Publication 17
Your Federal Income Tax
For use in Preparing 2004 ReturnsIntroduction, Useful Items and Important Changes
Do I Have To File a Return?
Individuals—In General
Dependents
Children Under Age 14
Self-Employed Persons
Aliens
Who Should File
Which Form Should I Use?
Form 1040EZ
Form 1040A
Form 1040
Does My Return Have To Be on Paper?
IRS
When Do I Have To File?
Extensions of Time To File
How Do I Prepare My Return?
When Do I Report My Income and Expenses?
Social Security Number
Presidential Election Campaign Fund
Computations
Attachments
Third Party Designee
Signatures
Paid Preparer
Refunds
Amount You Owe
Gift To Reduce Debt Held by the Public
Peel-Off Address Label
Where Do I File?
What Happens After I File?
What Records Should I Keep?
Interest on Refunds
Past-Due Refund
Change of Address
What If I Made a Mistake?
Amended Returns and Claims for Refund
Penalties
Marital Status
Single
Married Filing Jointly
Filing a Joint Return
Married Filing Separately
Special Rules
Head of Household
Considered Unmarried
Keeping Up a Home
Qualifying Person
Qualifying Widow(er) With Dependent Child
Exemptions
Personal Exemptions
Exemptions for Dependents
Dependency Tests
Member of Household or Relationship Test
Citizen or Resident Test
Joint Return Test
Gross Income Test
Support Test
Multiple Support Agreement
Support Test for Child of Divorced or Separated Parents
Phaseout of Exemptions
Social Security Numbers for Dependents
Personal Representative
Duties
Final Return for the Decedent
How To Report Certain Income
Exemptions, Deductions, and Credits
Tax Effect on Others
Income in Respect of the Decedent
Deductions in Respect of the Decedent
Withholding
Salaries and Wages
Tips
Taxable Fringe Benefits
Sick Pay
Pensions and Annuities
Gambling Winnings
Unemployment Compensation
Federal Payments
Backup Withholding
Estimated Tax
Who Does Not Have To Pay Estimated Tax
Who Must Pay Estimated Tax?
How To Figure Estimated Tax
When To Pay Estimated Tax
How To Figure Each Payment
How To Pay Estimated Tax
Credit for Withholding and Estimated Tax
Withholding
Estimated Tax
Underpayment Penalty
Employee Compensation
Miscellaneous Compensation
Fringe Benefits
Retirement Plan Contributions
Stock Options
Restricted Property
Special Rules for Certain Employees
Clergy
Members of Religious Orders
Foreign Employer
Military
Volunteers
Sickness and Injury Benefits
Disability Pensions
Long-Term Care Insurance Contracts
Workers' Compensation
Other Sickness and Injury Benefits
Keeping a Daily Tip Record
Reporting Tips to Your Employer
Tip Rate Determination and Education Program
Reporting Tips on Your Tax Return
Allocated Tips
General Information
Taxable Interest
U.S. Savings Bonds
Education Savings Bond Program
U.S. Treasury Bills, Notes, and Bonds
Bonds Sold Between Interest Dates
Insurance
Original Issue Discount (OID)
State or Local Government Obligations
When To Report Interest Income
How To Report Interest Income
General Information
Ordinary Dividends
Qualified Dividends
Dividends Used to Buy More Stock
Money Market Funds
Capital Gain Distributions
Nondividend Distributions
Liquidating Distributions
Distributions of Stock and Stock Rights
Other Distributions
How To Report Dividend Income
Rental Income
Rental Expenses
Repairs and Improvements
Other Expenses
Not Rented for Profit
Property Changed to Rental Use
Renting Part of Property
Personal Use of Dwelling Unit (Including Vacation Home)
Dwelling Unit Used as Home
Figuring Days of Personal Use
How To Divide Expenses
How To Figure Rental Income and Deductions
Depreciation
Depreciation Methods
Special Depreciation Allowance
MACRS
MACRS Depreciation Under GDS
Using the Optional Tables
MACRS Depreciation Under ADS
Other Rules About Depreciable Property
Limits on Rental Losses
At-Risk Rules
Passive Activity Limits
How To Report Rental Income and Expenses
Schedule E (Form 1040)
Employee Pensions and Annuities
Cost (Investment in the Contract)
Simplified Method
Survivors
How To Report
Lump-Sum Distributions
Rollovers
Special Additional Taxes
Disability Pensions
Purchased Annuities
Are Any of Your Benefits Taxable?
How To Report Your Benefits
How Much Is Taxable?
Examples
Deductions Related to Your Benefits
Repayments More Than Gross Benefits
Bartering
Canceled Debts
Exceptions
Education Loan Repayment Assistance
Life Insurance Proceeds
Endowment Contract Proceeds
Public Safety Officer Killed in the Line of Duty
Accelerated Death Benefits
Partnership Income
S Corporation Income
Recoveries
Itemized Deduction Recoveries
Rents from Personal Property
Repayments
Royalties
Unemployment Benefits
Welfare and Other Public Assistance Benefits
Other Income
Cost Basis
Real Property
Adjusted Basis
Increases to Basis
Decreases to Basis
Basis Other Than Cost
Property Received for Services
Taxable Exchanges
Involuntary Conversions
Nontaxable Exchanges
Property Transferred From a Spouse
Property Received as a Gift
Inherited Property
Property Changed to Business or Rental Use
Stocks and Bonds
Sales and Trades
What Is a Sale or Trade?
How To Figure Gain or Loss
Nontaxable Trades
Transfers Between Spouses
Related Party Transactions
Capital Gains and Losses
Capital or Ordinary Gain or Loss
Capital Assets and Noncapital Assets
Holding Period
Nonbusiness Bad Debts
Rollover of Gain From Publicly Traded Securities
Main Home
Figuring Gain or Loss
Selling Price
Amount Realized
Adjusted Basis
Amount of Gain or Loss
Other Dispositions
Determining Basis
Excluding the Gain
Maximum Exclusion
Ownership and Use Tests
Reduced Maximum Exclusion
More Than One Home Sold During 2-Year Period
Business Use or Rental of Home
Reporting the Sale
Special Situations
Recapturing (Paying Back) a Federal Mortgage Subsidy
Reporting Capital Gains and Losses
Capital Losses
Capital Gain Tax Rates
Comprehensive Example
Traditional IRAs
What Is a Traditional IRA?
Who Can Set Up a Traditional IRA?
When and How Can a Traditional IRA Be Set Up?
How Much Can Be Contributed?
When Can Contributions Be Made?
How Much Can You Deduct?
Nondeductible Contributions
Inherited IRAs
Can You Move Retirement Plan Assets?
When Can You Withdraw or Use IRA Assets?
When Must You Withdraw IRA Assets? (Required Minimum Distributions)
Are Distributions Taxable?
What Acts Result in Penalties or Additional Taxes?
Roth IRAs
What Is a Roth IRA?
When Can a Roth IRA Be Set Up?
Can You Contribute to a Roth IRA?
Can You Move Amounts Into a Roth IRA?
Are Distributions Taxable?
Who Can Deduct Moving Expenses
Related to Start of Work
Distance Test
Time Test
Deductible Moving Expenses
Household Goods and Personal Effects
Travel Expenses
Nondeductible Expenses
How and When To Report
When To Deduct Expenses
General Rules
Instruments Executed After 1984
How To Deduct Alimony Paid
How To Report Alimony Received
Recapture Rule
Educator Expenses
Student Loan Interest Deduction
Student Loan Interest Defined
Can You Claim the Deduction
Who Can Claim a Dependent's Expenses
How Much Can You Deduct
How Do You Figure the Deduction
Tuition and Fees Deduction
Can You Claim the Deduction
What Expenses Qualify
Who Is an Eligible Student
Who Can Claim a Dependent's Expenses
How Much Can You Deduct
Standard Deduction Amount
Standard Deduction for Dependents
Who Should Itemize
What Are Medical Expenses?
What Expenses Can You Include This Year?
How Much of the Expenses Can You Deduct?
Whose Medical Expenses Can You Include?
Decedent
What Medical Expenses Are Includible?
Insurance Premiums
Meals and Lodging
Transportation
Disabled Dependent Care Expenses
How Do You Treat Reimbursements?
Insurance Reimbursement
Damages for Personal Injuries
How Do You Figure and Report the Deduction on Your Tax Return?
What Tax Form Do You Use?
Impairment-Related Work Expenses (Business or Medical)
Health Insurance Costs for Self-Employed Persons
Tests To Deduct Any Tax
Income Taxes
State and Local Income Taxes
Foreign Income Taxes
General Sales Taxes
Real Estate Taxes
Real Estate-Related Items You Cannot Deduct
Personal Property Taxes
Taxes and Fees You Cannot Deduct
Where To Deduct
Home Mortgage Interest
Amount Deductible
Points
Mortgage Interest Statement
Investment Interest
Investment Property
Allocation of Interest Expense
Limit on Deduction
Items You Cannot Deduct
Personal Interest
Allocation of Interest
How To Report
Organizations That Qualify To Receive Deductible Contributions
Types of Qualified Organizations
Contributions You Can Deduct
Contributions From Which You Benefit
Expenses Paid for Student Living With You
Out-of-Pocket Expenses in Giving Services
Contributions You Cannot Deduct
Contributions to Individuals
Contributions to Nonqualified Organizations
Contributions From Which You Benefit
Value of Time or Services
Personal Expenses
Appraisal Fees
Contributions of Property
Determining Fair Market Value
Giving Property That Has Decreased in Value
Giving Property That Has Increased in Value
When To Deduct
Limits on Deductions
50% Limit
30% Limit
Special 30% Limit for Capital Gain Property
20% Limit
Carryovers
Records To Keep
Cash Contributions
Noncash Contributions
How To Report
Casualty
Theft
Loss on Deposits
Proof of Loss
Amount of Loss
Adjusted Basis
Decrease in Fair Market Value
Insurance and Other Reimbursements
Single Casualty on Multiple Properties
Deduction Limits
$100 Rule
10% Rule
When To Report Gains and Losses
Disaster Area Loss
How To Report Gains and Losses
Travel Expenses
Traveling Away From Home
Tax Home
Temporary Assignment or Job
What Travel Expenses Are Deductible?
Travel in the United States
Travel Outside the United States
Conventions
Entertainment Expenses
50% Limit
Gift Expenses
Transportation Expenses
Car Expenses
Recordkeeping
How To Prove Expenses
How Long To Keep Records and Receipts
How To Report
Reimbursements
Completing Forms 2106 and 2106-EZ
Special Rules
Illustrated Example
Qualifying Work- Related Education
Education Required by Employer or by Law
Education To Maintain or Improve Skills
Education To Meet Minimum Requirements
Education That Qualifies You for a New Trade or Business
What Expenses Can Be Deducted
Transportation Expenses
Travel Expenses
No Double Benefit Allowed
Reimbursements
Deducting Business Expenses
Self-Employed Persons
Employees
Performing Artists and Fee-Basis Officials
Impairment-Related Work Expenses
Recordkeeping
Deductions Subject to the 2% Limit
Unreimbursed Employee Expenses (Line 20)
Tax Preparation Fees (Line 21)
Other Expenses (Line 22)
Deductions Not Subject to the 2% Limit
List of Deductions
Officials Paid on a Fee Basis
Armed Forces Reservists Traveling More Than 100 Miles From Home
Nondeductible Expenses
List of Nondeductible Expenses
Are You Subject to the Limit?
Which Itemized Deductions Are Limited?
Which Itemized Deductions Are Not Limited?
How Do You Figure the Limit?
Example
Figuring Your Tax
Alternative Minimum Tax
Tax Figured by IRS
Filing the Return
Which Parent's Return To Use
Parents Who Do Not File a Joint Return
Parent's Election To Report Child's Interest and Dividends
Effect of Making the Election
Figuring Child's Income
Figuring Additional Tax
Illustrated Example
Tax for Children Under Age 14 Who Have Investment Income of More Than $1,600
Providing Parental Information (Form 8615, lines A–C)
Step 1. Figuring the Child's Net Investment Income (Form 8615, Part I)
Step 2. Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II)
Step 3. Figuring the Child's Tax (Form 8615, Part III)
Illustrated Example
Tests To Claim the Credit
Qualifying Person Test
Keeping Up a Home Test
Earned Income Test
Work-Related Expense Test
Joint Return Test
Provider Identification Test
How To Figure the Credit
Figuring Total Work-Related Expenses
Earned Income Limit
Dollar Limit
Amount of Credit
How To Claim the Credit
Employment Taxes for Household Employers
Example
Can You Take the Credit?
Qualified Individual
Income Limits
Figuring the Credit
Step 1. Determine Initial Amount
Step 2. Total Certain Nontaxable Pensions and Benefits
Step 3. Determine Excess Adjusted Gross Income
Step 4. Determine Your Credit
Credit Figured for You
Examples
Qualifying Child
Amount of Credit
Limits on the Credit
Claiming the Credit
Example
Additional Child Tax Credit
Checking Your Withholding
Information for Both the Hope and Lifetime Learning Credits
Can You Claim a Credit
What Expenses Qualify
Who Can Claim a Dependent's Expenses
Effect of the Amount of Your Income on the Amount of Your Credit
When Must the Credit Be Repaid (Recaptured)
Information for Only the Hope Credit
Who Is an Eligible Student
Figuring the Credit
Claiming the Credit
Information for Only the Lifetime Learning Credit
Who Is an Eligible Student
Figuring the Credit
Claiming the Credit
Illustrated Example
Do You Qualify for the Credit?
If Improper Claim Made in Prior Year
Part A. Rules for Everyone
Rule 1. Your AGI Must Be Less Than:
Rule 2. You Must Have a Valid Social Security Number (SSN)
Rule 3. Your Filing Status Cannot Be Married Filing Separately
Rule 4. You Must Be a U.S. Citizen or Resident Alien All Year
Rule 5. You Cannot File Form 2555 or Form 2555-EZ
Rule 6. Your Investment Income Must Be $2,650 or Less
Rule 7. You Must Have Earned Income
Part B. Rules If You Have a Qualifying Child
Rule 8. Your Child Must Meet the Relationship, Age, and Residency Tests
Rule 9. Your Qualifying Child Cannot Be Used By More Than One Person To Claim the EIC
Rule 10. You Cannot Be a Qualifying Child of Another Person
Part C. Rules If You Do Not Have a Qualifying Child
Rule 11. You Must Be at Least Age 25 but Under Age 65
Rule 12. You Cannot Be the Dependent of Another Person
Rule 13. You Cannot Be a Qualifying Child of Another Person
Rule 14. You Must Have Lived in the United States More Than Half of the Year
Part D. Figuring and Claiming the EIC
Rule 15. Your Earned Income Must Be Less Than:
IRS Will Figure the EIC for You
How To Figure the EIC Yourself
Examples
Example 1. John and Janet Smith (Form 1040A)
Example 2. Kelly Green (Form 1040EZ)
Advance Earned Income Credit
How To Get Advance Payments for 2005
Advance Payments Received in 2004
Nonrefundable Credits
Adoption Credit
Foreign Tax Credit
Mortgage Interest Credit
Retirement Savings Contributions Credit
Credit for Prior Year Minimum Tax
Qualified Electric Vehicle Credit
Refundable Credits
Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld
Credit for Tax on Undistributed Capital Gain
Health Coverage Tax Credit
Your Rights as a Taxpayer
Declaration of Taxpayer Rights
Examinations, Appeals, Collections, and Refunds
How To Get Tax Help
