Publication 17: Your Federal Income Tax; Introductory Material

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

All material in this publication may be reprinted freely. A citation to Your Federal Income Tax (2004) would be appropriate.

The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of:

Tax laws enacted by Congress,

Treasury regulations, and

Court decisions.

However, the information given does not cover every situation and is not intended to replace the law or change its meaning.

This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS.

All taxpayers have important rights when working with the IRS. These rights are described in Your Rights as a Taxpayer in the back of this publication.

What's New for 2004

This section summarizes important tax changes that took effect in 2004. Most of these changes are discussed in more detail throughout this publication.

Changes are also discussed in Publication 553, Highlights of 2004 Tax Changes.

Higher taxable income limits for using Form 1040A, 1040EZ, and TeleFile. Beginning with the 2004 return, the income limit for using Form 1040A, Form 1040EZ, and TeleFile will increase to taxable income of less than $100,000. Previously, the limit was taxable income of less than $50,000. See chapter 1 for other requirements to use these forms.

Tax Computation Worksheet. If your taxable income for 2004 is $100,000 or more, you will figure your 2004 tax using a new Tax Computation Worksheet, rather than the Tax Rate Schedules. The Tax Computation Worksheet is found on page 285. The Tax Rate Schedules are shown on page 284 so you can see the tax rate that applies to all levels of taxable income. Do not use them to figure your tax.

Standard mileage rates. The standard mileage rate for the cost of operating your car increased to 37.5 cents a mile for all business miles driven. See chapter 28. The standard mileage rate allowed for use of your car for medical reasons increased to 14 cents a mile. See chapter 23. The standard mileage rate allowed for use of your car for determining moving expenses increased to 14 cents a mile. See chapter 19.

Retirement savings plans. The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. Traditional IRA income limits. If you have a traditional IRA 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. See chapter 18. 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 $13,000 ($16,000 If you were age 50 or over). However, for SIMPLE plans, the amount increased to $9,000 ($10,500 if you were age 50 or over).

Health savings accounts (HSAs). You may be able to deduct contributions made to your health savings account (HSA). HSAs are discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Deduction for clean-fuel vehicle. You can claim the maximum amount allowed for a clean-fuel vehicle or other clean-fuel vehicle property you placed in service in 2004. The 25% reduction of the maximum amount for 2004 has been eliminated. See Publication 535, chapter 12, for more information on the deduction.

Tax credit for qualified electric vehicle. You can claim the maximum tax credit allowed for a qualified electric vehicle you placed in service in 2004. The 25% reduction of the maximum credit for 2004 has been eliminated. See chapter 39 for more information.

Educator expenses. The deduction as an adjustment to gross income for educator expenses was scheduled to expire at the end of 2003. However, the provision has been extended until the end of 2005. The expenses can be deducted on Form 1040, line 23, or Form 1040A, line 16.

Additional child tax credit. In determining the additional child tax credit, the percentage of taxable earned income taken into account is increased to 15%. Also, taxable earned income, for this purpose, includes combat pay.

Earned income credit. You can now choose to include combat pay in your earned income for purposes of computing this credit.

Sales tax deduction. You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Form 1040, Schedule A. See chapter 24 for more information.

Income averaging for farmers and fishermen. Fishermen can elect to use income averaging on Form 1040, Schedule J, Income Averaging for Farmers and Fishermen, to reduce their tax. Also, the benefit of income averaging is extended to farmers and fishermen who owe the alternative minimum tax. See the Instructions for Form 1040, Schedule J for details.

Student loan interest deduction. The person legally obligated to make interest payments on a student loan may be able to deduct interest payments on that loan made by someone else. See chapter 21 for more information.

Tuition and fees deduction increased. The amount of qualified education expenses you can take into account in figuring your tuition and fees deduction increased. See chapter 21 for more information.

Hope or lifetime learning credit income limits increased. The amount of income you can have and still receive a Hope or lifetime learning credit has increased. See chapter 37 for more information.

Qualified tuition program (QTP) distributions. You may be able to exclude from income distributions from a QTP established and maintained by an eligible educational institution if the distributions are not more than your qualified higher education expenses. See chapter 13 for more information.

Certain amounts increased. Some tax items that are indexed for inflation increased for 2004. 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 $2,650. See chapter 38. 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. See chapter 22. Exemption amount. You are allowed a $3,100 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income. See chapter 3. Limit on itemized deduction. Some of your itemized deductions may be limited if your adjusted gross income is more than $142,700 ($71,350 if you are married filing separately). See chapter 31. Tax benefits for adoption. The adoption credit and the maximum exclusion from income of benefits under an employer's adoption assistance program are increased to $10,390. See Adoption Credit in chapter 39 and Publication 968, Tax Benefits for Adoption. Social security and Medicare taxes. The maximum wages subject to social security tax (6.2%) increased to $87,900. All wages are subject to Medicare tax (1.45%).

What's New for 2005

This section summarizes the important changes that take effect in 2005 that could affect your estimated tax payments for 2005. More information on these and other changes can be found in Publication 553.

Retirement savings plans. The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. Traditional IRA income limits. If you have a traditional IRA 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. Limit on elective deferrals. The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $14,000 ($18,000 if you are age 50 or over). However, for SIMPLE plans, the amount increases to $10,000 ($12,000 if you are age 50 or over). IRA deduction expanded. The amount you, and your spouse if filing jointly, may be able to deduct as an IRA contribution will increase to $4,000 ($4,500 if age 50 or older at the end of 2005). See chapter 18 for more information.

Deduction for clean-fuel vehicle. You can claim the maximum amount allowed for a clean-fuel vehicle or other clean-fuel vehicle property you place in service in 2005. The 50% reduction of the maximum amount for 2005 has been eliminated. See Publication 535, chapter 12, for more information on the deduction.

Tax credit for qualified electric vehicle. You can claim the maximum tax credit allowed for a qualified electric vehicle you place in service in 2005. The 50% reduction of the maximum credit for 2005 has been eliminated. See chapter 39 for more information.

Uniform definition of a child. Beginning in 2005, the definition of “qualified child” for the following tax benefits will change.

Dependency exemption.
Head of household filing status.
Earned income credit (EIC).
Child tax credit.
Child and dependent care credit.

Reminders

Listed below are important reminders and other items that may help you file your 2004 tax return. Many of these items are explained in more detail later in this publication.

Write in your social security number. To protect your privacy, social security numbers (SSNs) are not printed on the peel-off label that comes in the mail with your tax instruction booklet. This means you must enter your SSN in the space provided on your tax form. If you filed a joint return for 2003 and are filing a joint return for 2004 with the same spouse, enter your names and SSNs in the same order as on your 2003 return. See chapter 1.

Taxpayer identification numbers. You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. This applies even if the person was born in 2004. Generally, this number is the person's social security number (SSN). See chapter 1.

Reporting interest and dividends. If you have interest or dividend income of more than $1,500, you have to file Schedule 1 (Form 1040A) or Schedule B (Form 1040) with your tax return. Also, you cannot file Form 1040EZ if you have more than $1,500 of taxable interest income.

Tax relief for victims of terrorist attacks. Under the Victims of Terrorism Tax Relief Act of 2001, the federal income tax liability of those killed in the following attacks is forgiven for certain tax years.

The April 19, 1995, terrorist attack on the Alfred P. Murrah Federal Building (Oklahoma City).
The September 11, 2001, terrorist attacks.
The terrorist attacks involving anthrax occurring after September 10, 2001, and before January 2, 2002.

The Act also exempts from federal income tax certain amounts received by survivors. For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

Benefits for public safety officer's survivors. A survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty will generally be excluded from the recipient's income regardless of the date of the officer's death. The provision applies to a chaplain killed in the line of duty after September 10, 2001. The chaplain must have been responding to a fire, rescue, or emergency as a member or employee of a fire or police department. See chapter 13.

Parent of a kidnapped child. The parent of a child who is presumed by law enforcement authorities to have been kidnapped by someone who is not a family member may be able to take the child into account in determining his or her eligibility for the following.

Head of household or qualifying widow(er) with dependent child filing status.
Exemption for dependents.
Child tax credit.
Earned income credit.

See Publication 501, Exemptions, Standard Deduction, and Filing Information and Publication 596, Earned Income Credit (EIC).

Payments received by Holocaust victims. Restitution payments received after 1999 (and certain interest earned on the payments) are not taxable and do not affect the taxability of certain benefits, such as social security benefits. For more details, see chapter 13.

Advance earned income credit. If a qualifying child lives with you and you expect to qualify for the earned income credit in 2005, you may be able to get part of the credit paid to you in advance throughout the year (by your employer) instead of waiting until you file your tax return. See chapter 38.

Sale of your home. Generally, you will only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). See chapter 16.

Retirement planning services. If your employer has a qualified retirement plan, qualified retirement planning services provided for you (or your spouse) by your employer are not included in your income. For more information, see Retirement Planning Services under Fringe Benefits in chapter 6.

Individual retirement arrangements (IRAs). The following paragraphs highlight important reminders that relate to IRAs. See chapter 18 for details. IRA for spouse. A married couple filing a joint return can contribute up to the maximum amount each to their IRAs, even if one spouse had little or no income. Spouse covered by plan. Even if your spouse is covered by an employer-sponsored retirement plan, you may be able to deduct contributions to your traditional IRA if you are not covered by an employer plan. Roth IRA. You may be able to establish a Roth IRA. In this type of IRA, contributions are not deductible but earnings grow tax free and qualified withdrawals are not taxable. You may also be able to convert a traditional IRA to a Roth IRA, but you must include all or part of the taxable converted amount in income.

Retirement savings contributions credit. If you contribute to an individual retirement arrangement (IRA) or to a retirement plan sponsored by your employer, you may qualify for a tax credit. See Retirement Savings Contributions Credit in chapter 39.

Foreign source income. If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2 or 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents and royalties). If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Child tax credit. You may be able to claim a tax credit for each of your qualifying children under age 17 at the end of the year. See chapter 36.

Health insurance credit. If you are an eligible individual, you can claim a tax credit equal to 65% of the amount you pay for qualified health insurance coverage. See chapter 39.

Joint return responsibility. Generally, both spouses are responsible for the tax and any interest or penalties on a joint tax return. In some cases, one spouse may be relieved of that responsibility for items of the other spouse that were incorrectly reported on the joint return. For details, see Joint responsibility in chapter 2.

Include your phone number on your return. To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. Please enter your daytime telephone number on your tax form next to your signature.

Third party designee. You can check the “Yes” box in the “Third Party Designee” area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

Payment of taxes. Make your check or money order payable to “United States Treasury.” You can pay your taxes by credit card, using the Electronic Federal Tax Payment System (EFTPS), or, if you file electronically, by electronic funds withdrawal. See chapter 1.

Faster ways to file your return. The IRS offers fast, accurate ways to file your tax return information without filing a paper tax return. You can use IRS e-file (electronic filing). For details, see chapter 1.

Free electronic filing. You may be able to file your 2004 taxes online for free thanks to an electronic filing agreement. See chapter 1.

Mailing your return. If you are filing a paper return, you may be mailing your return to a different address because the IRS has changed the filing location for several areas. If you received an envelope with your tax package, please use it. Otherwise, see the last page of this publication for a list of IRS addresses.

Private delivery services. You may be able to use a designated private delivery service to mail your tax returns and payments. See chapter 1 for more information.

Change of address. If you change your address, you should notify the IRS. See Change of Address, under What Happens After I File, in chapter 1.

Refund on a late filed return. If you were due a refund but you did not file a return, you generally must file your return within 3 years from the date the return was due (including extensions) to get that refund. See chapter 1 for more information.

Privacy Act and paperwork reduction information. The IRS Restructuring and Reform Act of 1998, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell you what our legal right is to ask for the information, why we are asking for it, how it will be used, what could happen if we do not receive it, and whether your response is voluntary, required to obtain a benefit, or mandatory under the law. A complete statement on this subject can be found in your tax form instruction booklet.

Customer service for taxpayers expanded. The Internal Revenue Service has expanded customer service for taxpayers. Through the agency's Everyday Tax Solutions service, you can set up a personal appointment at the most convenient Taxpayer Assistance Center, on the most convenient business day. See How To Get Tax Help in the back of this publication.

Treasury Inspector General for Tax Administration. If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877- 8339 for TTY/TDD users). You can remain anonymous.

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.

Introduction

This publication covers the general rules for filing a federal income tax return. It supplements the information contained in your tax form instruction booklet. It explains the tax law to make sure you pay only the tax you owe and no more.

How this publication is arranged. This publication closely follows Form 1040, U.S. Individual Income Tax Return. It is divided into six parts which cover different sections of Form 1040. Each part is further divided into chapters which generally discuss one line of the form.

Figure 1, Finding Form 1040 Information in Publication 17, beginning on the next page shows you line-by-line where the items found on Form 1040 are discussed in this publication. Do not worry if you file Form 1040A or Form 1040EZ. Anything included on a line of either of these forms is also included on Form 1040.

The table of contents inside the front cover and the index in the back of the publication are also useful tools to help you find the information you need.

What is in this publication. The publication begins with the rules for filing a tax return. It explains:

Who must file a return,
Which tax form to use,
When the return is due,
How to e-file your return, and
Other general information.

It will help you identify which filing status you qualify for, whether you can claim any dependents, and whether the income you receive is taxable. The publication goes on to explain the standard deduction, the kinds of expenses you may be able to deduct, and the various kinds of credits you may be able to take to reduce your tax.

Throughout the publication are examples showing how the tax law applies in typical situations. Sample forms and schedules show you how to report certain items on your return. Also throughout the publication are flowcharts and tables that present tax information in an easy-to-understand manner.

Many of the subjects discussed in this publication are discussed in greater detail in other IRS publications. References to those other publications are provided for your information.

Icons. Small graphic symbols, or icons, are used to draw your attention to special information. See Table 1, Legend of Icons, below, for an explanation of each icon used in this publication.

What is not covered in this publication. Some material that you may find helpful is not included in this publication but can be found in your tax form instruction booklet. This includes lists of:

Where to report certain items shown on information documents, and
Recorded tax information topics (TeleTax).

If you operate your own business or have other self-employment income, such as from babysitting or selling crafts, see the following publications for more information.

Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).
Publication 533, Self-Employment Tax.
Publication 535, Business Expenses.
Publication 587, Business Use of Your Home (Including Use by Daycare Providers).
Publication 911, Direct Sellers.

IRS mission. 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.

Help from the IRS. There are many ways you can get help from the IRS. These are explained under How To Get Tax Help in the back of this publication.

Tax questions. Visit www.irs.gov or call 1-800-829-1040.
Forms and publications. Visit www.irs.gov to download them, call 1-800- 829-3676, or write to one of the three addresses shown on page 290.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put “Publications Comment” on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Tax questions. If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Ordering forms and publications. Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the three addresses shown under How To Get Tax Help in the back of this publication.

Table 1. Legend of Icons

Icon	Explanation
	Items that may cause you particular problems, or an alert about pending legislation that may be enacted after this publication goes to print.
	An Internet site or an email address.
	An address you may need.
	Items you should keep in your personal records.
	Items you may need to figure or a worksheet you may need to complete.
	An important phone number.
	Helpful information you may need.

Finding Form 1040 information in Publication 17, page 1

Finding Form 1040 information in Publication 17, page 2

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