2002 Tax Help Archives  
  Home > Tax Help Archives > 2002 > Pub 553 > HTML Page 3 of 5

Publication 553 2002 Tax Year

2003 Changes

This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

2003 Changes for Individuals


Standard Mileage Rate

Business-related mileage. For 2003, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck is decreased to 36 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical and move-related mileage. For 2003, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is decreased to 12 cents a mile. See Transportation under What Medical Expenses Are Deductible in Publication 502, Medical and Dental Expenses, or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.


Social Security and Medicare Taxes

For 2003, the employer and employee will continue to pay:

  1. 6.2% each for social security tax (old-age, survivors, and disability insurance), and
  2. 1.45% each for Medicare tax (hospital insurance).

Wage limits. For social security tax, the maximum amount of 2003 wages subject to the tax has increased to $87,000. For Medicare tax, all covered 2003 wages are subject to the tax. For information about these taxes, see Publication 15, Circular E, Employer’s Tax Guide.

Household employees. The $1,300 social security and Medicare wage threshold for household employees has been increased to $1,400 for 2003. This means that if you pay a household employee cash wages of less than $1,400 in 2003, you do not have to report and pay social security and Medicare taxes on that employee’s 2003 wages. For more information on household employment taxes, see Publication 926, Household Employer’s Tax Guide.


Self-Employed Health Insurance Deduction

For 2003, this deduction increases to 100% of the amount paid for medical and qualified long-term care insurance for you and your family. For more information, see chapter 7 in Publication 535, Business Expenses.


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.


Depreciation and Section 179 Deduction

Increased section 179 deduction. The total cost of section 179 property that you can elect to deduct is increased from $24,000 to $25,000 beginning in 2003. For more information on the section 179 deduction, see chapter 2 in Publication 946, How To Depreciate Property.


Coverdell Education Savings Account (ESA)

There will be no additional tax on excess contributions if the excess (and earnings on that amount) is withdrawn before the beginning of the sixth month following the year of the contribution. Generally, a calendar year taxpayer will have until May 31, 2003, to withdraw an excess contribution for 2002. Previously, excess contributions (and earnings) had to be withdrawn by the due date (including extensions) for filing the beneficiary’s tax return or, if no return was required, by April 15 of the following year. The Coverdell ESA is explained in chapter 5 of Publication 970, Tax Benefits for Education.


Lifetime Learning Credit

Beginning in 2003, the amount of qualified tuition and related expenses you may 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. The lifetime learning credit is explained in chapter 2 of Publication 970, Tax Benefits for Education.


Child and Dependent Care Credit Increase

Beginning in 2003, the following changes will be made to the child and dependent care credit. For details on this credit, see Publication 503, Child and Dependent Care Credit.

Credit percentage. The credit will be as much as 35% of your qualified expenses. The 35% rate will be reduced if your adjusted gross income is more than $15,000. For 2002, the credit could be no more than 30% of qualified expenses, and the 30% rate was reduced if adjusted gross income was more than $10,000.

Dollar limit. The limit on the amount of qualifying expenses will increase to $3,000 for one qualifying individual and to $6,000 for two or more qualifying individuals. For 2002, the amounts were $2,400 and $4,800 respectively.

Earned income amount for student-spouse or spouse not able to care for self. The amount of earned income your spouse, who is either a full-time student or not able to care for himself or herself, is treated as having earned is increased to $250 a month if there is one qualifying person and to $500 a month if there are two or more qualifying persons. For 2002, the amounts were $200 and $400 respectively.


Tax Benefits for Adoption Increased

Beginning in 2003, the maximum adoption credit or exclusion increases to $10,160. In the case of the adoption of a child with special needs, this amount will be allowed regardless of whether you have qualifying expenses. See Publication 968, Tax Benefits for Adoption, for more information.


Estimated Tax Requirements for Higher Income Taxpayers

For installment payments for tax years beginning in 2003, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your adjusted gross income is more than $150,000 ($75,000 if married filing a separate return), you will have to pay the smaller of 90% of your expected tax for 2003 or 110% of the tax shown on your 2002 return to avoid an estimated tax penalty. See Publication 505, Tax Withholding and Estimated Tax, for more information.


Health Insurance Credit

At a date to be announced in 2003, an older worker eligible for the alternative trade adjustment assistance program can qualify for the health insurance credit if he or she:

  1. Is covered by a qualifying certification,
  2. Is reemployed not more than 26 weeks after the date of separation from the adversely-affected employment,
  3. Is at least 50 years of age,
  4. Does not earn more than $50,000 a year in wages from reemployment,
  5. Is employed on a full-time basis, and
  6. Does not return to the employment from which he or she was separated.

More information will be available when the program begins.


Disclosure of Reportable Transactions

For each reportable transaction that you enter into after 2002 and in which you participated directly or indirectly, you must attach Form 8886, Reportable Transaction Dis- closure Statement, to your return for each year that your tax liability is affected by your participation in the transaction. In addition, for the first year you disclose a reportable transaction, you must send a copy to:

Internal Revenue Service
LM:PFTG:OTSA
Large & Mid-Size Business Division
1111 Constitution Avenue, NW
Washington, DC 20224.

Reportable transaction. A reportable transaction is a transaction or series of transactions described in one or more of the following six categories.

  1. Listed transactions. This category includes transactions that are the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by notice, regulation, or other form of published guidance as a listed transaction. For existing guidance, see the instructions for Form 8886. There may be subsequent guidance identifying additional listed transactions.
  2. Confidential transactions. This category includes transactions that are offered under conditions of confidentiality. See section 1.6011-4T(b)(3) of the regulations for more information.
  3. Transactions with contractual protection. This category includes transactions for which you have or expect to have contractual protection against the possibility that part or all of the intended tax benefits from the transaction will not be sustained.
  4. Loss transactions. For individuals, this category includes transactions that result in, or are likely to result in, a gross loss (before netting any gain against it) of at least $2 million in any single tax year or $4 million in any combination of tax years. The loss amount is at least $50,000 for a single tax year if the loss involves a foreign currency transaction defined in section 988(c)(1) of the Internal Revenue Code. Different limits apply to corporations, partner- ships, and S corporations.
  5. Transactions with significant book-tax differences. This category includes transactions in which the treatment for federal income tax purposes of any income, deduction, or credit item or items from the transaction differs, or is reasonably expected to differ, by more than $10 million on a gross basis from the treatment of these items for book purposes in any tax year. This category applies only to:
    1. Reporting companies under the Securities Exchange Act and related entities (as defined in sections 267(b) and 707(b) of the Internal Revenue Code), or
    2. Business entities that have $100 million or more in gross assets, including the assets of all related entities (as defined in sections 267(b) and 707(b) of the Internal Revenue Code).
  6. Transactions with brief asset holding periods. This category includes transactions with both of the following characteristics.
    1. The transaction involves an asset(s) held by an investor for less than 45 days. To determine the asset’s holding period, see section 246(c)(3) and (4) of the Internal Revenue Code.
    2. The transaction results in a tax credit (including a foreign tax credit) exceeding $250,000.

More information. For more information and exceptions to these rules, see Form 8886 and its instructions.

For the disclosure rules that apply to transactions entered into before 2003, see Tax Shelter Disclosure Statement under 2002 Changes.

At the time this publication was being prepared for print, the regulations relating to reportable transactions were expected to be revised. The revised regulations will permit taxpayers who entered into transactions after 2002 and before the filing date of the revised regulations to elect to apply the revised regulations instead of the rules described here.


2003 Changes for Businesses


Standard Mileage Rate

Business-related mileage. For 2003, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck is decreased to 36 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.


Self-Employed Health Insurance Deduction

For 2003, this deduction increases to 100% of the amount paid for medical and qualified long-term care insurance for you and your family. For more information, see chapter 7 in Publication 535, Business Expenses.


Social Security and Medicare Taxes

For 2003, the employer and employee will continue to pay:

  1. 6.2% each for social security tax (old-age, survivors, and disability insurance), and
  2. 1.45% each for Medicare tax (hospital insurance).

Wage limits. For social security tax, the maximum amount of 2003 wages subject to the tax has increased to $87,000. For Medicare tax, all covered 2003 wages are subject to the tax. For information about these taxes, see Publication 15, Circular E, Employer’s Tax Guide.

Household employees. The $1,300 social security and Medicare wage threshold for household employees has been increased to $1,400 for 2003. This means that if you pay a household employee cash wages of less than $1,400 in 2003, you do not have to report and pay social security and Medicare taxes on that employee’s 2003 wages. For more information on household employment taxes, see Publication 926, Household Employer’s Tax Guide.


Depreciation and Section 179 Deduction

Increased section 179 deduction. The total cost of section 179 property that you can elect to deduct is increased from $24,000 to $25,000 beginning in 2003. For more information on the section 179 deduction, see chapter 2 in Publication 946, How To Depreciate Property.


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.


Disclosure of Reportable Transactions

For each reportable transaction that you enter into after 2002 and in which you participated directly or indirectly, you must attach Form 8886, Reportable Transaction Dis- closure Statement, to your return for each year that your tax liability is affected by your participation in the transaction. A partnership or S corporation must attach Form 8886 to its return for each year that any partner or shareholder’s tax liability is affected or is reasonably expected to be affected by its participation in the transaction. In addition, for the first year you disclose a reportable transaction, you must send a copy to:

Internal Revenue Service
LM:PFTG:OTSA
Large & Mid-Size Business Division
1111 Constitution Avenue, NW
Washington, DC 20224.

Reportable transaction. A reportable transaction is a transaction or series of transactions described in one or more of the following six categories.

  1. Listed transactions. This category includes transactions that are the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by notice, regulation, or other form of published guidance as a listed transaction. For existing guidance, see the instructions for Form 8886. There may be subsequent guidance identifying additional listed transactions.
  2. Confidential transactions. This category includes transactions that are offered under conditions of confidentiality. See section 1.6011-4T(b)(3) of the regulations for more information.
  3. Transactions with contractual protection. This category includes transactions for which you have or expect to have contractual protection against the possibility that part or all of the intended tax benefits from the transaction will not be sustained.
  4. Loss transactions. For individuals, this category includes transactions that result in, or are likely to result in, a gross loss (before netting any gain against it) of at least $2 million in any single tax year or $4 million in any combination of tax years. The loss amount is at least $50,000 for a single tax year if the loss involves a foreign currency transaction defined in section 988(c)(1) of the Internal Revenue Code. For corporations, this category includes trans actions that result in, or are likely to result in, a gross loss (before netting any gain against it) of at least $10 million in any single tax year or $20 million in any combination of tax years. For partnerships and S corporations, this category includes transactions that result in, or are likely to result in, a gross loss (before netting any gain against it) of at least $5 million in any single tax year or $10 million in any combination of tax years.
  5. Transactions with significant book-tax differences. This category includes transactions in which the treatment for federal income tax purposes of any income, deduction, or credit item or items from the transaction differs, or is reasonably expected to differ, by more than $10 million on a gross basis from the treatment of these items for book purposes in any tax year. This category applies only to:
    1. Reporting companies under the Securities Exchange Act and related entities (as defined in sections 267(b) and 707(b) of the Internal Revenue Code), or
    2. Business entities that have $100 million or more in gross assets, including the assets of all related entities (as defined in sections 267(b) and 707(b) of the Internal Revenue Code).
  6. Transactions with brief asset holding periods. This category includes transactions with both of the following characteristics.
    1. The transaction involves an asset(s) held by an investor for less than 45 days. To determine the asset’s holding period, see section 246(c)(3) and (4) of the Internal Revenue Code.
    2. The transaction results in a tax credit (including a foreign tax credit) exceeding $250,000.

More information. For more information and exceptions to these rules, see Form 8886 and its instructions.

For the disclosure rules that apply to transactions entered into before 2003, see Tax Shelter Disclosure Statement under 2002 Changes.

At the time this publication was being prepared for print, the regulations relating to reportable transactions were expected to be revised. The revised regulations will permit taxpayers who entered into transactions after 2002 and before the filing date of the revised regulations to elect to apply the revised regulations instead of the rules described here.


2003 Changes for IRAs and Other Retirement Plans

For more information about IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

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.

Modified AGI Limit for Traditional IRAs

For 2003, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross in-come (AGI) is between:

  • $60,000 and $70,000 for a married couple filing a joint return or a qualifying widow(er),
  • $40,000 and $50,000 for a single individual or head of household, or
  • $–0– and $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 increase by $6,000. For more information, see How Much Can I Deduct? in chapter 1 of Publication 590.

Election to Change IRA Distribution Method

If you are a designated beneficiary who has elected to take the entire balance of an inherited IRA by the end of the fifth year following the year of the owner’s death, you may now be able to change your election. You may switch to receiving the balance over your life expectancy. For more information, see Switch from election to take balance by the end of the fifth year under Figuring the Required Minimum Distribution in chapter 1 of Publication 590.

403(b) Plans

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

For more information about 403(b) plans, see Publication 571.

Simplified Rules for Required Minimum Distributions

There are new rules for determining the amount of a required minimum distribution for a year beginning after 2002. The new rules, including new life expectancy tables, have been incorporated into chapter 1 and appendix C of Publication 590.

Statement of Required Minimum Distribution

If a minimum distribution is required from your IRA for 2003, the trustee, custodian, or issuer that held the IRA at the end of 2002 must either report the amount of the required minimum distribution to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31, 2003. It can be provided with the year end fair market value statement that you normally get each year. No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died.


2003 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.

Form 8872 filed before June 30, 2003, can be filed electronically or by mail.

2003 Changes of Excise Taxes


New Tax Rates

The tax rates for gasohol and for gasoline removed or entered for the production of gasohol have increased for 2003. See Form 720, Quarterly Federal Excise Tax Return, for the new rates that apply to these fuels.


Air Transportation Taxes

For amounts paid in 2003, the tax on the use of international air travel facilities will be $13.40 per person for flights that begin or end in the United States, or $6.70 per person for domestic segments that begin or end in Alaska or Hawaii (applies only to departures). See Publication 510, Excise Taxes for 2003, for information on air transportation taxes.


Luxury Tax

The luxury tax on passenger vehicles does not apply after 2002.

Previous | First | Next

Publication 553 | 2002 Tax Year Archives | Tax Help Archives | Home