2003 Changes for Individuals

• Adoption benefits
• Alternative minimum tax
• Astronauts
• Capital gains maximum tax rates
• Child and dependent care credit
• Child tax credit
• Dividends — maximum tax rate
• Earned income credit (EIC)
• Education credits
• Education Savings Bond exclusion
• Exemption amount
• Free electronic filing
• Health coverage tax credit
• Hope credit
• Lifetime learning credit
• Limit on itemized deductions
• Medical Savings Accounts program
• Military benefits
• Retirement savings plans
• Self-employed health insurance deduction
• Social Security and Medicare Taxes
• Standard deduction
• Standard mileage rates
• Tax rates for 2003

2003 Changes for Businesses

• Applying for an Employer Identification Number (EIN)
• Capital gain reporting requirements
• Corporate estimated tax payments
• Depreciation and Section 179
• Liberty Zone depreciation rules
• Nonqualified Capital Construction Fund Withdrawals
• Marginal production of oil and gas
• Self-employed health insurance deduction
• Self-employment tax
• Standard meal and snack rates
• Standard mileage rate

2003 Changes for IRAs and Other Retirement Plans

• 403(b) plan changes
• Individual retirement arrangements (IRAs)
• Qualified plans
• Simplified employee pensions (SEPs)
• SIMPLE plans
• Thrift savings plan

2003 Changes for Exempt Organizations

2003 Changes in Estates & Trusts

• Capital gains
• Dividends
• Estate and gift maximum tax rate
• Estate tax exclusion amount
• Form 709-A is obsolete
• Generation-skipping transfer exemption
• Gift tax exclusion amount
• State death tax credit reduction

2003 Change of Foreign Issues

2003 Tax Law Changes for Individuals

Adoption Benefits

Beginning in 2003, the maximum adoption credit increases to $10,160. Also, the exclusion from income of benefits under your employer's adoption assistance program increases to $10,160. You will be allowed these amounts for the adoption of a child with special needs regardless of whether you have qualifying expenses.

Publication 968, Tax Benefits for Adoption, has more information.

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Astronauts Who Die in the Line of Duty

Three tax relief provisions are extended to astronauts who die in the line of duty after 2002 (including the crew of the space shuttle Columbia) and their survivors. These provisions are discussed on the following pages of Publication 3920, Tax Relief for Victims of Terrorist Attacks.

1. Pages 2-8: Tax Forgiveness
2. Page 9: Death Benefits
3. Page 10: Estate Tax Reduction

However, the above discussions need to be modified for astronauts. The following paragraphs explain these modifications. Please read these paragraphs in conjunction with the corresponding discussions in Publication 3920.

Tax forgiveness (pages 2-8). The following paragraphs modify the tax forgiveness rules for astronauts who die in the line of duty after 2002.

Years eligible for tax forgiveness (page 2). For astronauts who die in the line of duty, income tax is forgiven for the year of death and the previous year. For the crew of the space shuttle Columbia, income tax is forgiven for 2002 and 2003.

Worksheet A (page 3) and Worksheet B (page 4). Use Worksheet A or B in Publication 3920 to figure the income tax to be forgiven. When filling out columns (A) and (B) of Worksheet A or B for a crew member of the space shuttle Columbia, enter the amounts for 2002 and 2003, respectively. Leave column (C) blank.

Line 2 of Worksheet A and line 3 of Worksheet B require an entry for the decedent's total tax. The total tax lines for 2002 and 2003 returns are listed in the following table.

Form	2002	2003
1040	Line 61	Line 60
1040A	Line 38	File Form 1040
1040EZ	Line 10	File Form 1040
TeleFile Tax Record	Line K	File Form 1040
1040NR	Line 57	Line 56
1040NR-EZ	Line 17	File Form 1040NR

Nonqualifying income (page 5). For an astronaut, the second bullet should read "Amounts that would not have been payable but for an action taken after the date the astronaut died."

How to complete the returns (page 7). Write "Astronaut killed in the line of duty" across the top of page 1 of each return.

Designated private delivery services (page 8). Two private delivery services have been added to the list. They are:

• FedEx International Priority.
• FedEx International First.

Death benefits (page 9). Beginning in 2003, payments received by an individual or an estate from the employer of an astronaut as a result of death in the line of duty are not included in income as explained in Publication 3920.

Estate tax reduction (page 10). For decedents dying in 2003, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (revised August 2003) must be filed by the executor for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $1,000,000.

However, the executor can choose to compute the tax on the astronaut's estate using the rate schedule on page 25 of the November 2001 revision of the instructions for Form 706. If the executor makes this choice, he or she must write "Section 2201" at the top of page 1 of the return.

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Alternative Minimum Tax

Exemption amounts. Beginning in 2003, the exemption amounts for figuring the alternative minimum tax (AMT) increased. The amount depends on your filing status.

Personal Credits Still Allowed Against Alternative Minimum Tax. The provision that allows certain nonrefundable personal credits to reduce both your regular tax and any alternative minimum tax (AMT) has been extended and continues to be in effect for 2003. This provision, as it applies to the alternative minimum tax, was originally scheduled to expire after 2001. Without the extension, these credits could not have been used to reduce ACT in 2003.

More information. The instructions for Form 6251 have more information on the alternative minimum tax.

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Lower Maximum Tax Rates on Certain Capital Gains

For sales and other dispositions of property after May 5, 2003 (including installment payments received after that date), the maximum tax rates on net capital gain have changed as follows.

• The 20% and 10% tax rates have been lowered to 15% and 5%, respectively.
• The 8% tax rate for qualified 5-year gain has been eliminated. Instead, the new 5% rate applies to gain that would have qualified for the new 8% rate.

There is no change to the maximum tax rates that apply to collectibles gain, gain on qualified small business stock, and unrecaptured section 1250 gain.

Elimination of 18% rate. In 2006, the 20% rate was scheduled to be lowered to 18% for qualified 5-year gain from property with a holding period that began after 2000. The 18% rate and the 5-year holding period have been eliminated. Instead, the new 15% rate applies to gain that would have qualified for the 18% rate.

Taxpayers who owned certain assets on January 1, 2001, could have elected to treat those assets as sold and repurchased on the same date, if they paid tax for 2001 on any resulting gain. The purpose of the election was to make any future gain on the asset eligible for the 18% rate. That election is irrevocable. Thus, if you made the election, you may not amend your 2001 income tax return to get a refund of the tax your paid on the resulting gain.

Note: Fiscal year 2002-2003 filers should see Announcement 2003-56 for special rules for filing Schedule D (Form 1040), Capital Gains and Losses, and Form 6251, Alternative Minimum Tax—Individuals. 12-SEP-2003

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Dividends Taxed At Capital Gain Rate

Beginning in 2003, qualified dividends are subject to the same 5% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Forms 1099–DIV or similar statements you receive. Before 2003, all dividends were taxed at the higher tax rates that applied to ordinary income.

If you have qualified dividends, you must figure your tax by completing either Schedule D (Form 1040) or the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040 or the instructions for Form 1040A.

Investment interest deducted. If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 5% or 15% tax rate. Reduce it by the amount of qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction.

More information. Publication 550, Investment Income and Expenses, has more information on dividends and treatment of investment expenses.

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Child and Dependent Care Credit

Beginning in 2003, the following changes apply to the child and dependent care credit.

Credit percentage. The credit can be as much as 35% (increased from 30% in 2002) of your qualified expenses.

Income that qualifies for the highest percentage. The maximum adjusted gross income amount that qualifies for the highest credit percentage increased to $15,000. Previously, this amount was $10,000.

Dollar limit. The limit on the amount of qualifying expenses increased to $3,000 for one qualifying individual and to $6,000 for two or more qualifying individuals. Previously, these amounts were $2,400 and $4,800, respectively.

Earned income amount for nonworking spouse. If your spouse is either a full-time student or not able to care for himself or herself, the amount of income he or she is treated as having earned has increased to $250 a month if there is one qualifying person and to $500 a month if there are two or more qualifying persons. Previously, these amounts were $200 and $400, respectively.

More information. Publication 503, Child and Dependent Care Expenses, has more information.

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Child Tax Credit

For 2003, the maximum child tax credit is increased to $1,000 for each qualifying child. But you must reduce your credit by any advance payment you received in 2003.

Advance child tax credit payment. You must reduce your 2003 child tax credits by any advance child tax credit payment you received in 2003. The amount of your advance payment is shown on Notice 1319. This notice was mailed to you in 2003. If you do not have this notice, you can check the amount of your advance payment on the IRS web site or call us at 1-800-829-1040. If you received an advance payment but did not have a qualifying child for 2003, you do not have to pay back the amount you received. Do not enter the amount of your advance payment on your return. If you filed a joint return for 2002, but for 2003 you are not filing a joint return (or a joint return with the same spouse), you are considered to have received one-half of the advance payment.

More information. For details, see Publication 972, Child Tax Credit.

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Earned Income Credit (EIC)

The maximum amount of income you can earn and still get the earned income credit increased. The amount depends on your filing status and number of children. The maximum amount of investment income you can have and still be eligible for the credit has increased to $2,600.

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Education Credits

Beginning in 2003, the following changes apply to the Hope and lifetime learning (education) credits.

Income limits for credit reduction increased.

If you are married and filing a joint return, the amount of your Hope or lifetime learning credit for 2003 is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $83,000 and $103,000. You cannot claim an education credit if your MAGI is $103,000 or more. This is an increase from the 2002 limits of $82,000 and $102,000. The limits for other filing statuses did not change.

Lifetime Learning Credit

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

More information. Chapters 2 and 3 in Publication 970, Tax Benefits for Education, have more information.

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Education Savings Bond Exclusion

For 2003, the amount of your interest exclusion will be phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $87,750 and $117,750. You cannot take the deduction if your MAGI is $117,750 or more. For 2002, the limits that applied to you were $86,400 and $116,400.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $58,500 and $73,500. You cannot take a deduction if your MAGI is $73,500 or more. For 2002, the limits that applied to you were $57,600 and $72,600. Chapter 10 in Publication 970, Tax Benefits for Education, has more information.

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Exemption Amount

The amount you can deduct for each exemption has increased from $3,000 in 2002 to $3,050 in 2003.

You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2003, the phaseout begins at:

• $104,625 for married persons filing separately,
• $139,500 for single individuals,
• $174,400 for heads of household, and
• $209,250 for married persons filing jointly.

If your adjusted gross income is above the amount for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions.

Free Electronic Filing

The Internal Revenue Service has arranged for qualified persons to electronically file their 2003 individual federal tax return for free. Please visit our electronic filing home page for more information on free electronic filing and a list of qualified tax service providers.

Health Coverage Tax Credit

You may be able to claim a new credit for health insurance premiums you paid in 2003 if:

1. You are a worker whose job was displaced by foreign trade, or
2. You receive a pension from the Pension Benefit Guaranty Corporation.

The credit is available to eligible individuals for qualifying payments made for each month in 2003. For more information, see Health Coverage Tax Credit in Publication 502, Medical and Dental Expenses, and Form 8885, Health Coverage Tax Credit.

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Limit on Itemized Deductions

If your adjusted gross income is above a certain amount, you lose all or part of your itemized deductions. In 2003, this amount is increased to $139,500 ($69,750 if married filing separately). In 2002, the amount was $137,300 ($68,650 if married filing separately). For more information and a worksheet to figure the amount you can deduct, see the instructions for line 28 of Schedule A (Form 1040).

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Medical Savings Accounts (MSAs) Program Expires

The pilot program for Medical Savings Accounts is scheduled to end December 31, 2003. You can participate in an Archer MSA after 2003 only if:

1. You were an active Medical Savings Account participant before January 1, 2004, or
2. You become an active Medical Savings Account participant after 2003 because you are covered by a High Deductible Health Plan of an Medical Savings Account participating employer.

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Military Family Tax Relief

The Military Family Tax Relief Act of 2003 provides the following tax relief for members of the Armed Forces and their families. More information can be found in Publication 3, Armed Forces' Tax Guide.

Death Gratuity Payments

The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001, increased to $12,000 and is all nontaxable. Previously, the death gratuity was $6,000 and only $3,000 of it was nontaxable. So you may be able to claim a refund if you paid tax on a death gratuity you received because of a death that occurred after September 10, 2001.

Military Base Realignment and Closure Benefit

A military base realignment and closure benefit generally is nontaxable if paid to you after November 10, 2003.

Dependent-Care Assistance Program

Benefits you received after 2002 under a dependent-care assistance program are nontaxable. Publication 3, Armed Forces' Tax Guide, has a complete list of items that are excludable from gross income.

Extension of Deadlines Expanded to Include Contingency Operations

The extension of the deadline for filing a return for members of the Armed Forces serving in a combat zone now also applies to members of the Armed Forces serving in a contingency operation.

Sale of a Home

If you have been a member of the uniformed services or Foreign Service, you now may be able to exclude from income a gain from selling your main home, even if you did not live in it for the required 2 years during the 5-year period ending on the date of sale. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the uniformed services or Foreign Service of the United States.

Example. David bought and moved into a home in 1995. He lived in it as his main home for 2 ½ years. For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2003. To meet the 2-year use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. This means he can disregard those 6 years. Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2 ½ years during this test period.

     Claiming a refund for a prior year home sale. This change applies to any sale of a main home after May 6, 1997, so you may be able to claim a refund if you paid tax on a gain from a sale after that date. Generally, you must file a claim for credit or refund within 3 years from the date you filed your original return or within 2 years from the date you paid the tax, whichever is later. However, the deadline to file a claim based on this rule for 1997, 1998, 1999, or 2000 has been extended to November 10, 2004.

More information on selling your home can be found in Publication 523, Selling Your Home.

Student at U.S. Military Academy May Be Exempt From Additional Tax on Coverdell ESA or Qualified Tuition Program (QTP) Distribution

For 2003, the 10% additional tax on taxable distributions from a Coverdell education savings account (ESA) or qualified tuition program (QTP) does not apply to distributions made on account of the attendance of the designated beneficiary at a U.S. military academy.

This applies to students at the U.S. Military Academy, the U.S. Naval Academy, the U.S. Air Force Academy, the U.S. Coast Guard Academy, and the U.S. Merchant Marine Academy. This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in title 10 of the U.S. Code) attributable to such attendance.

Chapters 7 (Coverdell Education Savings Account (ESA)) and 8 (Qualified Tuition Program (QTP)) in Publication 970, Tax Benefits for Education, have more information about the additional tax on distributions.

Armed Forces Reservists

Beginning in 2003, if you are a member of a reserve component of the Armed Forces of the United States, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction.

More information. See "Armed Forces Reservists Traveling More Than 100 Miles From Home" in chapter 6 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

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Retirement Savings Plans

The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans.

Traditional individual retirement arrangements income limits.

If you have a traditional individual retirement arrangement and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phaseout increases. The amounts vary depending on filing status.

Deemed individual retirement arrangements.

A qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed individual retirement arrangement) to receive voluntary employee contributions. An employee's account can be treated as a traditional individual retirement arrangement or a Roth individual retirement arrangement.

Limit on elective deferrals.

The maximum amount of elective deferrals under a salary reduction agreement that could be contributed to a qualified plan increased to $12,000 ($14,000 If you were age 50 or over). However, for SIMPLE plans, the amount increased to $8,000 ($9,000 if you were age 50 or over).

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Self-Employed Health Insurance Deduction

Beginning in 2003, the self-employed health insurance deduction percentage increases to 100%. Chapter 7 of Publication 535, Business Expenses, has more information.

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Social Security and Medicare Taxes

The maximum wages subject to social security tax (6.2%) increased to $87,000. All wages are subject to Medicare tax (1.45%).

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Standard Deduction

The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption for you can be claimed by another person.

In addition to the general increase in the standard deduction allowed for all filing statuses, the standard deduction for married persons filing a joint return has increased to double the amount allowed to a single person. Also, the standard deduction for a married person filing separately has increased to the same amount allowed to a single person.

The basic standard deduction amounts for 2003 are:

• Head of household — $7,000
• Married taxpayers filing jointly and qualifying widow(er)s — $9,500
• Married taxpayers filing separately — $4,750
• Single — $4,750

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Standard Mileage Rates

The allowable deductions for the standard mileage rate have decreased as follows:

• Business miles. The standard mileage rate for the cost of operating your car decreased to 36 cents a mile for all business miles driven. Publication 463, Travel, Entertainment, Gift, and Car Expenses, has more information about car expenses and use of the standard mileage rate.
• Medical reasons. The standard mileage rate allowed for use of your car for medical reasons decreased to 12 cents a mile. Publication 502, Medical and Dental Expenses, has information on deductible mileage related to medical expenses.
• Moving. The standard mileage rate allowed for determining moving expenses decreased to 12 cents a mile. Publication 521, Moving Expenses, has information on deductible mileage related to a move.

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2003 Tax Rates

The 2003 Tax Rate Schedules have been revised to reflect the following changes:

1. The tax rate brackets of 27%, 30%, 35%, and 38.6%, have been reduced to 25%, 28%, 33%, and 35%, respectively.
2. The 15% rate bracket for married taxpayers filing jointly and qualifying widow(er)s has expanded to twice that of single filers.
3. The maximum taxable income subject to the 10% tax rate has increased to $7,000 for single taxpayers and married taxpayers filing separately ($14,000 for married taxpayers filing jointly and qualifying widow(er)s).

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2003 Tax Law Changes for Businesses

Applying for an Employer Identification Number (EIN)

Beginning in January 2004, when you apply for an Employer Identification Number (EIN) (on Form SS-4, by TeleTIN, or Online Application) and are expected to have a Federal tax obligation, you will be automatically pre-enrolled in Electronic Federal Tax Payment System (EFTPS) in order to make your Federal tax deposits. When you receive your EIN, you will also receive a separate mailing containing instructions for activating your EFTPS enrollment. You will still have the option to order Federal Tax Deposit coupons from the Internal Revenue Service by calling 1-800-829-4933. You can get more information about EFTPS by visiting the EFTPS website.

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Marginal Production of Oil and Gas

The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas has been extended to tax years beginning before 2004. For more information on marginal production, see section 613A(c) of the Internal Revenue Code.

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Self-employed Health Insurance Deduction

Beginning in 2003, the self-employed health insurance deduction percentage increases to 100%. Chapter 7 of Publication 535, Business Expenses, has more information.

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Self-Employment Tax

The self-employment tax rate on net earnings remains the same for 2003. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insur­ance) and 2.9% for Medicare (hospital insurance).

The maximum amount subject to the social security part for tax years beginning in 2003 has increased to $87,000. All net earnings of at least $400 are subject to the Medicare part.

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Standard Meal and Snack Rates for Family Daycare Providers

For tax years beginning in 2003, instead of using actual costs, family daycare providers can use the standard meal and snack rates to compute the deductible cost of meals and snacks provided to eligible children. The standard meal and snack rates can be used for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. However, a family daycare provider who receives reimbursement for a particular meal or snack can deduct only the portion of the applicable standard meal or snack rate that exceeds the amount of the reimbursement.

Family daycare providers. A family daycare provider is a person engaged in the business of providing family daycare.

Family daycare. Family daycare is childcare provided to eligible children in the home of the family daycare provider that meets all of the following.

• The childcare is non-medical.
• A transfer of legal custody is not involved.
• The childcare generally lasts for less than 24 hours each day.

Eligible children. Eligible children are minor children receiving daycare in the home of the family daycare provider. Eligible children do not include children who are full-time or part-time residents in the home where the childcare is provided or children whose parents or guardians are residents of the same home.

Example. A family daycare provider's own children, and any children who live in the family daycare provider's home on a full- or part-time basis, are not eligible children, even if they receive daycare services from the family daycare provider.

A family daycare provider who chooses to use the standard meal and snack rates for a particular tax year must use the rates for all deductible food costs for eligible children during that tax year.

Updates to the standard meal and snack rates may be found at the following websites: http://www.irs.gov/businesses/small/index.html and www.fns.usda.gov/cnd/care. More information on family daycare providers can be found in Publication 587, Business Use of Your Home.

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Standard Mileage Rate

The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2003 is 36 cents a mile for all business miles.

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Capital Gains — Announcement 2003-56

Announcement 2003-56, Changes to Reporting Requirements for Certain 2002 Forms Because of Changes in the Capital Gains Tax Rates, explains necessary modifications to 2002 returns affected by the change in the capital gains tax rates after May 5, 2003. See Announcement 2003-56 for more information. 12-SEP-2003

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Corporation estimated tax payments

The installment due date for 25% of any corporate estimated tax payment otherwise due in September 2003 has been changed to October 1, 2003. The due date for the remaining 75% of the September 2003 estimated tax payment has not changed.

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Depreciation and Section 179 Expense

50% special depreciation allowance. For qualified property you acquire after May 5, 2003, you can take a special depreciation allowance that is equal to 50% of the property's depreciable basis. However, instead of claiming the 50% special allowance, you can elect to claim the 30% special allowance or elect not to claim any special allowance.

    Note: If you acquire qualified property in a like-kind exchange or involuntary conversion, the carried-over basis of the acquired property is eligible for a special depreciation allowance.

Increased Section 179 limit. The maximum section 179 deduction you can elect for property you placed in service in 2003 has increased from $24,000 to $100,000 for quali­fied section 179 property ($135,000 for qualified zone property, qualified renewal property, or qualified New York Liberty Zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $400,000 (increased from $200,000).

Off-the-shelf computer software. The definition of section 179 property has been expanded to include off-the-shelf computer software placed in service in 2003. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function, However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.

Section 179 expense election. A section 179 expense election (or any specification made in the election) made after 2002 can be revoked without IRS approval by filing an amended return. However, once made, the revocation is irrevocable.

Depreciation limits on passenger automobiles. The total depreciation deduction (including the section 179 expense and the special depreciation allowance) you can take for a passenger automobile (that is not a truck or van or an electric vehicle) that you use in your business and first place in service in 2003 is:

• $7,660 if acquired before May 6, 2003, and you claim the 30% special allowance;
• $10,710 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
• $3,060 if you elect not to claim any special allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

Caution: The limits are reduced if the business use of the vehicle is less than 100%.

Depreciation limits on electric vehicles. The total depreciation deduction (including the section 179 expense and the special depreciation allowance) you can take for an electric vehicle that you use in your business and first place in service in 2003 is:

• $22,880 if acquired before May 6, 2003, and you claim the 30% special allowance;
• $32,030 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
• $9,080 if you elect not to claim any special allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

Caution: The limits are reduced if the business use of the vehicle is less than 100%.

Depreciation limits on truck or van. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for a truck or van (such as a minivan or a sports utility vehicle built on a truck chassis) that you use in your business and first place in service in 2003 is higher than for other passenger vehicles. The maximum amount allowable is:

• $7,960 if acquired before May 6, 2003, and you claim the 30% special allowance;
• $11,010 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
• $3,360 if you elect not to claim any special allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

Caution: The limits are reduced if the business use of the vehicle is less than 100%.

Exclusion of qualified nonpersonal use trucks and vans from definition of passenger automobiles. A truck or van placed in service after July 6, 2003, that is a “qualified nonpersonal use vehicle” is not considered to be a passenger automobile (and is therefore not subject to the passenger automobile limits). A truck or van is a qualified nonpersonal use vehicle only if it has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes. For example, a van that has only a front bench for seating, in which permanent shelving has been installed, that constantly carries merchandise or equipment, and that has been specially painted with advertising or the company's name, is a vehicle not likely to be used more than a de minimus amount for personal purposes.

More information. Publication 946, How to Depreciate Property, has more information on depreciation methods and rules.

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Extension of Time To Take Advantage of Certain Tax Relief for Tax Years That Include September 11, 2001

Time to claim special depreciation allowances. For your tax year that included September 11, 2001, you may have until December 31, 2003, to:

1. Claim the 30% special depreciation allowance (or Liberty Zone depreciation allowance),
2. Elect the increased section 179 expense deduction for Liberty Zone property, or
3. Depreciate Liberty Zone leasehold improvement property as 5-year property using the straight-line method of depreciation.

You may be eligible if:

1. You placed qualified property (or Liberty Zone property) in service during your tax year,
2. You timely filed your return for your tax year without claiming the special depreciation allowance or increased section 179 expense deduction, and
3. You did not make an election not to claim the 30% special depreciation allowance.

If eligible, file an amended return for your tax year that included September 11, 2001, and any later affected tax years. In some situations, you may have to file Form 3115, Application for Change in Accounting Method. Use the procedures outlined in Rev. Proc. 2003-50, 2003-50 IRB 119.

Half-year convention. You may be eligible for additional time to elect to apply the half-year convention instead of the mid-quarter convention to all property placed in service during your 2000 fiscal year or 2001 calendar or fiscal year, if:

1. The third or fourth quarter of your tax year included September 11, 2001;
2. You otherwise would have been required to use the mid-quarter convention under MACRS;
3. You timely filed your return for your tax year without making the election.

If eligible, you can make the election and any necessary adjustments resulting from the election by filing, by December 31, 2003, an amended return for your tax year that included September 11, 2001, and any later affected tax years. For more information, see Notice 2003-45, 2003-29 I.R.B. 86. -- 10-OCT-2003

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Commercial Fishermen: Nonqualified Capital Construction Fund Withdrawals

For tax years ending after May 5, 2003, the maximum tax rate applied to nonqualified withdrawals from the capital gain account in a capital construction fund decreases from 20% to 15%.

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2003 Changes for IRAs and Other Retirement Plans

403(b) Plan Changes

Increase in the limit on elective deferrals.

For 2003, the limit on elective deferrals has been increased from $11,000 to $12,000. The limit on elective deferrals will increase by $1,000 each year through 2006.

Catch-up contributions.

If you are age 50 or older by the end of 2003, you may be permitted to make additional catch-up contributions of up to $2,000 to your 403(b) plan.

More information.

Publication 571, Tax-Sheltered Annuity Plans (403(b)) Plans, has more information.

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Individual Retirement Arrangements (IRAs)

Modified AGI Limit for Traditional IRAs Increased

For 2003, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

• More than $60,000 but less than $70,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $40,000 but less than $50,000 for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing separately, the upper and lower limits of the phaseout range increased by $6,000. Publication 590, Individual Retirement Arrangements (IRAs), has more information.

Deemed IRAs

For plan years beginning after 2002, a qualified plan (defined later) can maintain a separate account or annuity under the plan to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of a traditional IRA or Roth IRA, it is deemed a traditional IRA or Roth IRA. A deemed IRA is subject to IRA rules and not to qualified plan rules. Also, the deemed IRA and contributions to it are not taken into account in applying qualified plan rules to any other contributions under the plan. Voluntary employee contributions must be designated as such by employees covered under the plan. They are includible in income.

Qualified plan. For deemed IRA purposes, qualified plans are defined contribution plans, defined benefit plans, annuity plans described in section 403(a), 403(b) plans, or section 457 deferred compensation plans.

Amending the plan. If you want to provide for a deemed IRA, you will have to amend your plan. For information on amending your plan, see Revenue Procedure 2003–13 in Internal Revenue Bulletin 2003–4.

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Qualified Plans

Elective Deferrals (401(k) Plans). The limit on elective deferrals for participants in 401(k) plans (excluding SIMPLE plans) is as follows.

Note. The $15,000 limit is subject to adjustment after 2006 for cost-of-living increases.

Catch-up contributions.  A plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions, as follows.

Note. The $5,000 limit is subject to adjustment after 2006 for cost-of-living increases.

The catch-up contribution limit. The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts:

• The catch-up contribution limit.
• The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

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Simplified Employee Pensions (SEPs)

The limit on elective deferrals and catch-up contributions for participants in SARSEPs are the same as for Qualified Plans.

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SIMPLE Plans

Salary reduction contributions. The limit on salary reduction contributions to a SIMPLE is as follows.

Note. The $10,000 limit is subject to adjustment after 2005 for cost-of-living increases.

Catch-up contributions. A SIMPLE plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions, as follows.

Note. The $2,500 limit is subject to adjustment after 2006 for cost-of-living increases.

The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.

Publication 590, Individual Retirement Arrangements (IRAs), has more information.

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Thrift Savings Plan

Catch-up contributions. Beginning in 2003, participants in the TSP who are age 50 or over at the end of the year generally will be able to make catch-up contributions to the plan. For 2003, the maximum catch-up contribution is $2,000.

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Tax Law Changes for Exempt Organizations

Report of Contributions and Expenditures

Organizations required to file Form 8872, Political Organization Report of Contributions and Expenditures, on or after June 30, 2003, must file the form electronically if the organization expects to have contributions or expenditures that are more than $50,000.

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Note: Fiscal year 2002-2003 estates should see Announcement 2003-56 for special rules for filing Schedule D (Form 1041), Capital Gains and Losses, and Form 1041, U.S. Income Tax Return for Estates and Trusts. 12-SEP-2003

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Reduction of Credit for State Death Taxes

For estates of decedents dying in 2003, the credit allowed for state death taxes is limited to 50% of the amount that would otherwise be allowed.

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Dividends

The same 15% (or 5%) maximum tax rate that applies to net capital gain also applies to dividends paid by most domestic and foreign corporations after December 31, 2002. Certain dividends from regulated investment companies (such as mutual funds), real estate investment trusts, and certain foreign corporations do not qualify for the reduced rates. The 2003 Form 1099-DIV, Dividends and Distributions, and the 2003 Instructions for Form 1099-DIV have been reissued to add a box for the reporting of qualified dividends subject to the reduced rates.

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Increased Annual Exclusion for Gifts

The annual exclusion for gifts made to spouses who are not U.S. citizens is increased to $112,000.

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Increased Estate Tax Applicable Exclusion Amount

An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds the applicable exclusion amount, listed below.

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Increase in Generation-Skipping Transfer (GST) Exemption

The generation-skipping transfer (GST) lifetime exemption increased to $1,120,000. The annual increase can only be allocated to transfers made during or after the year of the increase.

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Reduction of Maximum Estate and Gift Tax Rate

For estates of decedents dying, and gifts made, after 2002, the maximum rate for the estate tax and the gift tax is as follows.

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Form 709-A is Obsolete

Form 709–A, United States Short Form Gift Return, has been obsoleted. All gift tax returns must now be filed on Form 709, United States Gift (and generation-Skipping Transfer) Tax Return.

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Tax Law Changes Related to Foreign Issues

New Requirements for Form W-7

If you are a resident or nonresident alien applying for an Individual Taxpayer Identification Number (ITIN) to file a tax return, you now must attach your original, completed tax return to Form W-7, Application for IRS Individual Taxpayer Identification Number.

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