 4,479 4,101

30,700 30,750 4,491 3,909 4,491 4,109

30,750 30,800 4,504 3,916 4,504 4,116

30,800 30,850 4,516 3,924 4,516 4,124

30,850 30,900 4,529 3,931 4,529 4,131

30,900 30,950 4,541 3,939 4,541 4,139

30,950 31,000 4,554 3,946 4,554 4,146

31,000 31,050 4,566 3,954 4,566 4,154

31,050 31,100 4,579 3,961 4,579 4,161

31,100 31,150 4,591 3,969 4,591 4,169

31,150 31,200 4,604 3,976 4,604 4,176

31,200 31,250 4,616 3,984 4,616 4,184

31,250 31,300 4,629 3,991 4,629 4,191

31,300 31,350 4,641 3,999 4,641 4,199

31,350 31,400 4,654 4,006 4,654 4,206

31,400 31,450 4,666 4,014 4,666 4,214

31,450 31,500 4,679 4,021 4,679 4,221

31,500 31,550 4,691 4,029 4,691 4,229

31,550 31,600 4,704 4,036 4,704 4,236

31,600 31,650 4,716 4,044 4,716 4,244

31,650 31,700 4,729 4,051 4,729 4,251

31,700 31,750 4,741 4,059 4,741 4,259

31,750 31,800 4,754 4,066 4,754 4,266

31,800 31,850 4,766 4,074 4,766 4,274

31,850 31,900 4,779 4,081 4,779 4,281

31,900 31,950 4,791 4,089 4,791 4,289

31,950 32,000 4,804 4,096 4,804 4,296
Appendix D D-5

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 68)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

32,000

33,000

34,000

35,000

36,000

37,000

38,000

39,000

40,000

32,000 32,050 4,816 4,104 4,816 4,304

32,050 32,100 4,829 4,111 4,829 4,311

32,100 32,150 4,841 4,119 4,841 4,319

32,150 32,200 4,854 4,126 4,854 4,326

32,200 32,250 4,866 4,134 4,866 4,334

32,250 32,300 4,879 4,141 4,879 4,341

32,300 32,350 4,891 4,149 4,891 4,349

32,350 32,400 4,904 4,156 4,904 4,356

32,400 32,450 4,916 4,164 4,916 4,364

32,450 32,500 4,929 4,171 4,929 4,371

32,500 32,550 4,941 4,179 4,941 4,379

32,550 32,600 4,954 4,186 4,954 4,386

32,600 32,650 4,966 4,194 4,966 4,394

32,650 32,700 4,979 4,201 4,979 4,401

32,700 32,750 4,991 4,209 4,991 4,409

32,750 32,800 5,004 4,216 5,004 4,416

32,800 32,850 5,016 4,224 5,016 4,424

32,850 32,900 5,029 4,231 5,029 4,431

32,900 32,950 5,041 4,239 5,041 4,439

32,950 33,000 5,054 4,246 5,054 4,446

33,000 33,050 5,066 4,254 5,066 4,454

33,050 33,100 5,079 4,261 5,079 4,461

33,100 33,150 5,091 4,269 5,091 4,469

33,150 33,200 5,104 4,276 5,104 4,476

33,200 33,250 5,116 4,284 5,116 4,484

33,250 33,300 5,129 4,291 5,129 4,491

33,300 33,350 5,141 4,299 5,141 4,499

33,350 33,400 5,154 4,306 5,154 4,506

33,400 33,450 5,166 4,314 5,166 4,514

33,450 33,500 5,179 4,321 5,179 4,521

33,500 33,550 5,191 4,329 5,191 4,529

33,550 33,600 5,204 4,336 5,204 4,536

33,600 33,650 5,216 4,344 5,216 4,544

33,650 33,700 5,229 4,351 5,229 4,551

33,700 33,750 5,241 4,359 5,241 4,559

33,750 33,800 5,254 4,366 5,254 4,566

33,800 33,850 5,266 4,374 5,266 4,574

33,850 33,900 5,279 4,381 5,279 4,581

33,900 33,950 5,291 4,389 5,291 4,589

33,950 34,000 5,304 4,396 5,304 4,596

34,000 34,050 5,316 4,404 5,316 4,604

34,050 34,100 5,329 4,411 5,329 4,611

34,100 34,150 5,341 4,419 5,341 4,619

34,150 34,200 5,354 4,426 5,354 4,626

34,200 34,250 5,366 4,434 5,366 4,634

34,250 34,300 5,379 4,441 5,379 4,641

34,300 34,350 5,391 4,449 5,391 4,649

34,350 34,400 5,404 4,456 5,404 4,656

34,400 34,450 5,416 4,464 5,416 4,664

34,450 34,500 5,429 4,471 5,429 4,671

34,500 34,550 5,441 4,479 5,441 4,679

34,550 34,600 5,454 4,486 5,454 4,686

34,600 34,650 5,466 4,494 5,466 4,694

34,650 34,700 5,479 4,501 5,479 4,701

34,700 34,750 5,491 4,509 5,491 4,709

34,750 34,800 5,504 4,516 5,504 4,716

34,800 34,850 5,516 4,524 5,516 4,724

34,850 34,900 5,529 4,531 5,529 4,731

34,900 34,950 5,541 4,539 5,541 4,739

34,950 35,000 5,554 4,546 5,554 4,746

35,000 35,050 5,566 4,554 5,566 4,754

35,050 35,100 5,579 4,561 5,579 4,761

35,100 35,150 5,591 4,569 5,591 4,769

35,150 35,200 5,604 4,576 5,604 4,776

35,200 35,250 5,616 4,584 5,616 4,784

35,250 35,300 5,629 4,591 5,629 4,791

35,300 35,350 5,641 4,599 5,641 4,799

35,350 35,400 5,654 4,606 5,654 4,806

35,400 35,450 5,666 4,614 5,666 4,814

35,450 35,500 5,679 4,621 5,679 4,821

35,500 35,550 5,691 4,629 5,691 4,829

35,550 35,600 5,704 4,636 5,704 4,836

35,600 35,650 5,716 4,644 5,716 4,844

35,650 35,700 5,729 4,651 5,729 4,851

35,700 35,750 5,741 4,659 5,741 4,859

35,750 35,800 5,754 4,666 5,754 4,866

35,800 35,850 5,766 4,674 5,766 4,874

35,850 35,900 5,779 4,681 5,779 4,881

35,900 35,950 5,791 4,689 5,791 4,889

35,950 36,000 5,804 4,696 5,804 4,896

36,000 36,050 5,816 4,704 5,816 4,904

36,050 36,100 5,829 4,711 5,829 4,911

36,100 36,150 5,841 4,719 5,841 4,919

36,150 36,200 5,854 4,726 5,854 4,926

36,200 36,250 5,866 4,734 5,866 4,934

36,250 36,300 5,879 4,741 5,879 4,941

36,300 36,350 5,891 4,749 5,891 4,949

36,350 36,400 5,904 4,756 5,904 4,956

36,400 36,450 5,916 4,764 5,916 4,964

36,450 36,500 5,929 4,771 5,929 4,971

36,500 36,550 5,941 4,779 5,941 4,979

36,550 36,600 5,954 4,786 5,954 4,986

36,600 36,650 5,966 4,794 5,966 4,994

36,650 36,700 5,979 4,801 5,979 5,001

36,700 36,750 5,991 4,809 5,991 5,009

36,750 36,800 6,004 4,816 6,004 5,016

36,800 36,850 6,016 4,824 6,016 5,024

36,850 36,900 6,029 4,831 6,029 5,031

36,900 36,950 6,041 4,839 6,041 5,039

36,950 37,000 6,054 4,846 6,054 5,046

37,000 37,050 6,066 4,854 6,066 5,054

37,050 37,100 6,079 4,861 6,079 5,061

37,100 37,150 6,091 4,869 6,091 5,069

37,150 37,200 6,104 4,876 6,104 5,076

37,200 37,250 6,116 4,884 6,116 5,084

37,250 37,300 6,129 4,891 6,129 5,091

37,300 37,350 6,141 4,899 6,141 5,099

37,350 37,400 6,154 4,906 6,154 5,106

37,400 37,450 6,166 4,914 6,166 5,114

37,450 37,500 6,179 4,921 6,179 5,121

37,500 37,550 6,191 4,929 6,191 5,129

37,550 37,600 6,204 4,936 6,204 5,136

37,600 37,650 6,216 4,944 6,216 5,144

37,650 37,700 6,229 4,951 6,229 5,151

37,700 37,750 6,241 4,959 6,241 5,159

37,750 37,800 6,254 4,966 6,254 5,166

37,800 37,850 6,266 4,974 6,266 5,174

37,850 37,900 6,279 4,981 6,279 5,181

37,900 37,950 6,291 4,989 6,291 5,189

37,950 38,000 6,304 4,996 6,304 5,196

38,000 38,050 6,316 5,004 6,316 5,204

38,050 38,100 6,329 5,011 6,329 5,214

38,100 38,150 6,341 5,019 6,341 5,226

38,150 38,200 6,354 5,026 6,354 5,239

38,200 38,250 6,366 5,034 6,366 5,251

38,250 38,300 6,379 5,041 6,379 5,264

38,300 38,350 6,391 5,049 6,391 5,276

38,350 38,400 6,404 5,056 6,404 5,289

38,400 38,450 6,416 5,064 6,416 5,301

38,450 38,500 6,429 5,071 6,429 5,314

38,500 38,550 6,441 5,079 6,441 5,326

38,550 38,600 6,454 5,086 6,454 5,339

38,600 38,650 6,466 5,094 6,466 5,351

38,650 38,700 6,479 5,101 6,479 5,364

38,700 38,750 6,491 5,109 6,491 5,376

38,750 38,800 6,504 5,116 6,504 5,389

38,800 38,850 6,516 5,124 6,516 5,401

38,850 38,900 6,529 5,131 6,529 5,414

38,900 38,950 6,541 5,139 6,541 5,426

38,950 39,000 6,554 5,146 6,554 5,439

39,000 39,050 6,566 5,154 6,566 5,451

39,050 39,100 6,579 5,161 6,579 5,464

39,100 39,150 6,591 5,169 6,591 5,476

39,150 39,200 6,604 5,176 6,604 5,489

39,200 39,250 6,616 5,184 6,616 5,501

39,250 39,300 6,629 5,191 6,629 5,514

39,300 39,350 6,641 5,199 6,641 5,526

39,350 39,400 6,654 5,206 6,654 5,539

39,400 39,450 6,666 5,214 6,666 5,551

39,450 39,500 6,679 5,221 6,679 5,564

39,500 39,550 6,691 5,229 6,691 5,576

39,550 39,600 6,704 5,236 6,704 5,589

39,600 39,650 6,716 5,244 6,716 5,601

39,650 39,700 6,729 5,251 6,729 5,614

39,700 39,750 6,741 5,259 6,741 5,626

39,750 39,800 6,754 5,266 6,754 5,639

39,800 39,850 6,766 5,274 6,766 5,651

39,850 39,900 6,779 5,281 6,779 5,664

39,900 39,950 6,791 5,289 6,791 5,676

39,950 40,000 6,804 5,296 6,804 5,689

40,000 40,050 6,816 5,304 6,816 5,701

40,050 40,100 6,829 5,311 6,829 5,714

40,100 40,150 6,841 5,319 6,841 5,726

40,150 40,200 6,854 5,326 6,854 5,739

40,200 40,250 6,866 5,334 6,866 5,751

40,250 40,300 6,879 5,341 6,879 5,764

40,300 40,350 6,891 5,349 6,891 5,776

40,350 40,400 6,904 5,356 6,904 5,789

40,400 40,450 6,916 5,364 6,916 5,801

40,450 40,500 6,929 5,371 6,929 5,814

40,500 40,550 6,941 5,379 6,941 5,826

40,550 40,600 6,954 5,386 6,954 5,839

40,600 40,650 6,966 5,394 6,966 5,851

40,650 40,700 6,979 5,401 6,979 5,864

40,700 40,750 6,991 5,409 6,991 5,876

40,750 40,800 7,004 5,416 7,004 5,889

40,800 40,850 7,016 5,424 7,016 5,901

40,850 40,900 7,029 5,431 7,029 5,914

40,900 40,950 7,041 5,439 7,041 5,926

40,950 41,000 7,054 5,446 7,054 5,939
D-6 Appendix D

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 69)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

41,000

42,000

43,000

44,000

45,000

46,000

47,000

48,000

49,000

41,000 41,050 7,066 5,454 7,066 5,951

41,050 41,100 7,079 5,461 7,079 5,964

41,100 41,150 7,091 5,469 7,091 5,976

41,150 41,200 7,104 5,476 7,104 5,989

41,200 41,250 7,116 5,484 7,116 6,001

41,250 41,300 7,129 5,491 7,129 6,014

41,300 41,350 7,141 5,499 7,141 6,026

41,350 41,400 7,154 5,506 7,154 6,039

41,400 41,450 7,166 5,514 7,166 6,051

41,450 41,500 7,179 5,521 7,179 6,064

41,500 41,550 7,191 5,529 7,191 6,076

41,550 41,600 7,204 5,536 7,204 6,089

41,600 41,650 7,216 5,544 7,216 6,101

41,650 41,700 7,229 5,551 7,229 6,114

41,700 41,750 7,241 5,559 7,241 6,126

41,750 41,800 7,254 5,566 7,254 6,139

41,800 41,850 7,266 5,574 7,266 6,151

41,850 41,900 7,279 5,581 7,279 6,164

41,900 41,950 7,291 5,589 7,291 6,176

41,950 42,000 7,304 5,596 7,304 6,189

42,000 42,050 7,316 5,604 7,316 6,201

42,050 42,100 7,329 5,611 7,329 6,214

42,100 42,150 7,341 5,619 7,341 6,226

42,150 42,200 7,354 5,626 7,354 6,239

42,200 42,250 7,366 5,634 7,366 6,251

42,250 42,300 7,379 5,641 7,379 6,264

42,300 42,350 7,391 5,649 7,391 6,276

42,350 42,400 7,404 5,656 7,404 6,289

42,400 42,450 7,416 5,664 7,416 6,301

42,450 42,500 7,429 5,671 7,429 6,314

42,500 42,550 7,441 5,679 7,441 6,326

42,550 42,600 7,454 5,686 7,454 6,339

42,600 42,650 7,466 5,694 7,466 6,351

42,650 42,700 7,479 5,701 7,479 6,364

42,700 42,750 7,491 5,709 7,491 6,376

42,750 42,800 7,504 5,716 7,504 6,389

42,800 42,850 7,516 5,724 7,516 6,401

42,850 42,900 7,529 5,731 7,529 6,414

42,900 42,950 7,541 5,739 7,541 6,426

42,950 43,000 7,554 5,746 7,554 6,439

43,000 43,050 7,566 5,754 7,566 6,451

43,050 43,100 7,579 5,761 7,579 6,464

43,100 43,150 7,591 5,769 7,591 6,476

43,150 43,200 7,604 5,776 7,604 6,489

43,200 43,250 7,616 5,784 7,616 6,501

43,250 43,300 7,629 5,791 7,629 6,514

43,300 43,350 7,641 5,799 7,641 6,526

43,350 43,400 7,654 5,806 7,654 6,539

43,400 43,450 7,666 5,814 7,666 6,551

43,450 43,500 7,679 5,821 7,679 6,564

43,500 43,550 7,691 5,829 7,691 6,576

43,550 43,600 7,704 5,836 7,704 6,589

43,600 43,650 7,716 5,844 7,716 6,601

43,650 43,700 7,729 5,851 7,729 6,614

43,700 43,750 7,741 5,859 7,741 6,626

43,750 43,800 7,754 5,866 7,754 6,639

43,800 43,850 7,766 5,874 7,766 6,651

43,850 43,900 7,779 5,881 7,779 6,664

43,900 43,950 7,791 5,889 7,791 6,676

43,950 44,000 7,804 5,896 7,804 6,689

44,000 44,050 7,816 5,904 7,816 6,701

44,050 44,100 7,829 5,911 7,829 6,714

44,100 44,150 7,841 5,919 7,841 6,726

44,150 44,200 7,854 5,926 7,854 6,739

44,200 44,250 7,866 5,934 7,866 6,751

44,250 44,300 7,879 5,941 7,879 6,764

44,300 44,350 7,891 5,949 7,891 6,776

44,350 44,400 7,904 5,956 7,904 6,789

44,400 44,450 7,916 5,964 7,916 6,801

44,450 44,500 7,929 5,971 7,929 6,814

44,500 44,550 7,941 5,979 7,941 6,826

44,550 44,600 7,954 5,986 7,954 6,839

44,600 44,650 7,966 5,994 7,966 6,851

44,650 44,700 7,979 6,001 7,979 6,864

44,700 44,750 7,991 6,009 7,991 6,876

44,750 44,800 8,004 6,016 8,004 6,889

44,800 44,850 8,016 6,024 8,016 6,901

44,850 44,900 8,029 6,031 8,029 6,914

44,900 44,950 8,041 6,039 8,041 6,926

44,950 45,000 8,054 6,046 8,054 6,939

45,000 45,050 8,066 6,054 8,066 6,951

45,050 45,100 8,079 6,061 8,079 6,964

45,100 45,150 8,091 6,069 8,091 6,976

45,150 45,200 8,104 6,076 8,104 6,989

45,200 45,250 8,116 6,084 8,116 7,001

45,250 45,300 8,129 6,091 8,129 7,014

45,300 45,350 8,141 6,099 8,141 7,026

45,350 45,400 8,154 6,106 8,154 7,039

45,400 45,450 8,166 6,114 8,166 7,051

45,450 45,500 8,179 6,121 8,179 7,064

45,500 45,550 8,191 6,129 8,191 7,076

45,550 45,600 8,204 6,136 8,204 7,089

45,600 45,650 8,216 6,144 8,216 7,101

45,650 45,700 8,229 6,151 8,229 7,114

45,700 45,750 8,241 6,159 8,241 7,126

45,750 45,800 8,254 6,166 8,254 7,139

45,800 45,850 8,266 6,174 8,266 7,151

45,850 45,900 8,279 6,181 8,279 7,164

45,900 45,950 8,291 6,189 8,291 7,176

45,950 46,000 8,304 6,196 8,304 7,189

46,000 46,050 8,316 6,204 8,316 7,201

46,050 46,100 8,329 6,211 8,329 7,214

46,100 46,150 8,341 6,219 8,341 7,226

46,150 46,200 8,354 6,226 8,354 7,239

46,200 46,250 8,366 6,234 8,366 7,251

46,250 46,300 8,379 6,241 8,379 7,264

46,300 46,350 8,391 6,249 8,391 7,276

46,350 46,400 8,404 6,256 8,404 7,289

46,400 46,450 8,416 6,264 8,416 7,301

46,450 46,500 8,429 6,271 8,429 7,314

46,500 46,550 8,441 6,279 8,441 7,326

46,550 46,600 8,454 6,286 8,454 7,339

46,600 46,650 8,466 6,294 8,466 7,351

46,650 46,700 8,479 6,301 8,479 7,364

46,700 46,750 8,491 6,309 8,491 7,376

46,750 46,800 8,504 6,316 8,504 7,389

46,800 46,850 8,516 6,324 8,516 7,401

46,850 46,900 8,529 6,331 8,529 7,414

46,900 46,950 8,541 6,339 8,541 7,426

46,950 47,000 8,554 6,346 8,554 7,439

47,000 47,050 8,566 6,354 8,566 7,451

47,050 47,100 8,579 6,361 8,579 7,464

47,100 47,150 8,591 6,369 8,591 7,476

47,150 47,200 8,604 6,376 8,604 7,489

47,200 47,250 8,616 6,384 8,616 7,501

47,250 47,300 8,629 6,391 8,629 7,514

47,300 47,350 8,641 6,399 8,641 7,526

47,350 47,400 8,654 6,406 8,654 7,539

47,400 47,450 8,666 6,414 8,666 7,551

47,450 47,500 8,679 6,421 8,679 7,564

47,500 47,550 8,691 6,429 8,691 7,576

47,550 47,600 8,704 6,436 8,704 7,589

47,600 47,650 8,716 6,444 8,716 7,601

47,650 47,700 8,729 6,451 8,729 7,614

47,700 47,750 8,741 6,459 8,741 7,626

47,750 47,800 8,754 6,466 8,754 7,639

47,800 47,850 8,766 6,474 8,766 7,651

47,850 47,900 8,779 6,481 8,779 7,664

47,900 47,950 8,791 6,489 8,791 7,676

47,950 48,000 8,804 6,496 8,804 7,689

48,000 48,050 8,816 6,504 8,816 7,701

48,050 48,100 8,829 6,511 8,829 7,714

48,100 48,150 8,841 6,519 8,841 7,726

48,150 48,200 8,854 6,526 8,854 7,739

48,200 48,250 8,866 6,534 8,866 7,751

48,250 48,300 8,879 6,541 8,879 7,764

48,300 48,350 8,891 6,549 8,891 7,776

48,350 48,400 8,904 6,556 8,904 7,789

48,400 48,450 8,916 6,564 8,916 7,801

48,450 48,500 8,929 6,571 8,929 7,814

48,500 48,550 8,941 6,579 8,941 7,826

48,550 48,600 8,954 6,586 8,954 7,839

48,600 48,650 8,966 6,594 8,966 7,851

48,650 48,700 8,979 6,601 8,979 7,864

48,700 48,750 8,991 6,609 8,991 7,876

48,750 48,800 9,004 6,616 9,004 7,889

48,800 48,850 9,016 6,624 9,016 7,901

48,850 48,900 9,029 6,631 9,029 7,914

48,900 48,950 9,041 6,639 9,041 7,926

48,950 49,000 9,054 6,646 9,054 7,939

49,000 49,050 9,066 6,654 9,066 7,951

49,050 49,100 9,079 6,661 9,079 7,964

49,100 49,150 9,091 6,669 9,091 7,976

49,150 49,200 9,104 6,676 9,104 7,989

49,200 49,250 9,116 6,684 9,116 8,001

49,250 49,300 9,129 6,691 9,129 8,014

49,300 49,350 9,141 6,699 9,141 8,026

49,350 49,400 9,154 6,706 9,154 8,039

49,400 49,450 9,166 6,714 9,166 8,051

49,450 49,500 9,179 6,721 9,179 8,064

49,500 49,550 9,191 6,729 9,191 8,076

49,550 49,600 9,204 6,736 9,204 8,089

49,600 49,650 9,216 6,744 9,216 8,101

49,650 49,700 9,229 6,751 9,229 8,114

49,700 49,750 9,241 6,759 9,241 8,126

49,750 49,800 9,254 6,766 9,254 8,139

49,800 49,850 9,266 6,774 9,266 8,151

49,850 49,900 9,279 6,781 9,279 8,164

49,900 49,950 9,291 6,789 9,291 8,176

49,950 50,000 9,304 6,796 9,304 8,189
Appendix D D-7

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 70)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

50,000

51,000

52,000

53,000

54,000

55,000

56,000

57,000

58,000

50,000 50,050 9,316 6,804 9,316 8,201

50,050 50,100 9,329 6,811 9,329 8,214

50,100 50,150 9,341 6,819 9,341 8,226

50,150 50,200 9,354 6,826 9,354 8,239

50,200 50,250 9,366 6,834 9,366 8,251

50,250 50,300 9,379 6,841 9,379 8,264

50,300 50,350 9,391 6,849 9,391 8,276

50,350 50,400 9,404 6,856 9,404 8,289

50,400 50,450 9,416 6,864 9,416 8,301

50,450 50,500 9,429 6,871 9,429 8,314

50,500 50,550 9,441 6,879 9,441 8,326

50,550 50,600 9,454 6,886 9,454 8,339

50,600 50,650 9,466 6,894 9,466 8,351

50,650 50,700 9,479 6,901 9,479 8,364

50,700 50,750 9,491 6,909 9,491 8,376

50,750 50,800 9,504 6,916 9,504 8,389

50,800 50,850 9,516 6,924 9,516 8,401

50,850 50,900 9,529 6,931 9,529 8,414

50,900 50,950 9,541 6,939 9,541 8,426

50,950 51,000 9,554 6,946 9,554 8,439

51,000 51,050 9,566 6,954 9,566 8,451

51,050 51,100 9,579 6,961 9,579 8,464

51,100 51,150 9,591 6,969 9,591 8,476

51,150 51,200 9,604 6,976 9,604 8,489

51,200 51,250 9,616 6,984 9,616 8,501

51,250 51,300 9,629 6,991 9,629 8,514

51,300 51,350 9,641 6,999 9,641 8,526

51,350 51,400 9,654 7,006 9,654 8,539

51,400 51,450 9,666 7,014 9,666 8,551

51,450 51,500 9,679 7,021 9,679 8,564

51,500 51,550 9,691 7,029 9,691 8,576

51,550 51,600 9,704 7,036 9,704 8,589

51,600 51,650 9,716 7,044 9,716 8,601

51,650 51,700 9,729 7,051 9,729 8,614

51,700 51,750 9,741 7,059 9,741 8,626

51,750 51,800 9,754 7,066 9,754 8,639

51,800 51,850 9,766 7,074 9,766 8,651

51,850 51,900 9,779 7,081 9,779 8,664

51,900 51,950 9,791 7,089 9,791 8,676

51,950 52,000 9,804 7,096 9,804 8,689

52,000 52,050 9,816 7,104 9,816 8,701

52,050 52,100 9,829 7,111 9,829 8,714

52,100 52,150 9,841 7,119 9,841 8,726

52,150 52,200 9,854 7,126 9,854 8,739

52,200 52,250 9,866 7,134 9,866 8,751

52,250 52,300 9,879 7,141 9,879 8,764

52,300 52,350 9,891 7,149 9,891 8,776

52,350 52,400 9,904 7,156 9,904 8,789

52,400 52,450 9,916 7,164 9,916 8,801

52,450 52,500 9,929 7,171 9,929 8,814

52,500 52,550 9,941 7,179 9,941 8,826

52,550 52,600 9,954 7,186 9,954 8,839

52,600 52,650 9,966 7,194 9,966 8,851

52,650 52,700 9,979 7,201 9,979 8,864

52,700 52,750 9,991 7,209 9,991 8,876

52,750 52,800 10,004 7,216 10,004 8,889

52,800 52,850 10,016 7,224 10,016 8,901

52,850 52,900 10,029 7,231 10,029 8,914

52,900 52,950 10,041 7,239 10,041 8,926

52,950 53,000 10,054 7,246 10,054 8,939

53,000 53,050 10,066 7,254 10,066 8,951

53,050 53,100 10,079 7,261 10,079 8,964

53,100 53,150 10,091 7,269 10,091 8,976

53,150 53,200 10,104 7,276 10,104 8,989

53,200 53,250 10,116 7,284 10,116 9,001

53,250 53,300 10,129 7,291 10,129 9,014

53,300 53,350 10,141 7,299 10,141 9,026

53,350 53,400 10,154 7,306 10,154 9,039

53,400 53,450 10,166 7,314 10,166 9,051

53,450 53,500 10,179 7,321 10,179 9,064

53,500 53,550 10,191 7,329 10,191 9,076

53,550 53,600 10,204 7,336 10,204 9,089

53,600 53,650 10,216 7,344 10,216 9,101

53,650 53,700 10,229 7,351 10,229 9,114

53,700 53,750 10,241 7,359 10,241 9,126

53,750 53,800 10,254 7,366 10,254 9,139

53,800 53,850 10,266 7,374 10,266 9,151

53,850 53,900 10,279 7,381 10,279 9,164

53,900 53,950 10,291 7,389 10,291 9,176

53,950 54,000 10,304 7,396 10,304 9,189

54,000 54,050 10,316 7,404 10,316 9,201

54,050 54,100 10,329 7,411 10,329 9,214

54,100 54,150 10,341 7,419 10,341 9,226

54,150 54,200 10,354 7,426 10,354 9,239

54,200 54,250 10,366 7,434 10,366 9,251

54,250 54,300 10,379 7,441 10,379 9,264

54,300 54,350 10,391 7,449 10,391 9,276

54,350 54,400 10,404 7,456 10,404 9,289

54,400 54,450 10,416 7,464 10,416 9,301

54,450 54,500 10,429 7,471 10,429 9,314

54,500 54,550 10,441 7,479 10,441 9,326

54,550 54,600 10,454 7,486 10,454 9,339

54,600 54,650 10,466 7,494 10,466 9,351

54,650 54,700 10,479 7,501 10,479 9,364

54,700 54,750 10,491 7,509 10,491 9,376

54,750 54,800 10,504 7,516 10,504 9,389

54,800 54,850 10,516 7,524 10,516 9,401

54,850 54,900 10,529 7,531 10,529 9,414

54,900 54,950 10,541 7,539 10,541 9,426

54,950 55,000 10,554 7,546 10,554 9,439

55,000 55,050 10,566 7,554 10,566 9,451

55,050 55,100 10,579 7,561 10,579 9,464

55,100 55,150 10,591 7,569 10,591 9,476

55,150 55,200 10,604 7,576 10,604 9,489

55,200 55,250 10,616 7,584 10,616 9,501

55,250 55,300 10,629 7,591 10,629 9,514

55,300 55,350 10,641 7,599 10,641 9,526

55,350 55,400 10,654 7,606 10,654 9,539

55,400 55,450 10,666 7,614 10,666 9,551

55,450 55,500 10,679 7,621 10,679 9,564

55,500 55,550 10,691 7,629 10,691 9,576

55,550 55,600 10,704 7,636 10,704 9,589

55,600 55,650 10,716 7,644 10,716 9,601

55,650 55,700 10,729 7,651 10,729 9,614

55,700 55,750 10,741 7,659 10,741 9,626

55,750 55,800 10,754 7,666 10,754 9,639

55,800 55,850 10,766 7,674 10,766 9,651

55,850 55,900 10,779 7,681 10,779 9,664

55,900 55,950 10,791 7,689 10,791 9,676

55,950 56,000 10,804 7,696 10,804 9,689

56,000 56,050 10,816 7,704 10,816 9,701

56,050 56,100 10,829 7,711 10,829 9,714

56,100 56,150 10,841 7,719 10,841 9,726

56,150 56,200 10,854 7,726 10,854 9,739

56,200 56,250 10,866 7,734 10,866 9,751

56,250 56,300 10,879 7,741 10,879 9,764

56,300 56,350 10,891 7,749 10,891 9,776

56,350 56,400 10,904 7,756 10,904 9,789

56,400 56,450 10,916 7,764 10,916 9,801

56,450 56,500 10,929 7,771 10,929 9,814

56,500 56,550 10,941 7,779 10,941 9,826

56,550 56,600 10,954 7,786 10,954 9,839

56,600 56,650 10,966 7,794 10,966 9,851

56,650 56,700 10,979 7,801 10,979 9,864

56,700 56,750 10,991 7,809 10,991 9,876

56,750 56,800 11,004 7,816 11,004 9,889

56,800 56,850 11,016 7,826 11,016 9,901

56,850 56,900 11,029 7,839 11,029 9,914

56,900 56,950 11,041 7,851 11,041 9,926

56,950 57,000 11,054 7,864 11,054 9,939

57,000 57,050 11,066 7,876 11,066 9,951

57,050 57,100 11,079 7,889 11,079 9,964

57,100 57,150 11,091 7,901 11,091 9,976

57,150 57,200 11,104 7,914 11,104 9,989

57,200 57,250 11,116 7,926 11,116 10,001

57,250 57,300 11,129 7,939 11,129 10,014

57,300 57,350 11,141 7,951 11,141 10,026

57,350 57,400 11,154 7,964 11,155 10,039

57,400 57,450 11,166 7,976 11,169 10,051

57,450 57,500 11,179 7,989 11,183 10,064

57,500 57,550 11,191 8,001 11,197 10,076

57,550 57,600 11,204 8,014 11,211 10,089

57,600 57,650 11,216 8,026 11,225 10,101

57,650 57,700 11,229 8,039 11,239 10,114

57,700 57,750 11,241 8,051 11,253 10,126

57,750 57,800 11,254 8,064 11,267 10,139

57,800 57,850 11,266 8,076 11,281 10,151

57,850 57,900 11,279 8,089 11,295 10,164

57,900 57,950 11,291 8,101 11,309 10,176

57,950 58,000 11,304 8,114 11,323 10,189

58,000 58,050 11,316 8,126 11,337 10,201

58,050 58,100 11,329 8,139 11,351 10,214

58,100 58,150 11,341 8,151 11,365 10,226

58,150 58,200 11,354 8,164 11,379 10,239

58,200 58,250 11,366 8,176 11,393 10,251

58,250 58,300 11,379 8,189 11,407 10,264

58,300 58,350 11,391 8,201 11,421 10,276

58,350 58,400 11,404 8,214 11,435 10,289

58,400 58,450 11,416 8,226 11,449 10,301

58,450 58,500 11,429 8,239 11,463 10,314

58,500 58,550 11,441 8,251 11,477 10,326

58,550 58,600 11,454 8,264 11,491 10,339

58,600 58,650 11,466 8,276 11,505 10,351

58,650 58,700 11,479 8,289 11,519 10,364

58,700 58,750 11,491 8,301 11,533 10,376

58,750 58,800 11,504 8,314 11,547 10,389

58,800 58,850 11,516 8,326 11,561 10,401

58,850 58,900 11,529 8,339 11,575 10,414

58,900 58,950 11,541 8,351 11,589 10,426

58,950 59,000 11,554 8,364 11,603 10,439
D-8 Appendix D

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 71)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

59,000

60,000

61,000

62,000

63,000

64,000

65,000

66,000

67,000

59,000 59,050 11,566 8,376 11,617 10,451

59,050 59,100 11,579 8,389 11,631 10,464

59,100 59,150 11,591 8,401 11,645 10,476

59,150 59,200 11,604 8,414 11,659 10,489

59,200 59,250 11,616 8,426 11,673 10,501

59,250 59,300 11,629 8,439 11,687 10,514

59,300 59,350 11,641 8,451 11,701 10,526

59,350 59,400 11,654 8,464 11,715 10,539

59,400 59,450 11,666 8,476 11,729 10,551

59,450 59,500 11,679 8,489 11,743 10,564

59,500 59,550 11,691 8,501 11,757 10,576

59,550 59,600 11,704 8,514 11,771 10,589

59,600 59,650 11,716 8,526 11,785 10,601

59,650 59,700 11,729 8,539 11,799 10,614

59,700 59,750 11,741 8,551 11,813 10,626

59,750 59,800 11,754 8,564 11,827 10,639

59,800 59,850 11,766 8,576 11,841 10,651

59,850 59,900 11,779 8,589 11,855 10,664

59,900 59,950 11,791 8,601 11,869 10,676

59,950 60,000 11,804 8,614 11,883 10,689

60,000 60,050 11,816 8,626 11,897 10,701

60,050 60,100 11,829 8,639 11,911 10,714

60,100 60,150 11,841 8,651 11,925 10,726

60,150 60,200 11,854 8,664 11,939 10,739

60,200 60,250 11,866 8,676 11,953 10,751

60,250 60,300 11,879 8,689 11,967 10,764

60,300 60,350 11,891 8,701 11,981 10,776

60,350 60,400 11,904 8,714 11,995 10,789

60,400 60,450 11,916 8,726 12,009 10,801

60,450 60,500 11,929 8,739 12,023 10,814

60,500 60,550 11,941 8,751 12,037 10,826

60,550 60,600 11,954 8,764 12,051 10,839

60,600 60,650 11,966 8,776 12,065 10,851

60,650 60,700 11,979 8,789 12,079 10,864

60,700 60,750 11,991 8,801 12,093 10,876

60,750 60,800 12,004 8,814 12,107 10,889

60,800 60,850 12,016 8,826 12,121 10,901

60,850 60,900 12,029 8,839 12,135 10,914

60,900 60,950 12,041 8,851 12,149 10,926

60,950 61,000 12,054 8,864 12,163 10,939

61,000 61,050 12,066 8,876 12,177 10,951

61,050 61,100 12,079 8,889 12,191 10,964

61,100 61,150 12,091 8,901 12,205 10,976

61,150 61,200 12,104 8,914 12,219 10,989

61,200 61,250 12,116 8,926 12,233 11,001

61,250 61,300 12,129 8,939 12,247 11,014

61,300 61,350 12,141 8,951 12,261 11,026

61,350 61,400 12,154 8,964 12,275 11,039

61,400 61,450 12,166 8,976 12,289 11,051

61,450 61,500 12,179 8,989 12,303 11,064

61,500 61,550 12,191 9,001 12,317 11,076

61,550 61,600 12,204 9,014 12,331 11,089

61,600 61,650 12,216 9,026 12,345 11,101

61,650 61,700 12,229 9,039 12,359 11,114

61,700 61,750 12,241 9,051 12,373 11,126

61,750 61,800 12,254 9,064 12,387 11,139

61,800 61,850 12,266 9,076 12,401 11,151

61,850 61,900 12,279 9,089 12,415 11,164

61,900 61,950 12,291 9,101 12,429 11,176

61,950 62,000 12,304 9,114 12,443 11,189

62,000 62,050 12,316 9,126 12,457 11,201

62,050 62,100 12,329 9,139 12,471 11,214

62,100 62,150 12,341 9,151 12,485 11,226

62,150 62,200 12,354 9,164 12,499 11,239

62,200 62,250 12,366 9,176 12,513 11,251

62,250 62,300 12,379 9,189 12,527 11,264

62,300 62,350 12,391 9,201 12,541 11,276

62,350 62,400 12,404 9,214 12,555 11,289

62,400 62,450 12,416 9,226 12,569 11,301

62,450 62,500 12,429 9,239 12,583 11,314

62,500 62,550 12,441 9,251 12,597 11,326

62,550 62,600 12,454 9,264 12,611 11,339

62,600 62,650 12,466 9,276 12,625 11,351

62,650 62,700 12,479 9,289 12,639 11,364

62,700 62,750 12,491 9,301 12,653 11,376

62,750 62,800 12,504 9,314 12,667 11,389

62,800 62,850 12,516 9,326 12,681 11,401

62,850 62,900 12,529 9,339 12,695 11,414

62,900 62,950 12,541 9,351 12,709 11,426

62,950 63,000 12,554 9,364 12,723 11,439

63,000 63,050 12,566 9,376 12,737 11,451

63,050 63,100 12,579 9,389 12,751 11,464

63,100 63,150 12,591 9,401 12,765 11,476

63,150 63,200 12,604 9,414 12,779 11,489

63,200 63,250 12,616 9,426 12,793 11,501

63,250 63,300 12,629 9,439 12,807 11,514

63,300 63,350 12,641 9,451 12,821 11,526

63,350 63,400 12,654 9,464 12,835 11,539

63,400 63,450 12,666 9,476 12,849 11,551

63,450 63,500 12,679 9,489 12,863 11,564

63,500 63,550 12,691 9,501 12,877 11,576

63,550 63,600 12,704 9,514 12,891 11,589

63,600 63,650 12,716 9,526 12,905 11,601

63,650 63,700 12,729 9,539 12,919 11,614

63,700 63,750 12,741 9,551 12,933 11,626

63,750 63,800 12,754 9,564 12,947 11,639

63,800 63,850 12,766 9,576 12,961 11,651

63,850 63,900 12,779 9,589 12,975 11,664

63,900 63,950 12,791 9,601 12,989 11,676

63,950 64,000 12,804 9,614 13,003 11,689

64,000 64,050 12,816 9,626 13,017 11,701

64,050 64,100 12,829 9,639 13,031 11,714

64,100 64,150 12,841 9,651 13,045 11,726

64,150 64,200 12,854 9,664 13,059 11,739

64,200 64,250 12,866 9,676 13,073 11,751

64,250 64,300 12,879 9,689 13,087 11,764

64,300 64,350 12,891 9,701 13,101 11,776

64,350 64,400 12,904 9,714 13,115 11,789

64,400 64,450 12,916 9,726 13,129 11,801

64,450 64,500 12,929 9,739 13,143 11,814

64,500 64,550 12,941 9,751 13,157 11,826

64,550 64,600 12,954 9,764 13,171 11,839

64,600 64,650 12,966 9,776 13,185 11,851

64,650 64,700 12,979 9,789 13,199 11,864

64,700 64,750 12,991 9,801 13,213 11,876

64,750 64,800 13,004 9,814 13,227 11,889

64,800 64,850 13,016 9,826 13,241 11,901

64,850 64,900 13,029 9,839 13,255 11,914

64,900 64,950 13,041 9,851 13,269 11,926

64,950 65,000 13,054 9,864 13,283 11,939

65,000 65,050 13,066 9,876 13,297 11,951

65,050 65,100 13,079 9,889 13,311 11,964

65,100 65,150 13,091 9,901 13,325 11,976

65,150 65,200 13,104 9,914 13,339 11,989

65,200 65,250 13,116 9,926 13,353 12,001

65,250 65,300 13,129 9,939 13,367 12,014

65,300 65,350 13,141 9,951 13,381 12,026

65,350 65,400 13,154 9,964 13,395 12,039

65,400 65,450 13,166 9,976 13,409 12,051

65,450 65,500 13,179 9,989 13,423 12,064

65,500 65,550 13,191 10,001 13,437 12,076

65,550 65,600 13,204 10,014 13,451 12,089

65,600 65,650 13,216 10,026 13,465 12,101

65,650 65,700 13,229 10,039 13,479 12,114

65,700 65,750 13,241 10,051 13,493 12,126

65,750 65,800 13,254 10,064 13,507 12,139

65,800 65,850 13,266 10,076 13,521 12,151

65,850 65,900 13,279 10,089 13,535 12,164

65,900 65,950 13,291 10,101 13,549 12,176

65,950 66,000 13,304 10,114 13,563 12,189

66,000 66,050 13,316 10,126 13,577 12,201

66,050 66,100 13,329 10,139 13,591 12,214

66,100 66,150 13,341 10,151 13,605 12,226

66,150 66,200 13,354 10,164 13,619 12,239

66,200 66,250 13,366 10,176 13,633 12,251

66,250 66,300 13,379 10,189 13,647 12,264

66,300 66,350 13,391 10,201 13,661 12,276

66,350 66,400 13,404 10,214 13,675 12,289

66,400 66,450 13,416 10,226 13,689 12,301

66,450 66,500 13,429 10,239 13,703 12,314

66,500 66,550 13,441 10,251 13,717 12,326

66,550 66,600 13,454 10,264 13,731 12,339

66,600 66,650 13,466 10,276 13,745 12,351

66,650 66,700 13,479 10,289 13,759 12,364

66,700 66,750 13,491 10,301 13,773 12,376

66,750 66,800 13,504 10,314 13,787 12,389

66,800 66,850 13,516 10,326 13,801 12,401

66,850 66,900 13,529 10,339 13,815 12,414

66,900 66,950 13,541 10,351 13,829 12,426

66,950 67,000 13,554 10,364 13,843 12,439

67,000 67,050 13,566 10,376 13,857 12,451

67,050 67,100 13,579 10,389 13,871 12,464

67,100 67,150 13,591 10,401 13,885 12,476

67,150 67,200 13,604 10,414 13,899 12,489

67,200 67,250 13,616 10,426 13,913 12,501

67,250 67,300 13,629 10,439 13,927 12,514

67,300 67,350 13,641 10,451 13,941 12,526

67,350 67,400 13,654 10,464 13,955 12,539

67,400 67,450 13,666 10,476 13,969 12,551

67,450 67,500 13,679 10,489 13,983 12,564

67,500 67,550 13,691 10,501 13,997 12,576

67,550 67,600 13,704 10,514 14,011 12,589

67,600 67,650 13,716 10,526 14,025 12,601

67,650 67,700 13,729 10,539 14,039 12,614

67,700 67,750 13,741 10,551 14,053 12,626

67,750 67,800 13,754 10,564 14,067 12,639

67,800 67,850 13,766 10,576 14,081 12,651

67,850 67,900 13,779 10,589 14,095 12,664

67,900 67,950 13,791 10,601 14,109 12,676

67,950 68,000 13,804 10,614 14,123 12,689
Appendix D D-9

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 72)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

68,000

69,000

70,000

71,000

72,000

73,000

74,000

75,000

76,000

68,000 68,050 13,816 10,626 14,137 12,701

68,050 68,100 13,829 10,639 14,151 12,714

68,100 68,150 13,841 10,651 14,165 12,726

68,150 68,200 13,854 10,664 14,179 12,739

68,200 68,250 13,866 10,676 14,193 12,751

68,250 68,300 13,879 10,689 14,207 12,764

68,300 68,350 13,891 10,701 14,221 12,776

68,350 68,400 13,904 10,714 14,235 12,789

68,400 68,450 13,916 10,726 14,249 12,801

68,450 68,500 13,929 10,739 14,263 12,814

68,500 68,550 13,941 10,751 14,277 12,826

68,550 68,600 13,954 10,764 14,291 12,839

68,600 68,650 13,966 10,776 14,305 12,851

68,650 68,700 13,979 10,789 14,319 12,864

68,700 68,750 13,991 10,801 14,333 12,876

68,750 68,800 14,004 10,814 14,347 12,889

68,800 68,850 14,017 10,826 14,361 12,901

68,850 68,900 14,031 10,839 14,375 12,914

68,900 68,950 14,045 10,851 14,389 12,926

68,950 69,000 14,059 10,864 14,403 12,939

69,000 69,050 14,073 10,876 14,417 12,951

69,050 69,100 14,087 10,889 14,431 12,964

69,100 69,150 14,101 10,901 14,445 12,976

69,150 69,200 14,115 10,914 14,459 12,989

69,200 69,250 14,129 10,926 14,473 13,001

69,250 69,300 14,143 10,939 14,487 13,014

69,300 69,350 14,157 10,951 14,501 13,026

69,350 69,400 14,171 10,964 14,515 13,039

69,400 69,450 14,185 10,976 14,529 13,051

69,450 69,500 14,199 10,989 14,543 13,064

69,500 69,550 14,213 11,001 14,557 13,076

69,550 69,600 14,227 11,014 14,571 13,089

69,600 69,650 14,241 11,026 14,585 13,101

69,650 69,700 14,255 11,039 14,599 13,114

69,700 69,750 14,269 11,051 14,613 13,126

69,750 69,800 14,283 11,064 14,627 13,139

69,800 69,850 14,297 11,076 14,641 13,151

69,850 69,900 14,311 11,089 14,655 13,164

69,900 69,950 14,325 11,101 14,669 13,176

69,950 70,000 14,339 11,114 14,683 13,189

70,000 70,050 14,353 11,126 14,697 13,201

70,050 70,100 14,367 11,139 14,711 13,214

70,100 70,150 14,381 11,151 14,725 13,226

70,150 70,200 14,395 11,164 14,739 13,239

70,200 70,250 14,409 11,176 14,753 13,251

70,250 70,300 14,423 11,189 14,767 13,264

70,300 70,350 14,437 11,201 14,781 13,276

70,350 70,400 14,451 11,214 14,795 13,289

70,400 70,450 14,465 11,226 14,809 13,301

70,450 70,500 14,479 11,239 14,823 13,314

70,500 70,550 14,493 11,251 14,837 13,326

70,550 70,600 14,507 11,264 14,851 13,339

70,600 70,650 14,521 11,276 14,865 13,351

70,650 70,700 14,535 11,289 14,879 13,364

70,700 70,750 14,549 11,301 14,893 13,376

70,750 70,800 14,563 11,314 14,907 13,389

70,800 70,850 14,577 11,326 14,921 13,401

70,850 70,900 14,591 11,339 14,935 13,414

70,900 70,950 14,605 11,351 14,949 13,426

70,950 71,000 14,619 11,364 14,963 13,439

71,000 71,050 14,633 11,376 14,977 13,451

71,050 71,100 14,647 11,389 14,991 13,464

71,100 71,150 14,661 11,401 15,005 13,476

71,150 71,200 14,675 11,414 15,019 13,489

71,200 71,250 14,689 11,426 15,033 13,501

71,250 71,300 14,703 11,439 15,047 13,514

71,300 71,350 14,717 11,451 15,061 13,526

71,350 71,400 14,731 11,464 15,075 13,539

71,400 71,450 14,745 11,476 15,089 13,551

71,450 71,500 14,759 11,489 15,103 13,564

71,500 71,550 14,773 11,501 15,117 13,576

71,550 71,600 14,787 11,514 15,131 13,589

71,600 71,650 14,801 11,526 15,145 13,601

71,650 71,700 14,815 11,539 15,159 13,614

71,700 71,750 14,829 11,551 15,173 13,626

71,750 71,800 14,843 11,564 15,187 13,639

71,800 71,850 14,857 11,576 15,201 13,651

71,850 71,900 14,871 11,589 15,215 13,664

71,900 71,950 14,885 11,601 15,229 13,676

71,950 72,000 14,899 11,614 15,243 13,689

72,000 72,050 14,913 11,626 15,257 13,701

72,050 72,100 14,927 11,639 15,271 13,714

72,100 72,150 14,941 11,651 15,285 13,726

72,150 72,200 14,955 11,664 15,299 13,739

72,200 72,250 14,969 11,676 15,313 13,751

72,250 72,300 14,983 11,689 15,327 13,764

72,300 72,350 14,997 11,701 15,341 13,776

72,350 72,400 15,011 11,714 15,355 13,789

72,400 72,450 15,025 11,726 15,369 13,801

72,450 72,500 15,039 11,739 15,383 13,814

72,500 72,550 15,053 11,751 15,397 13,826

72,550 72,600 15,067 11,764 15,411 13,839

72,600 72,650 15,081 11,776 15,425 13,851

72,650 72,700 15,095 11,789 15,439 13,864

72,700 72,750 15,109 11,801 15,453 13,876

72,750 72,800 15,123 11,814 15,467 13,889

72,800 72,850 15,137 11,826 15,481 13,901

72,850 72,900 15,151 11,839 15,495 13,914

72,900 72,950 15,165 11,851 15,509 13,926

72,950 73,000 15,179 11,864 15,523 13,939

73,000 73,050 15,193 11,876 15,537 13,951

73,050 73,100 15,207 11,889 15,551 13,964

73,100 73,150 15,221 11,901 15,565 13,976

73,150 73,200 15,235 11,914 15,579 13,989

73,200 73,250 15,249 11,926 15,593 14,001

73,250 73,300 15,263 11,939 15,607 14,014

73,300 73,350 15,277 11,951 15,621 14,026

73,350 73,400 15,291 11,964 15,635 14,039

73,400 73,450 15,305 11,976 15,649 14,051

73,450 73,500 15,319 11,989 15,663 14,064

73,500 73,550 15,333 12,001 15,677 14,076

73,550 73,600 15,347 12,014 15,691 14,089

73,600 73,650 15,361 12,026 15,705 14,101

73,650 73,700 15,375 12,039 15,719 14,114

73,700 73,750 15,389 12,051 15,733 14,126

73,750 73,800 15,403 12,064 15,747 14,139

73,800 73,850 15,417 12,076 15,761 14,151

73,850 73,900 15,431 12,089 15,775 14,164

73,900 73,950 15,445 12,101 15,789 14,176

73,950 74,000 15,459 12,114 15,803 14,189

74,000 74,050 15,473 12,126 15,817 14,201

74,050 74,100 15,487 12,139 15,831 14,214

74,100 74,150 15,501 12,151 15,845 14,226

74,150 74,200 15,515 12,164 15,859 14,239

74,200 74,250 15,529 12,176 15,873 14,251

74,250 74,300 15,543 12,189 15,887 14,264

74,300 74,350 15,557 12,201 15,901 14,276

74,350 74,400 15,571 12,214 15,915 14,289

74,400 74,450 15,585 12,226 15,929 14,301

74,450 74,500 15,599 12,239 15,943 14,314

74,500 74,550 15,613 12,251 15,957 14,326

74,550 74,600 15,627 12,264 15,971 14,339

74,600 74,650 15,641 12,276 15,985 14,351

74,650 74,700 15,655 12,289 15,999 14,364

74,700 74,750 15,669 12,301 16,013 14,376

74,750 74,800 15,683 12,314 16,027 14,389

74,800 74,850 15,697 12,326 16,041 14,401

74,850 74,900 15,711 12,339 16,055 14,414

74,900 74,950 15,725 12,351 16,069 14,426

74,950 75,000 15,739 12,364 16,083 14,439

75,000 75,050 15,753 12,376 16,097 14,451

75,050 75,100 15,767 12,389 16,111 14,464

75,100 75,150 15,781 12,401 16,125 14,476

75,150 75,200 15,795 12,414 16,139 14,489

75,200 75,250 15,809 12,426 16,153 14,501

75,250 75,300 15,823 12,439 16,167 14,514

75,300 75,350 15,837 12,451 16,181 14,526

75,350 75,400 15,851 12,464 16,195 14,539

75,400 75,450 15,865 12,476 16,209 14,551

75,450 75,500 15,879 12,489 16,223 14,564

75,500 75,550 15,893 12,501 16,237 14,576

75,550 75,600 15,907 12,514 16,251 14,589

75,600 75,650 15,921 12,526 16,265 14,601

75,650 75,700 15,935 12,539 16,279 14,614

75,700 75,750 15,949 12,551 16,293 14,626

75,750 75,800 15,963 12,564 16,307 14,639

75,800 75,850 15,977 12,576 16,321 14,651

75,850 75,900 15,991 12,589 16,335 14,664

75,900 75,950 16,005 12,601 16,349 14,676

75,950 76,000 16,019 12,614 16,363 14,689

76,000 76,050 16,033 12,626 16,377 14,701

76,050 76,100 16,047 12,639 16,391 14,714

76,100 76,150 16,061 12,651 16,405 14,726

76,150 76,200 16,075 12,664 16,419 14,739

76,200 76,250 16,089 12,676 16,433 14,751

76,250 76,300 16,103 12,689 16,447 14,764

76,300 76,350 16,117 12,701 16,461 14,776

76,350 76,400 16,131 12,714 16,475 14,789

76,400 76,450 16,145 12,726 16,489 14,801

76,450 76,500 16,159 12,739 16,503 14,814

76,500 76,550 16,173 12,751 16,517 14,826

76,550 76,600 16,187 12,764 16,531 14,839

76,600 76,650 16,201 12,776 16,545 14,851

76,650 76,700 16,215 12,789 16,559 14,864

76,700 76,750 16,229 12,801 16,573 14,876

76,750 76,800 16,243 12,814 16,587 14,889

76,800 76,850 16,257 12,826 16,601 14,901

76,850 76,900 16,271 12,839 16,615 14,914

76,900 76,950 16,285 12,851 16,629 14,926

76,950 77,000 16,299 12,864 16,643 14,939
D-10 Appendix D

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 73)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

77,000

78,000

79,000

80,000

81,000

82,000

83,000

84,000

85,000

77,000 77,050 16,313 12,876 16,657 14,951

77,050 77,100 16,327 12,889 16,671 14,964

77,100 77,150 16,341 12,901 16,685 14,976

77,150 77,200 16,355 12,914 16,699 14,989

77,200 77,250 16,369 12,926 16,713 15,001

77,250 77,300 16,383 12,939 16,727 15,014

77,300 77,350 16,397 12,951 16,741 15,026

77,350 77,400 16,411 12,964 16,755 15,039

77,400 77,450 16,425 12,976 16,769 15,051

77,450 77,500 16,439 12,989 16,783 15,064

77,500 77,550 16,453 13,001 16,797 15,076

77,550 77,600 16,467 13,014 16,811 15,089

77,600 77,650 16,481 13,026 16,825 15,101

77,650 77,700 16,495 13,039 16,839 15,114

77,700 77,750 16,509 13,051 16,853 15,126

77,750 77,800 16,523 13,064 16,867 15,139

77,800 77,850 16,537 13,076 16,881 15,151

77,850 77,900 16,551 13,089 16,895 15,164

77,900 77,950 16,565 13,101 16,909 15,176

77,950 78,000 16,579 13,114 16,923 15,189

78,000 78,050 16,593 13,126 16,937 15,201

78,050 78,100 16,607 13,139 16,951 15,214

78,100 78,150 16,621 13,151 16,965 15,226

78,150 78,200 16,635 13,164 16,979 15,239

78,200 78,250 16,649 13,176 16,993 15,251

78,250 78,300 16,663 13,189 17,007 15,264

78,300 78,350 16,677 13,201 17,021 15,276

78,350 78,400 16,691 13,214 17,035 15,289

78,400 78,450 16,705 13,226 17,049 15,301

78,450 78,500 16,719 13,239 17,063 15,314

78,500 78,550 16,733 13,251 17,077 15,326

78,550 78,600 16,747 13,264 17,091 15,339

78,600 78,650 16,761 13,276 17,105 15,351

78,650 78,700 16,775 13,289 17,119 15,364

78,700 78,750 16,789 13,301 17,133 15,376

78,750 78,800 16,803 13,314 17,147 15,389

78,800 78,850 16,817 13,326 17,161 15,401

78,850 78,900 16,831 13,339 17,175 15,414

78,900 78,950 16,845 13,351 17,189 15,426

78,950 79,000 16,859 13,364 17,203 15,439

79,000 79,050 16,873 13,376 17,217 15,451

79,050 79,100 16,887 13,389 17,231 15,464

79,100 79,150 16,901 13,401 17,245 15,476

79,150 79,200 16,915 13,414 17,259 15,489

79,200 79,250 16,929 13,426 17,273 15,501

79,250 79,300 16,943 13,439 17,287 15,514

79,300 79,350 16,957 13,451 17,301 15,526

79,350 79,400 16,971 13,464 17,315 15,539

79,400 79,450 16,985 13,476 17,329 15,551

79,450 79,500 16,999 13,489 17,343 15,564

79,500 79,550 17,013 13,501 17,357 15,576

79,550 79,600 17,027 13,514 17,371 15,589

79,600 79,650 17,041 13,526 17,385 15,601

79,650 79,700 17,055 13,539 17,399 15,614

79,700 79,750 17,069 13,551 17,413 15,626

79,750 79,800 17,083 13,564 17,427 15,639

79,800 79,850 17,097 13,576 17,441 15,651

79,850 79,900 17,111 13,589 17,455 15,664

79,900 79,950 17,125 13,601 17,469 15,676

79,950 80,000 17,139 13,614 17,483 15,689

80,000 80,050 17,153 13,626 17,497 15,701

80,050 80,100 17,167 13,639 17,511 15,714

80,100 80,150 17,181 13,651 17,525 15,726

80,150 80,200 17,195 13,664 17,539 15,739

80,200 80,250 17,209 13,676 17,553 15,751

80,250 80,300 17,223 13,689 17,567 15,764

80,300 80,350 17,237 13,701 17,581 15,776

80,350 80,400 17,251 13,714 17,595 15,789

80,400 80,450 17,265 13,726 17,609 15,801

80,450 80,500 17,279 13,739 17,623 15,814

80,500 80,550 17,293 13,751 17,637 15,826

80,550 80,600 17,307 13,764 17,651 15,839

80,600 80,650 17,321 13,776 17,665 15,851

80,650 80,700 17,335 13,789 17,679 15,864

80,700 80,750 17,349 13,801 17,693 15,876

80,750 80,800 17,363 13,814 17,707 15,889

80,800 80,850 17,377 13,826 17,721 15,901

80,850 80,900 17,391 13,839 17,735 15,914

80,900 80,950 17,405 13,851 17,749 15,926

80,950 81,000 17,419 13,864 17,763 15,939

81,000 81,050 17,433 13,876 17,777 15,951

81,050 81,100 17,447 13,889 17,791 15,964

81,100 81,150 17,461 13,901 17,805 15,976

81,150 81,200 17,475 13,914 17,819 15,989

81,200 81,250 17,489 13,926 17,833 16,001

81,250 81,300 17,503 13,939 17,847 16,014

81,300 81,350 17,517 13,951 17,861 16,026

81,350 81,400 17,531 13,964 17,875 16,039

81,400 81,450 17,545 13,976 17,889 16,051

81,450 81,500 17,559 13,989 17,903 16,064

81,500 81,550 17,573 14,001 17,917 16,076

81,550 81,600 17,587 14,014 17,931 16,089

81,600 81,650 17,601 14,026 17,945 16,101

81,650 81,700 17,615 14,039 17,959 16,114

81,700 81,750 17,629 14,051 17,973 16,126

81,750 81,800 17,643 14,064 17,987 16,139

81,800 81,850 17,657 14,076 18,001 16,151

81,850 81,900 17,671 14,089 18,015 16,164

81,900 81,950 17,685 14,101 18,029 16,176

81,950 82,000 17,699 14,114 18,043 16,189

82,000 82,050 17,713 14,126 18,057 16,201

82,050 82,100 17,727 14,139 18,071 16,214

82,100 82,150 17,741 14,151 18,085 16,226

82,150 82,200 17,755 14,164 18,099 16,239

82,200 82,250 17,769 14,176 18,113 16,251

82,250 82,300 17,783 14,189 18,127 16,264

82,300 82,350 17,797 14,201 18,141 16,276

82,350 82,400 17,811 14,214 18,155 16,289

82,400 82,450 17,825 14,226 18,169 16,301

82,450 82,500 17,839 14,239 18,183 16,314

82,500 82,550 17,853 14,251 18,197 16,326

82,550 82,600 17,867 14,264 18,211 16,339

82,600 82,650 17,881 14,276 18,225 16,351

82,650 82,700 17,895 14,289 18,239 16,364

82,700 82,750 17,909 14,301 18,253 16,376

82,750 82,800 17,923 14,314 18,267 16,389

82,800 82,850 17,937 14,326 18,281 16,401

82,850 82,900 17,951 14,339 18,295 16,414

82,900 82,950 17,965 14,351 18,309 16,426

82,950 83,000 17,979 14,364 18,323 16,439

83,000 83,050 17,993 14,376 18,337 16,451

83,050 83,100 18,007 14,389 18,351 16,464

83,100 83,150 18,021 14,401 18,365 16,476

83,150 83,200 18,035 14,414 18,379 16,489

83,200 83,250 18,049 14,426 18,393 16,501

83,250 83,300 18,063 14,439 18,407 16,514

83,300 83,350 18,077 14,451 18,421 16,526

83,350 83,400 18,091 14,464 18,435 16,539

83,400 83,450 18,105 14,476 18,449 16,551

83,450 83,500 18,119 14,489 18,463 16,564

83,500 83,550 18,133 14,501 18,477 16,576

83,550 83,600 18,147 14,514 18,491 16,589

83,600 83,650 18,161 14,526 18,505 16,601

83,650 83,700 18,175 14,539 18,519 16,614

83,700 83,750 18,189 14,551 18,533 16,626

83,750 83,800 18,203 14,564 18,547 16,639

83,800 83,850 18,217 14,576 18,561 16,651

83,850 83,900 18,231 14,589 18,575 16,664

83,900 83,950 18,245 14,601 18,589 16,676

83,950 84,000 18,259 14,614 18,603 16,689

84,000 84,050 18,273 14,626 18,617 16,701

84,050 84,100 18,287 14,639 18,631 16,714

84,100 84,150 18,301 14,651 18,645 16,726

84,150 84,200 18,315 14,664 18,659 16,739

84,200 84,250 18,329 14,676 18,673 16,751

84,250 84,300 18,343 14,689 18,687 16,764

84,300 84,350 18,357 14,701 18,701 16,776

84,350 84,400 18,371 14,714 18,715 16,789

84,400 84,450 18,385 14,726 18,729 16,801

84,450 84,500 18,399 14,739 18,743 16,814

84,500 84,550 18,413 14,751 18,757 16,826

84,550 84,600 18,427 14,764 18,771 16,839

84,600 84,650 18,441 14,776 18,785 16,851

84,650 84,700 18,455 14,789 18,799 16,864

84,700 84,750 18,469 14,801 18,813 16,876

84,750 84,800 18,483 14,814 18,827 16,889

84,800 84,850 18,497 14,826 18,841 16,901

84,850 84,900 18,511 14,839 18,855 16,914

84,900 84,950 18,525 14,851 18,869 16,926

84,950 85,000 18,539 14,864 18,883 16,939

85,000 85,050 18,553 14,876 18,897 16,951

85,050 85,100 18,567 14,889 18,911 16,964

85,100 85,150 18,581 14,901 18,925 16,976

85,150 85,200 18,595 14,914 18,939 16,989

85,200 85,250 18,609 14,926 18,953 17,001

85,250 85,300 18,623 14,939 18,967 17,014

85,300 85,350 18,637 14,951 18,981 17,026

85,350 85,400 18,651 14,964 18,995 17,039

85,400 85,450 18,665 14,976 19,009 17,051

85,450 85,500 18,679 14,989 19,023 17,064

85,500 85,550 18,693 15,001 19,037 17,076

85,550 85,600 18,707 15,014 19,051 17,089

85,600 85,650 18,721 15,026 19,065 17,101

85,650 85,700 18,735 15,039 19,079 17,114

85,700 85,750 18,749 15,051 19,093 17,126

85,750 85,800 18,763 15,064 19,107 17,139

85,800 85,850 18,777 15,076 19,121 17,151

85,850 85,900 18,791 15,089 19,135 17,164

85,900 85,950 18,805 15,101 19,149 17,176

85,950 86,000 18,819 15,114 19,163 17,189
Appendix D D-11

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is— Your tax is—

* This column must also be used by a qualifying widow(er). (Continued on page 74)

If line 40

(taxable

income) is—

If line 40

(taxable

income) is—

86,000

87,000

88,000

89,000

90,000

91,000

92,000

93,000

94,000

86,000 86,050 18,833 15,126 19,177 17,201

86,050 86,100 18,847 15,139 19,191 17,214

86,100 86,150 18,861 15,151 19,205 17,226

86,150 86,200 18,875 15,164 19,219 17,239

86,200 86,250 18,889 15,176 19,233 17,251

86,250 86,300 18,903 15,189 19,247 17,264

86,300 86,350 18,917 15,201 19,261 17,276

86,350 86,400 18,931 15,214 19,275 17,289

86,400 86,450 18,945 15,226 19,289 17,301

86,450 86,500 18,959 15,239 19,303 17,314

86,500 86,550 18,973 15,251 19,317 17,326

86,550 86,600 18,987 15,264 19,331 17,339

86,600 86,650 19,001 15,276 19,345 17,351

86,650 86,700 19,015 15,289 19,359 17,364

86,700 86,750 19,029 15,301 19,373 17,376

86,750 86,800 19,043 15,314 19,387 17,389

86,800 86,850 19,057 15,326 19,401 17,401

86,850 86,900 19,071 15,339 19,415 17,414

86,900 86,950 19,085 15,351 19,429 17,426

86,950 87,000 19,099 15,364 19,443 17,439

87,000 87,050 19,113 15,376 19,457 17,451

87,050 87,100 19,127 15,389 19,471 17,464

87,100 87,150 19,141 15,401 19,485 17,476

87,150 87,200 19,155 15,414 19,499 17,489

87,200 87,250 19,169 15,426 19,513 17,501

87,250 87,300 19,183 15,439 19,527 17,514

87,300 87,350 19,197 15,451 19,541 17,526

87,350 87,400 19,211 15,464 19,557 17,539

87,400 87,450 19,225 15,476 19,573 17,551

87,450 87,500 19,239 15,489 19,590 17,564

87,500 87,550 19,253 15,501 19,606 17,576

87,550 87,600 19,267 15,514 19,623 17,589

87,600 87,650 19,281 15,526 19,639 17,601

87,650 87,700 19,295 15,539 19,656 17,614

87,700 87,750 19,309 15,551 19,672 17,626

87,750 87,800 19,323 15,564 19,689 17,639

87,800 87,850 19,337 15,576 19,705 17,651

87,850 87,900 19,351 15,589 19,722 17,664

87,900 87,950 19,365 15,601 19,738 17,676

87,950 88,000 19,379 15,614 19,755 17,689

88,000 88,050 19,393 15,626 19,771 17,701

88,050 88,100 19,407 15,639 19,788 17,714

88,100 88,150 19,421 15,651 19,804 17,726

88,150 88,200 19,435 15,664 19,821 17,739

88,200 88,250 19,449 15,676 19,837 17,751

88,250 88,300 19,463 15,689 19,854 17,764

88,300 88,350 19,477 15,701 19,870 17,776

88,350 88,400 19,491 15,714 19,887 17,789

88,400 88,450 19,505 15,726 19,903 17,801

88,450 88,500 19,519 15,739 19,920 17,814

88,500 88,550 19,533 15,751 19,936 17,826

88,550 88,600 19,547 15,764 19,953 17,839

88,600 88,650 19,561 15,776 19,969 17,851

88,650 88,700 19,575 15,789 19,986 17,864

88,700 88,750 19,589 15,801 20,002 17,876

88,750 88,800 19,603 15,814 20,019 17,889

88,800 88,850 19,617 15,826 20,035 17,901

88,850 88,900 19,631 15,839 20,052 17,914

88,900 88,950 19,645 15,851 20,068 17,926

88,950 89,000 19,659 15,864 20,085 17,939

89,000 89,050 19,673 15,876 20,101 17,951

89,050 89,100 19,687 15,889 20,118 17,964

89,100 89,150 19,701 15,901 20,134 17,976

89,150 89,200 19,715 15,914 20,151 17,989

89,200 89,250 19,729 15,926 20,167 18,001

89,250 89,300 19,743 15,939 20,184 18,014

89,300 89,350 19,757 15,951 20,200 18,026

89,350 89,400 19,771 15,964 20,217 18,039

89,400 89,450 19,785 15,976 20,233 18,051

89,450 89,500 19,799 15,989 20,250 18,064

89,500 89,550 19,813 16,001 20,266 18,076

89,550 89,600 19,827 16,014 20,283 18,089

89,600 89,650 19,841 16,026 20,299 18,101

89,650 89,700 19,855 16,039 20,316 18,114

89,700 89,750 19,869 16,051 20,332 18,126

89,750 89,800 19,883 16,064 20,349 18,139

89,800 89,850 19,897 16,076 20,365 18,151

89,850 89,900 19,911 16,089 20,382 18,164

89,900 89,950 19,925 16,101 20,398 18,176

89,950 90,000 19,939 16,114 20,415 18,189

90,000 90,050 19,953 16,126 20,431 18,201

90,050 90,100 19,967 16,139 20,448 18,214

90,100 90,150 19,981 16,151 20,464 18,226

90,150 90,200 19,995 16,164 20,481 18,239

90,200 90,250 20,009 16,176 20,497 18,251

90,250 90,300 20,023 16,189 20,514 18,264

90,300 90,350 20,037 16,201 20,530 18,276

90,350 90,400 20,051 16,214 20,547 18,289

90,400 90,450 20,065 16,226 20,563 18,301

90,450 90,500 20,079 16,239 20,580 18,314

90,500 90,550 20,093 16,251 20,596 18,326

90,550 90,600 20,107 16,264 20,613 18,339

90,600 90,650 20,121 16,276 20,629 18,351

90,650 90,700 20,135 16,289 20,646 18,364

90,700 90,750 20,149 16,301 20,662 18,376

90,750 90,800 20,163 16,314 20,679 18,389

90,800 90,850 20,177 16,326 20,695 18,401

90,850 90,900 20,191 16,339 20,712 18,414

90,900 90,950 20,205 16,351 20,728 18,426

90,950 91,000 20,219 16,364 20,745 18,439

91,000 91,050 20,233 16,376 20,761 18,451

91,050 91,100 20,247 16,389 20,778 18,464

91,100 91,150 20,261 16,401 20,794 18,476

91,150 91,200 20,275 16,414 20,811 18,489

91,200 91,250 20,289 16,426 20,827 18,501

91,250 91,300 20,303 16,439 20,844 18,514

91,300 91,350 20,317 16,451 20,860 18,526

91,350 91,400 20,331 16,464 20,877 18,539

91,400 91,450 20,345 16,476 20,893 18,551

91,450 91,500 20,359 16,489 20,910 18,564

91,500 91,550 20,373 16,501 20,926 18,576

91,550 91,600 20,387 16,514 20,943 18,589

91,600 91,650 20,401 16,526 20,959 18,601

91,650 91,700 20,415 16,539 20,976 18,614

91,700 91,750 20,429 16,551 20,992 18,626

91,750 91,800 20,443 16,564 21,009 18,639

91,800 91,850 20,457 16,576 21,025 18,651

91,850 91,900 20,471 16,589 21,042 18,664

91,900 91,950 20,485 16,601 21,058 18,676

91,950 92,000 20,499 16,614 21,075 18,689

92,000 92,050 20,513 16,626 21,091 18,701

92,050 92,100 20,527 16,639 21,108 18,714

92,100 92,150 20,541 16,651 21,124 18,726

92,150 92,200 20,555 16,664 21,141 18,739

92,200 92,250 20,569 16,676 21,157 18,751

92,250 92,300 20,583 16,689 21,174 18,764

92,300 92,350 20,597 16,701 21,190 18,776

92,350 92,400 20,611 16,714 21,207 18,789

92,400 92,450 20,625 16,726 21,223 18,801

92,450 92,500 20,639 16,739 21,240 18,814

92,500 92,550 20,653 16,751 21,256 18,826

92,550 92,600 20,667 16,764 21,273 18,839

92,600 92,650 20,681 16,776 21,289 18,851

92,650 92,700 20,695 16,789 21,306 18,864

92,700 92,750 20,709 16,801 21,322 18,876

92,750 92,800 20,723 16,814 21,339 18,889

92,800 92,850 20,737 16,826 21,355 18,901

92,850 92,900 20,751 16,839 21,372 18,914

92,900 92,950 20,765 16,851 21,388 18,926

92,950 93,000 20,779 16,864 21,405 18,939

93,000 93,050 20,793 16,876 21,421 18,951

93,050 93,100 20,807 16,889 21,438 18,964

93,100 93,150 20,821 16,901 21,454 18,976

93,150 93,200 20,835 16,914 21,471 18,989

93,200 93,250 20,849 16,926 21,487 19,001

93,250 93,300 20,863 16,939 21,504 19,014

93,300 93,350 20,877 16,951 21,520 19,026

93,350 93,400 20,891 16,964 21,537 19,039

93,400 93,450 20,905 16,976 21,553 19,051

93,450 93,500 20,919 16,989 21,570 19,064

93,500 93,550 20,933 17,001 21,586 19,076

93,550 93,600 20,947 17,014 21,603 19,089

93,600 93,650 20,961 17,026 21,619 19,101

93,650 93,700 20,975 17,039 21,636 19,114

93,700 93,750 20,989 17,051 21,652 19,126

93,750 93,800 21,003 17,064 21,669 19,139

93,800 93,850 21,017 17,076 21,685 19,151

93,850 93,900 21,031 17,089 21,702 19,164

93,900 93,950 21,045 17,101 21,718 19,176

93,950 94,000 21,059 17,114 21,735 19,189

94,000 94,050 21,073 17,126 21,751 19,201

94,050 94,100 21,087 17,139 21,768 19,214

94,100 94,150 21,101 17,151 21,784 19,226

94,150 94,200 21,115 17,164 21,801 19,239

94,200 94,250 21,129 17,176 21,817 19,251

94,250 94,300 21,143 17,189 21,834 19,264

94,300 94,350 21,157 17,201 21,850 19,276

94,350 94,400 21,171 17,214 21,867 19,289

94,400 94,450 21,185 17,226 21,883 19,301

94,450 94,500 21,199 17,239 21,900 19,314

94,500 94,550 21,213 17,251 21,916 19,326

94,550 94,600 21,227 17,264 21,933 19,339

94,600 94,650 21,241 17,276 21,949 19,351

94,650 94,700 21,255 17,289 21,966 19,364

94,700 94,750 21,269 17,301 21,982 19,376

94,750 94,800 21,283 17,314 21,999 19,389

94,800 94,850 21,297 17,326 22,015 19,401

94,850 94,900 21,311 17,339 22,032 19,414

94,900 94,950 21,325 17,351 22,048 19,426

94,950 95,000 21,339 17,364 22,065 19,439
D-12 Appendix D

APPENDIX

Draft as of

08/14/2003

2003 Tax Table—Continued

If line 40

(taxable

income) is—

And you are— And you are—

Married

filing

jointly

*

Married Single

filing

jointly

*

Single Head

of a

household

Married

filing

separately

But

less

than

At

least

Head

of a

household

Married

filing

separately

But

less

than

At

least

Your tax is— Your tax is—

If line 40

(taxable

income) is—

* This column must also be used by a qualifying widow(er).

95,000

96,000

97,000

98,000

99,000

$100,000

or over —

use the

Tax Rate

Schedules

on page 75

95,000 95,050 21,353 17,376 22,081 19,451

95,050 95,100 21,367 17,389 22,098 19,464

95,100 95,150 21,381 17,401 22,114 19,476

95,150 95,200 21,395 17,414 22,131 19,489

95,200 95,250 21,409 17,426 22,147 19,501

95,250 95,300 21,423 17,439 22,164 19,514

95,300 95,350 21,437 17,451 22,180 19,526

95,350 95,400 21,451 17,464 22,197 19,539

95,400 95,450 21,465 17,476 22,213 19,551

95,450 95,500 21,479 17,489 22,230 19,564

95,500 95,550 21,493 17,501 22,246 19,576

95,550 95,600 21,507 17,514 22,263 19,589

95,600 95,650 21,521 17,526 22,279 19,601

95,650 95,700 21,535 17,539 22,296 19,614

95,700 95,750 21,549 17,551 22,312 19,626

95,750 95,800 21,563 17,564 22,329 19,639

95,800 95,850 21,577 17,576 22,345 19,651

95,850 95,900 21,591 17,589 22,362 19,664

95,900 95,950 21,605 17,601 22,378 19,676

95,950 96,000 21,619 17,614 22,395 19,689

96,000 96,050 21,633 17,626 22,411 19,701

96,050 96,100 21,647 17,639 22,428 19,714

96,100 96,150 21,661 17,651 22,444 19,726

96,150 96,200 21,675 17,664 22,461 19,739

96,200 96,250 21,689 17,676 22,477 19,751

96,250 96,300 21,703 17,689 22,494 19,764

96,300 96,350 21,717 17,701 22,510 19,776

96,350 96,400 21,731 17,714 22,527 19,789

96,400 96,450 21,745 17,726 22,543 19,801

96,450 96,500 21,759 17,739 22,560 19,814

96,500 96,550 21,773 17,751 22,576 19,826

96,550 96,600 21,787 17,764 22,593 19,839

96,600 96,650 21,801 17,776 22,609 19,851

96,650 96,700 21,815 17,789 22,626 19,864

96,700 96,750 21,829 17,801 22,642 19,876

96,750 96,800 21,843 17,814 22,659 19,889

96,800 96,850 21,857 17,826 22,675 19,901

96,850 96,900 21,871 17,839 22,692 19,914

96,900 96,950 21,885 17,851 22,708 19,926

96,950 97,000 21,899 17,864 22,725 19,939

97,000 97,050 21,913 17,876 22,741 19,951

97,050 97,100 21,927 17,889 22,758 19,964

97,100 97,150 21,941 17,901 22,774 19,976

97,150 97,200 21,955 17,914 22,791 19,989

97,200 97,250 21,969 17,926 22,807 20,001

97,250 97,300 21,983 17,939 22,824 20,014

97,300 97,350 21,997 17,951 22,840 20,026

97,350 97,400 22,011 17,964 22,857 20,039

97,400 97,450 22,025 17,976 22,873 20,051

97,450 97,500 22,039 17,989 22,890 20,064

97,500 97,550 22,053 18,001 22,906 20,076

97,550 97,600 22,067 18,014 22,923 20,089

97,600 97,650 22,081 18,026 22,939 20,101

97,650 97,700 22,095 18,039 22,956 20,114

97,700 97,750 22,109 18,051 22,972 20,126

97,750 97,800 22,123 18,064 22,989 20,139

97,800 97,850 22,137 18,076 23,005 20,151

97,850 97,900 22,151 18,089 23,022 20,164

97,900 97,950 22,165 18,101 23,038 20,176

97,950 98,000 22,179 18,114 23,055 20,189

98,000 98,050 22,193 18,126 23,071 20,201

98,050 98,100 22,207 18,139 23,088 20,214

98,100 98,150 22,221 18,151 23,104 20,226

98,150 98,200 22,235 18,164 23,121 20,239

98,200 98,250 22,249 18,176 23,137 20,251

98,250 98,300 22,263 18,189 23,154 20,265

98,300 98,350 22,277 18,201 23,170 20,279

98,350 98,400 22,291 18,214 23,187 20,293

98,400 98,450 22,305 18,226 23,203 20,307

98,450 98,500 22,319 18,239 23,220 20,321

98,500 98,550 22,333 18,251 23,236 20,335

98,550 98,600 22,347 18,264 23,253 20,349

98,600 98,650 22,361 18,276 23,269 20,363

98,650 98,700 22,375 18,289 23,286 20,377

98,700 98,750 22,389 18,301 23,302 20,391

98,750 98,800 22,403 18,314 23,319 20,405

98,800 98,850 22,417 18,326 23,335 20,419

98,850 98,900 22,431 18,339 23,352 20,433

98,900 98,950 22,445 18,351 23,368 20,447

98,950 99,000 22,459 18,364 23,385 20,461

99,000 99,050 22,473 18,376 23,401 20,475

99,050 99,100 22,487 18,389 23,418 20,489

99,100 99,150 22,501 18,401 23,434 20,503

99,150 99,200 22,515 18,414 23,451 20,517

99,200 99,250 22,529 18,426 23,467 20,531

99,250 99,300 22,543 18,439 23,484 20,545

99,300 99,350 22,557 18,451 23,500 20,559

99,350 99,400 22,571 18,464 23,517 20,573

99,400 99,450 22,585 18,476 23,533 20,587

99,450 99,500 22,599 18,489 23,550 20,601

99,500 99,550 22,613 18,501 23,566 20,615

99,550 99,600 22,627 18,514 23,583 20,629

99,600 99,650 22,641 18,526 23,599 20,643

99,650 99,700 22,655 18,539 23,616 20,657

99,700 99,750 22,669 18,551 23,632 20,671

99,750 99,800 22,683 18,564 23,649 20,685

99,800 99,850 22,697 18,576 23,665 20,699

99,850 99,900 22,711 18,589 23,682 20,713

99,900 99,950 22,725 18,601 23,698 20,727

99,950 100,000 22,739 18,614 23,715 20,741
Index E-1

APPENDIX

INDEX

A

additional child tax credit ........................................................................................................ 1-34, 10-1, 10-6

adjusted basis............................................................................................................................ 11-3, 11-4, 11-9, 11-12, 11-34, 12-2, 12-3, 12-6, 4-12, I-2-22, I-2-27

adjusted gross income............................................................................................................... 1-37, 10-2, 10-6, 10-11, 14-2, 3-1, 3-6, 3-7, 3-8, 3-13, 3-19, 3-23, 3-24, 3-26, 3-27, 3-28, 4-3, 4-4, 

4-6, 4-12, 4-14, 4-15, 4-20, 5-2, 5-4, 6-13, 7-7, 8-4, 9-4, 9-7, 9-8, 9-9, 9-13, 9-20, I-2-26, I-4-4, I-4-

7, I-4-11, M-15-14, M-4-1, M-4-9, M-4-12

Adjustments .............................................................................................................................. 3, 3-1, 3-26, 3-27, 3-28, 3-29, 6-16, 6-27, 8-1, 8-9, M-i

adopted child ............................................................................................................................. 1-4, 1-21, 1-23, 1-24, 10-2, 9-6, I-1-2

Advanced earned income credit ............................................................................................... 6-23

Advance Earned Income Credit Payments.............................................................................. 9-20

Aliens ...................................................................................................................................... 4, I-1-2, I-1-3, I-2-8, I-2-9, M-17-1, M-17-2, M-17-3, M-17-4, M-17-9, M-ii

Alimony ..................................................................................................................................... 2-1, 2-21, 2-28, 2-29, 3-3, 3-25, 9-5

Allocated tips............................................................................................................................. 2-8

amount realized ........................................................................................................................ 12-2, 12-3, I-2-27

annuity ...................................................................................................................................... 13-1, 13-2, 13-7, 13-8, 13-9, 13-10, 13-11, 13-12, 13-20, 13-24, 13-26, 13-28, 14-1, 2-4, 2-27, 3-3, 

3-4, 5-3, 6-15, 6-22, 6-27

annuity income.......................................................................................................................... 13-28, 2-4, 2-27, 3-3, 6-22

Arrangement (IRA)................................................................................................................... 13-2, 13-24, 3-2

B

business expenses ..................................................................................................................... 2-21, 2-22, I-18-1, I-18-2, I-2-8, I-2-12, I-4-1, I-4-2, I-4-3, I-4-4, I-4-6, I-4-8, I-4-13, I-4-14, I-4-15, 

I-5-8, M-15-15, M-2-15, M-2-16, M-4-1, M-4-2, M-4-7, M-4-9

C

capital asset .............................................................................................................................. 11-2, 2-18, 2-20, I-5-8

Capital Gains ............................................................................................................................ 11-2, 11-9, 11-10, 11-11, 11-19, 12-1, 2-18, 2-20, 2-27, 4-1

capital gain distributions ......................................................................................................... 11-1, 11-2, 11-10, 11-15, 11-17, 11-21, 11-31, 11-34, 2-17, 2-19, 2-20, 4-17

capital loss................................................................................................................................. 11-1, 11-11, 11-19, 11-24, 11-25, 11-28, 11-31, 11-34

child and dependent care.......................................................................................................... 1-37, 3-26, 6-22, 7-1, 7-2, 7-6

child support ............................................................................................................................. 10, 2-3, 2-21, 7-6, I-2-1, I-2-2

Child Tax Credit........................................................................................................................ 3, 1-15, 10-1, 10-2, 10-3, 10-4, 10-5, 10-6, 10-7, 10-8, 10-15, 10-16, 10-17, 6-8, CW-16, CW-31, 

M-ii

Combat Zone ............................................................................................................................. 4, M-16-6, M-2-1, M-2-3, M-2-4, M-2-5, M-2-7, M-6-4, M-6-5, M-ii

compensation ............................................................................................................................ 1-5, 10-11, 13-2, 13-24, 2-1, 2-2, 2-3, 2-4, 2-5, 2-27, 2-29, 3-3, 3-4, 3-5, 3-7, 3-9, 3-13, 3-27, 3-28, 

5-3, 6-12, 6-15, 7-3, 9-4, 9-5, 9-9, CW-5, I-2-2, I-4-6, M-2-4, M-4-4

credit for child and dependent care ......................................................................................... 3-26, 6-22, 7-1, 7-2, 7-6, 7-10, M-ii, 7-13, 7-14, 7-15

credit for the elderly ................................................................................................................. 1-37, 13-20, 14-1, 14-6, 6-22

credit for the elderly or the disabled........................................................................................ 1-37, 13-20, 14-1, 6-22

credit rate.................................................................................................................................. 5-2, 5-4, 7-10

D

deceased taxpayer..................................................................................................................... 6-23

dependency exemption ............................................................................................................. 1-2, 1-3, 1-11, 1-13, 1-14, 1-15, 1-16, 1-17, 3-22, 7-1, 7-2, 7-6, 8-3, M-1-1, M-1-3

direct deposit............................................................................................................................. 6-2, 6-10, CW-1, CW-5, CW-12

disability pension...................................................................................................................... 13-2, M-2-3, M-2-4, M-2-9

dividends ................................................................................................................................... 11-3, 11-4, 11-7, 2-2, 2-3, 2-4, 2-9, 2-13, 2-14, 2-17, 2-18, 2-29, 3-3, 3-6, 4-19, 5-7, 6-12, 9-2, 9-5, 

I-2-25, I-2-26, I-5-5, M-15-5, M-15-6

Dividend reinvestment ............................................................................................................. 2-17

divorced or separated parents.................................................................................................. 1-6, 1-15, 1-22, 1-23, 4-4

E

Earned Income Credit .............................................................................................................. 3, 1-15, 6-2, 6-8, 6-16, 6-17, 6-28, 9-1, 9-3, 9-5, 9-8, 9-10, 9-11, 9-20, 9-27, 9-28, 9-29, 9-30, 9-31, 

9-32, 9-33, 9-34, 9-35, 9-36, 9-37, 9-38, CW-9, CW-10, CW-11, CW-25, CW-26, CW-27, CW-32, 

CW-33, CW-34, M-ii

Education Credits ..................................................................................................................... 3, 8-1, 8-5, 8-9, 8-13, M-4-5, M-ii

Electronic Payment Options..................................................................................................... 6-11

Eligible contributions ............................................................................................................... 5-2, 5-3

eligible educational institution ................................................................................................ 2-11, 3-19, 3-22, 8-1, 8-2, 8-3, 8-4

Eligible Student ........................................................................................................................ 3-22, 8-3

Employer ID Number ............................................................................................................... 2-22

estimated tax payments ........................................................................................................... 4-6, 6-1, 6-4, 6-8, 6-12, 6-13, 6-14, 6-22, I-5-11, M-6-2

Estimated Tax Penalty ............................................................................................................. 6-11

Excess Contributions................................................................................................................ 13-26, 3-5

Exclusion ................................................................................................................................... 4, 12-4, 12-5, 2-11, 3-6, 3-7, 3-23, 5-7, 8-4, I-2-8, I-4-13, I-5-9, M-15-1, M-15-2, M-15-6, M-15-17, 

M-15-21, M-15-22, M-15-23, M-2-4, M-2-7, M-ii

exclusion percentage................................................................................................................. 13-9

Exemptions................................................................................................................................ 2, 1-2, 1-3, 1-13, 1-14, I-1-1, M-1-1, M-1-4, M-1-5, M-i

exemption amount .................................................................................................................... 1-2, 1-3, 1-5, 1-18, 1-37, 4-19, 4-20, 4-21, 6-13

F

Filing a Joint Return ................................................................................................................ 1-19

Finishing the Return ................................................................................................................ 1, 6-1, 6-29, M-ii

Foreign earned income exclusion ............................................................................................. 3-6, 3-23, 8-4

Appendix E 
E-2 Index

APPENDIX

Foreign Tax Credit .................................................................................................................... 3, 2-20, 5-7, I-5-7, I-5-15, M-ii

Form 1040.................................................................................................................................. 9, 12, 13, 14, 15, 16, 1-16, 1-23, 1-25, 1-33, 1-37, 10-1, 10-2, 10-3, 10-6, 10-11, 11-2, 11-6, 11-9, 

11-15, 11-19, 11-21, 11-24, 11-25, 11-27, 11-28, 11-30, 11-31, 11-34, 11-37, 11-40, 11-45, 12-1, 

12-6, 13-12, 13-16, 13-20, 13-21, 13-22, 13-23, 13-24, 13-26, 13-28, 14-2, 14-3, 14-6, 2-4, 2-5, 2-6, 

2-7, 2-8, 2-9, 2-11, 2-14, 2-15, 2-16, 2-17, 2-18, 2-19, 2-20, 2-21, 2-23, 2-25, 2-27, 2-29, 2-30, 2-31, 

3-1, 3-2, 3-6, 3-11, 3-13, 3-20, 3-22, 3-24, 3-25, 3-26, 3-27, 4-2, 4-3, 4-4, 4-5, 4-9, 4-14, 4-17, 4-19, 

4-20, 4-21, 5-2, 5-6, 5-7, 6-6, 6-7, 6-8, 6-9, 6-10, 6-11, 6-13, 6-14, 6-15, 6-17, 6-18, 6-20, 6-21, 

6-22, 6-25, 6-27, 7-1, 7-7, 7-10, 8-1, 8-4, 8-10, 8-11, 9-4, 9-5, 9-10, 9-11, 9-13, 9-20, 9-26, CM-1, 

CM-2, CM-3, CM-4, CM-7, CM-8, CM-9, CP-6, CP-7, CP-8, CP-12, CP-13, CP-15, CP-19, CP-20, 

CP-22, CP-23, CW-3, CW-4, CW-7, CW-8, CW-9, CW-10, CW-11, CW-13, CW-14, CW-16, CW-17, 

CW-18, CW-19, CW-20, CW-25, CW-26, CW-27, CW-31, CW-32, CW-33, CW-34, CW-35, I-2-1, 

I-2-8, I-2-9, I-2-10, I-2-13, I-2-15, I-2-17, I-2-18, I-2-25, I-2-26, I-4-3, I-4-4, I-4-7, I-4-13, I-4-15, 

I-4-17, I-5-8, I-5-9, I-5-12, I-5-13, M-15-7, M-15-14, M-15-15, M-16-5, M-16-8, M-17-1, M-17-3, 

M-17-7, M-2-3, M-2-4, M-3-2, M-3-3, M-3-4, M-3-6, M-3-7, M-4-1, M-4-2, M-4-3, M-4-7, M-4-9, 

M-6-2, M-6-3

Form 1040A............................................................................................................................... 13, 14, 1-25, 1-37, 10-1, 10-3, 10-11, 11-2, 11-15, 11-34, 13-20, 13-21, 13-22, 13-23, 13-28, 14-2, 

14-3, 14-6, 2-4, 2-5, 2-7, 2-8, 2-9, 2-11, 2-15, 2-17, 2-18, 2-19, 2-20, 2-27, 2-29, 3-1, 3-2, 3-11, 3-

13, 3-20, 6-9, 6-11, 6-14, 6-17, 6-18, 6-20, 6-22, 6-25, 7-1, 3-22, 3-24, 3-25, 3-26, 3-27, 4-2, 4-17, 

4-19, 5-2, 6-6, 6-7, 6-8, 7-7, 7-10, 8-1, 8-4, 8-11, 9-4, 9-5, 9-10, 9-11, 9-13, 9-20, 9-26, CP-6, CP-7, 

CP-8, CP-19, CP-20, CW-13, CW-14, CW-16, CW-17, CW-18, CW-19, CW-20, CW-31, CW-32, CW33, CW-34, CW-35, M-17-7, M-6-3

Form 1040EZ............................................................................................................................. 12, 1-16, 1-37, 2-4, 2-5, 2-7, 2-8, 2-9, 2-16, 2-17, 2-20, 2-27, 2-29, 2-31, 3-1, 4-2, 4-19, 6-6, 6-8, 6-9, 

6-11, 6-17, 6-20, 6-22, 6-25, 6-27, 9-4, 9-10, 9-26, CW-3, CW-4, CW-7, CW-8, CW-9, CW-10, CW11, CW-25, CW-26, CW-27, M-6-3

Form 2441.................................................................................................................................. 7-1, 7-5, 7-7, 7-8, 7-9, 7-10, 7-11, 7-12, 7-14, 7-15, 9-5

foster child................................................................................................................................. 1-4, 1-21, 1-22, 1-23, 1-24, 10-2, 9-6, 9-9

full-time student ....................................................................................................................... 1-5, 1-15, 1-16, 5-2, 7-3, 7-5, 7-6, 9-6, 9-11

G

gain (or loss).............................................................................................................................. 12-2, 12-3

Gambling winnings................................................................................................................... 2-2

Getting Started ......................................................................................................................... 2, M-i

Government Payments ............................................................................................................. 2-20, 2-27

gross income.............................................................................................................................. 1-3, 1-5, 1-15, 1-16, 1-18, 1-30, 1-31, 1-35, 1-37, 10-2, 10-6, 10-11, 13-26, 14-2, 2-21, 3-1, 3-3, 3-4, 

3-6, 3-7, 3-8, 3-13, 3-19, 3-23, 3-24, 3-26, 3-27, 3-28, 4-3, 4-4, 4-6, 4-12, 4-14, 4-15, 4-20, 5-2, 5-3, 

5-4, 6-13, 7-1, 7-7, 8-4, 9-2, 9-4, 9-7, 9-8, 9-9, 9-13, 9-20, I-1-1, I-2-2, I-2-17, I-2-26, I-4-4, I-4-7, 

I-4-11, I-4-14, I-5-5, I-5-9, M-1-5, M-15-14, M-17-7, M-2-1, M-2-2, M-2-3, M-2-9, M-2-10, M-2-13, 

M-2-14, M-2-16, M-3-2, M-3-3, M-4-1, M-4-2, M-4-9, M-4-12

gross proceeds ........................................................................................................................... 11-5, 11-6, 11-11, 11-12, 11-14, 11-28, 11-31, 12-2

H

Head of Household.................................................................................................................... 1-19, 1-20, 1-22, 1-23, 1-26, 3-23, 5-2, 5-4, I-1-9, M-1-7

Hobby income............................................................................................................................ 2-1

holding period ........................................................................................................................... 11-1, 11-3, 11-4, 11-9, 11-14, 11-34

Home Leave............................................................................................................................... 4, I-18-1, I-18-4, I-18-5, M-ii

home mortgage interest............................................................................................................ 4-8, CM-1

Hope Credit ............................................................................................................................... 2-13, 8-5

Hope Scholarship Credit .......................................................................................................... 8-1, 8-9

Iidentification numbers............................................................................................................ 1-2, 9-3, 9-4, 9-2

Income ...................................................................................................................................... 1, 2, 3, 4, 1-3, 1-5, 1-15, 1-18, 1-31, 11-2, 11-10, 11-15, 11-19, 11-25, 13-1, 13-7, 13-8, 13-20, 13-

26, 14-2, 2-1, 2-4, 2-6, 2-7, 2-8, 2-9, 2-14, 2-16, 2-17, 2-20, 2-21, 2-22, 2-27, 2-30, 2-31, 3-1, 3-6, 

3-25, 3-26, 4-5, 4-6, 4-17, 5-3, 5-7, 6-1, 6-2, 6-4, 6-8, 6-16, 6-17, 6-22, 6-28, 7-3, 8-4, 9-1, 9-3, 9-4, 

9-5, 9-8, 9-10, 9-11, 9-20, 9-27, 9-28, 9-29, 9-30, 9-31, 9-32, 9-33, 9-34, 9-35, 9-36, 9-37, 9-38, CW9, CW-10, CW-11, CW-25, CW-26, CW-27, CW-32, CW-33, CW-34, I-2-1, I-2-4, I-2-5, I-2-7, I-2-8, 

I-2-17, I-4-13, I-5-4, I-5-5, I-5-6, I-5-8, I-5-9, I-5-15, M-15-1, M-15-2, M-15-5, M-15-6, M-15-14, 

M-15-15, M-15-17, M-15-21, M-15-22, M-15-23, M-17-1, M-2-1, M-2-2, M-2-3, M-2-11, M-2-13, 

M-2-14, M-2-16, M-6-2, M-6-3, M-i, M-ii

income tax withheld.................................................................................................................. 1-33, 11-6, 13-20, 2-20, 6-1, 6-7, 6-12, 6-16, 6-18, 6-27, 9-1, CM-1

Individual Retirement .............................................................................................................. 13-2, 13-14, 13-24, 3-2, 3-7, 1-34, 13-14

individual retirement arrangement (IRA)............................................................................... 13-14, 13-2, 13-24, 3-2

Installment Agreement............................................................................................................. 10, 6-11, M-6-2

Integrated Training .................................................................................................................. M-ii

interest income.......................................................................................................................... 13-19, 2-4, 2-9, 2-10, 2-11, 2-12, 2-13, 2-14, 2-15, 2-16, 2-17, 2-29, 3-6, 3-25, 6-4, 6-13, 6-22, 9-13, 

CM-1, I-2-4, I-2-26, I-5-2, I-5-5, I-5-6, I-5-7, I-5-12, I-5-18

Investment Interest.................................................................................................................. 2-19, 4-9, I-5-8

IRA Deduction Worksheet ........................................................................................................ 3-11, 3-13

IRA distribution........................................................................................................................ 13-23, 13-20, 13-21, 13-23, 2-1, 2-4, 2-30, 6-22

Itemized Deduction................................................................................................................... 3, 2-20, 4-3, 4-12, 4-14, M-15-15, M-4-9, M-i

J

Jury Duty .................................................................................................................................. 3-25

L

Lifetime Learning Credit ......................................................................................................... 2-13, 8-1, 8-5, 8-7, 8-9

Life insurance dividends .......................................................................................................... 2-13

life insurance proceeds ............................................................................................................. 1-6, 2-2

long-term care ........................................................................................................................... 2-2, 2-3, 4-4

lump-sum distribution.............................................................................................................. 13-24, 6-12
Index E-3

APPENDIX

M

main home................................................................................................................................. 1-5, 1-20, 1-22, 1-23, 1-24, 12-1, 12-2, 12-3, 12-4, 12-5, 12-6, 12-7, 4-8, 4-9, 5-6, I-2-21, M-1-3

Maximum allowable contribution ............................................................................................ 5-2

meals and lodging ..................................................................................................................... I-18-2, M-4-3, M-4-4, M-4-5, M-4-6

Medical and Dental Expenses.................................................................................................. 4-4, 4-5, 4-6

military pay............................................................................................................................... M-15-1, M-15-5, M-15-17, M-16-6, M-16-9, M-2-1, M-2-5, M-2-7, M-2-8

Minimum Distributions............................................................................................................ 13-24

minimum retirement age ......................................................................................................... 13-2, 13-20, 13-21, 13-22, 9-5

Miscellaneous Credits............................................................................................................... 3

miscellaneous itemized............................................................................................................. 13-12, 2-20, 3-1, 4-12, 4-20, I-4-4, I-4-7, I-4-13, I-4-15, M-4-2, M-4-3, M-4-5, M-4-7, M-4-9, M-4-

11, M-4-12

Modified Adjusted Gross Income .............................................................................................

Modified adjusted gross income ...............................................................................................

modified adjusted gross income ............................................................................................... 10-2, 3-6, 3-7, 3-8, 3-13, 3-23, 3-24, 3-27, 3-28, 8-4

mortgage.................................................................................................................................... 1-22, 4-6, 4-7, 4-8, 4-9, 4-10, 4-15, 4-20, 5-1, 5-6, 7-3, CM-1, I-2-19, M-2-17

N

nonrefundable credit................................................................................................................. 10-6, 14-6, 5-1, 7-10, 8-11

nontaxable income .................................................................................................................... 2-1, 2-2, 2-3, 2-30, I-2-1

O

On-Line filing............................................................................................................................ 9

Original Issue Discount............................................................................................................ 2-12, 2-15

Other U.S. Obligations.............................................................................................................. 2-11

Overpayments........................................................................................................................... 6-9

ownership and use tests ........................................................................................................... 12-1, 12-5, 12-6

P

payment option ......................................................................................................................... 10, 1-38, 6-2

Payment Voucher ...................................................................................................................... 6-10

Pensions..................................................................................................................................... 3, 13-1, 13-3, 13-7, 13-8, 13-9, 13-21, 13-23, 13-28, 13-29, 13-30, 13-31, 2-1, 2-5, 2-27, 2-28, 6-4, 

9-5, M-ii

pension earner .......................................................................................................................... 2, 3, CP-1, M-ii

Pension Earner Comprehensive Problems .............................................................................. M-ii

permanent and total disability ................................................................................................ 14-1

personal exemption................................................................................................................... 1-2, 1-3, 1-13, 1-14, 1-15, 1-16, 4-2, I-1-1, M-1-5

Personal Property Tax .............................................................................................................. 4-7

points 5, 12-3, 4-8, 4-9, M-2-7

Potential Pitfalls ....................................................................................................................... 5

Proof Copies of Forms............................................................................................................... 4

Q

qualified 5-year gain................................................................................................................. 11-1, 11-10, 2-19

qualified child............................................................................................................................ 10-6

Qualified expenses.................................................................................................................... 2-11, 3-2, 8-10

Qualified Student Loan ............................................................................................................ 3-18

qualifying individual ................................................................................................................ M-1-7, M-16-4

qualifying person ...................................................................................................................... 1-23, 1-29, 7-1, 7-2, 7-3, 7-4, 7-5, 7-6, 7-10, 7-13, I-1-9

Qualifying Widow...................................................................................................................... 1-19, 1-24, 1-26, 1-31

Qualifying Widow(er) with Dependent Child.......................................................................... 1-19, 1-24

Quality Review Checklist ......................................................................................................... 6-21, 6-22, 6-23

R

railroad retirement ................................................................................................................... 13-7, 13-15, 2-2, 2-4, 4-7, 9-5

real estate taxes........................................................................................................................ 1-22, 13-21, 4-7, I-5-2, I-5-8, I-5-9, M-2-17

refundable credit....................................................................................................................... 10-6, 14-6, 2-5, 5-1, 6-2, 6-4, 6-8, 7-10, 8-11, 9-1

rental property.......................................................................................................................... 12-1, 2-27, 2-30, 3-6, I-2-17, I-2-19, I-2-21, I-2-22, I-2-23, I-2-24, I-2-25, I-2-27, M-2-17

Return of capital ....................................................................................................................... 2-18

Roth IRA.................................................................................................................................... 13-15, 13-24, 3-2, 3-4, 5-3

Royalties.................................................................................................................................... 2-1, 2-27

S

Sale of Home ............................................................................................................................. 3, 12-1, 12-7, M-ii

Sale of Stock.............................................................................................................................. 3, 11-1, 11-35, 11-36, 11-37, 11-38, 11-39, 11-40, 11-41, 11-42, 11-43, 11-44, 11-45, 2-17, 2-19, Mii

Savings Accounts ...................................................................................................................... 2-9, 4-5

Savings Incentive Match Plans for Employees (SIMPLE) IRA.............................................. 13-15

Schedule 1 (Form 1040A) ......................................................................................................... 2-11, 2-17, 2-18

Schedule 2 (Form 1040A) ......................................................................................................... 7-7, 7-10

Schedule 3 (Form 1040A) ......................................................................................................... 14-2

Schedule A (Form 1040)............................................................................................................ 13-12, 3-1, 4-9, 4-20, I-4-13, M-15-15, M-4-7, M-4-9

Schedule B (Form 1040) ........................................................................................................... 2-11, 2-18

Schedule C................................................................................................................................. 2-1, 2-6, 2-21, 2-22, 2-23, 2-25, 2-30, 3-26, 3-27, 9-10, CP-14, CP-24, I-2-9, I-2-12, I-4-3, M-2-13, 

M-2-15, M-2-16, M-2-17

Schedule C-EZ........................................................................................................................... 2-1, 2-6, 2-21, 2-22, 2-23, 2-25, 2-30, 3-27, CP-14, CP-24, M-2-13, M-2-15, M-2-16, M-2-17
E-4 Index

APPENDIX

Schedule D ................................................................................................................................ 11-1, 11-2, 11-6, 11-8, 11-9, 11-10, 11-11, 11-12, 11-13, 11-15, 11-16, 11-17, 11-18, 11-19, 11-20, 

11-21, 11-22, 11-23, 11-24, 11-25, 11-26, 11-27, 11-28, 11-29, 11-30, 11-31, 11-32, 11-33, 11-34, 

11-36, 11-37, 11-38, 11-39, 11-40, 11-43, 11-44, 12-1, 12-6, 2-18, 2-19, 2-20, 2-27, 2-29, 4-17, CP16, CP-17, CP-26, CP-27

Schedule EIC............................................................................................................................. 1-37, 6-18, 9-3, 9-4, 9-10, 9-11, 9-12, 9-13, 9-20, 9-32, 9-33, 9-38, CW-21, CW-36

Schedule R (Form 1040) ........................................................................................................... 14-2

Schedule SE .............................................................................................................................. 2-1, 2-22, 2-23, 2-25, 2-30, 3-24, CP-15, CP-25, I-2-8, I-2-9, I-2-10, I-2-12, I-2-13, I-2-15, M-2-13, 

M-2-16, M-2-17

scholarships and fellowships.................................................................................................... 2-2, 2-3, 2-4, 2-8

Self-Employed ........................................................................................................................... I-2-7

Self-employed............................................................................................................................ 2-25, I-4-3, M-2-14

self-employed............................................................................................................................. 1-33, 13-24, 2-6, 2-21, 2-30, 3-1, 3-24, 6-12, 9-10, I-2-7, I-2-8, I-2-11, I-2-12, I-2-14, M-15-5, M-2-

13, M-2-14

self-employment income ........................................................................................................... 1-33, 2-22, 2-25, 2-30, I-2-7, I-2-11, M-15-7, M-2-13

selling expenses ........................................................................................................................ 11-11, 12-3, I-2-27

Selling price............................................................................................................................... 12-2, I-2-27

Series EE................................................................................................................................... 2-2, 2-10, 2-11, 2-29

Series HH Bonds....................................................................................................................... 2-11

severance pay............................................................................................................................ M-2-3, M-2-4

Simplified Method..................................................................................................................... 13-9, 13-10, 13-11, 13-12, 13-13, 13-28

Single 1-19, 1-25, 1-26, 1-29, 1-31, 10-3, 3-8, 3-23, 4-2, 5-3

social security benefits ............................................................................................................. 1-5, 1-6, 1-31, 13-7, 13-15, 13-16, 13-19, 13-22, 13-25, 14-2, 6-22, CP-1, CP-9, M-15-5

Social Security cards................................................................................................................. 6-3

standard deduction ................................................................................................................... 1-20, 1-37, 2-20, 4-1, 4-2, 4-3, 4-14, 4-17, 4-19, 4-20, 4-21, 6-13, 6-22, I-5-8, I-5-9, I-5-12, M-17-3

stock dividends.......................................................................................................................... 2-18, 11-3, 11-4, 2-17, 2-18, M-15-6

student loan interest deduction ............................................................................................... 3-1, 3-18, 3-19, 3-20, 3-26, 3-27, 8-1

Support Test.............................................................................................................................. 1-6, 1-15, M-1-1, M-1-4

T

tax-exempt interest................................................................................................................... 1-6, 13-19, 2-14, 2-16, 6-22

taxable income .......................................................................................................................... 1-2, 1-5, 1-15, 1-37, 10-11, 11-21, 11-24, 11-31, 13-23, 2-1, 2-2, 2-3, 2-12, 2-13, 2-20, 2-21, 2-22, 2-

29, 2-30, 4-17, 4-19, 4-20, 4-21, 6-12, 6-13, I-2-1, I-2-11, I-4-3, I-4-8, I-4-11, I-5-7, I-5-11, I-5-15, 

M-15-10, M-17-8, M-2-2

Taxpayer Identification Number.............................................................................................. 1-1, 1-2, 6-3, 6-17, 9-3, M-1-5, M-1-6, M-17-6

Taxpayer Identification Section ............................................................................................... 6-3, 6-17

TaxWise ..................................................................................................................................... 17, 1-15, 1-26, 1-34, 12-6, 13-15, 14-6, 2-28, 3-26, 4-19, 7-10, 8-11

Tax Options for Combat Zone Participants ............................................................................. 4, M-2-1, M-6-5, M-ii

Tax Table ................................................................................................................................... 4-1, 11-10, 11-19, 4-19, 4-21, D-1

testing ...................................................................................................................................... 4, 3-6, 5-3

testing period ............................................................................................................................ 5-3

traditional IRA.......................................................................................................................... 13-14, 13-16, 13-23, 13-25, 13-26, 3-1, 3-2, 3-3, 3-4, 3-5, 3-6, 3-7, 3-8, 3-9, 3-10, 3-11, 3-13, 3-16, 

3-25, 3-27, 3-28, CP-1

U

U.S. citizen................................................................................................................................. 1-5, 14-1, 9-2, 9-3, I-1-1, I-1-2, I-1-3, I-1-7, I-1-8, I-1-9, I-18-2, I-2-1, I-2-7, I-2-12, I-2-17, I-4-1, 

I-4-8, I-4-13, I-5-1, I-5-2, I-5-3, I-5-4, I-5-5, I-5-6, I-5-7, I-5-8, I-5-10, I-5-12, I-5-15, M-1-2, M-1-3, 

M-1-4, M-1-5, M-15-3, M-15-4, M-15-7, M-15-18, M-17-3, M-6-3, M-6-7

unearned income....................................................................................................................... 2-9

unemployment compensation................................................................................................... 1-5, 10-11, 2-2, 2-4, 2-27, 2-29, 6-12, 9-5, 9-9, CW-5, I-2-2

unreimbursed expenses............................................................................................................ 3-2

V

veterans benefits....................................................................................................................... 14-1

Volunteer Hotline...................................................................................................................... 6

W

wages, salaries, tips .................................................................................................................. 2-4, 2-29, 7-3, 9-4

Wage Earner Comprehensive Problem.................................................................................... M-ii

Welfare payments ..................................................................................................................... 1-22
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