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Part 21. Customer Account Services

Chapter 6. Individual Tax Returns

Section 4. Tax Computation/Tax Period Changes

21.6.4  Tax Computation/Tax Period Changes

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21.6.4.1  (10-01-2002)
Tax Computation/Tax Period Changes Overview

  1. This section provides information on computing tax and determining deductions allowed before the tax is computed. The following subjects are covered in this chapter:

    • Itemized and Standard Deductions

    • Tax Computation

    • Self-Employment Income and Tax

    • Tax Period Changes

    • Capital gains

  2. The Self-Employment Tax is added to the regular tax in determining the total tax.

21.6.4.2  (10-01-2008)
What Are Tax Computation and Tax Period Changes

  1. Various schedules/forms are used in computing tax. The schedules/forms and their purposes covered in this section are:

    • Schedule A, Itemized Deductions

    • Schedule D, Capital Gains and Losses

    • Schedule H, Household Employment Taxes

    • Schedule J, Income Averaging for Farmers and Fishermen

    • Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,800

    • Form 8814, Parents' Election to Report Child's Interest and Dividends

    • Form 6251, Alternative Minimum Tax Individuals

    • Schedule SE, Self-Employment Tax

    • Form 4137, Social Security and Medicare Tax on Unreported Tip Income

    • Form 1128, Application to Adopt, Change, or Retain a Tax Year

    • Form 8919, Uncollected Social Security and Medicare Tax on Wages

21.6.4.3  (10-01-2006)
Tax Computation/Tax Period Changes Research

  1. Refer to IRM 21.5.1, General Adjustments, IRM 21.5.2, Adjustment Guidelines, and each topic in this section for research requirements.

  2. During a taxpayer contact when:

    • it appears there may be a hardship situation, or

    • the taxpayer insists on being referred to Taxpayer Advocate Office (TAO), or

    • the contact meets TAO criteria and you cannot resolve it the issue in the same day

    • prepare and forward Form 911, Request for Taxpayer Advocate Service Assistance, to the local TAO. See IRM 13, Taxpayer Advocate Service, for more information.

21.6.4.4  (10-01-2006)
Working Tax Computation/Tax Period Changes Procedures

  1. This section contains procedures for computing tax and for tax period changes.

  2. Refer to IRM 21.5.1, General Adjustments, IRM 21.5.2, Adjustment Guidelines, IRM 21.5.3, General Claims Procedures, for specific guidance on adjustment input and claim processing.

21.6.4.4.1  (10-01-2003)
Itemized and Standard Deductions

  1. The taxpayer may claim Schedule A, Itemized Deductions, as limited, or the standard deduction whichever is larger, on Form 1040, U.S. Individual Income Tax Return.

21.6.4.4.1.1  (10-01-2008)
Procedures for Schedule A Itemized Deductions

  1. This section provides procedures for checking Schedule A, Itemized Deductions. Schedule A changes affect the taxable income amount.

    Note:

    Do not decrease taxable income below zero. This causes an unpostable 189 condition. See IRM 21.5.5,Unpostables , for additional information on unpostables.

    1. Math verify the Schedule A .

    2. Input the appropriate increase or decrease.

    3. Use Reason Code (RC) 076, the appropriate Blocking Series (BS) and Source Code (SC).

  2. Update the Return Processable Date (RPD) if the Schedule A is a late reply to a "U" coded return. The RPD is the received date of the Schedule A.

  3. Refer to IRM 21.5.1.4.2.10 , Late Replies, for more information.

21.6.4.4.1.2  (10-01-2003)
Information on Itemized Deductions Required Research

  1. Determine if itemized deductions are required. The following states do not permit taxpayers to itemize deductions on the state return unless they itemize on the federal return.

    • Georgia

    • Kansas

    • Maine

    • Maryland

    • Missouri

    • Nebraska

    • New York

    • North Dakota

    • Oklahoma

    • Rhode Island

    • Virginia

  2. Idaho requires taxpayers to itemize if excluding income from:

    • Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa

    • Form 2555, Foreign Earned Income

21.6.4.4.1.3  (10-01-2004)
Schedule A Itemized Deductions

  1. , Schedule A,Itemized Deductions , must be attached to Form 1040, U.S. Individual Income Tax Return, if the taxpayer itemizes deductions or Form 1040X, Amended U.S. Individual Income Tax Return, if the taxpayer is amending the return and Schedule A was not previously filed with the original return. Schedule A is divided into eight sections.

    • Medical and Dental Expenses

    • Taxes You Paid

    • Interest You Paid

    • Gifts to Charity

    • Casualty and Theft Losses

    • Job Expenses and Certain Miscellaneous Deductions

    • Other Miscellaneous Deductions

    • Total Itemized Deductions

21.6.4.4.1.4  (10-01-2003)
Medical and Dental Expenses

  1. Schedule A, Itemized Deductions , deductible medical and dental expenses must exceed 7.5% of the Adjusted Gross Income (AGI).

  2. Include as a medical expense (itemized deduction) the expense of :

    • Breast reconstruction following a mastectomy

    • Vision correction surgery

      Note:

      See Rev. Rul. 2003–57 for detailed information

  3. Include as a medical expense (itemized deduction) the expense of admission and transportation to a medical conference if:

    • The medical conference concerns the chronic illness of the taxpayer, the taxpayer's spouse, or dependent

    • The cost is primarily for and in the case of transportation essential to the medical care of the taxpayer, taxpayer's spouse, or taxpayer's dependent

    • The majority of the taxpayer's time is spent at the conference attending sessions on medical information

      Note:

      The costs of meals and lodging while attending the conference are not deductible. See Rev. Rul. 2000–24 for more information.

  4. Amounts paid for medicine or drugs that are purchased without a prescription of a physician are not deductible medical expenses. See Rev. Rul. 2003–58 for more information.

  5. Rev. Rul. 2002–19 explains the conditions under which the expense of a weight-loss program is deductible.

    • The weight loss program must be for treatment of a specific disease (including obesity) diagnosed by a physician

    • Deductible expenses include fees to join the weight loss program, and the cost to attend periodic meetings

    • The expenses must be uncompensated

    • The cost to purchase diet food items is not deductible

    • The deduction is subject to the same rules and limitations as other medical expenses

    • This revenue ruling applies to all open years

21.6.4.4.1.5  (10-01-2008)
Taxes and Fees-Deductible and Nondeductible

  1. The following taxes paid are deductible:

    • Income taxes—state, local, or foreign
      The American Jobs Creation Act of 2004 ( H.R. 4520, Pub. L. 108-357), allowed taxpayers to deduct state and local sales tax in lieu of state and local income tax for tax years 2004 and 2005. Additional information is available in Publication 600, State and Local General Sales Taxes.

      Note:

      H.R. 6111, extends this provision for tax years 2006 and 2007. The deduction for state and local sales taxes expired and not effective for tax year 2008.

    • Real property taxes—state, local, or foreign

    • Personal property taxes—state and local

    • Taxes paid as an expense of carrying on a trade or business or an income producing activity - state, local or foreign

    • Generation skipping transfer ("GST" ) tax imposed on income distributions

    • The environmental tax imposed by IRC Section 59A

    • Excess profits and war profits taxes - state, local, or foreign

    Note:

    Taxes of a business are deducted on Schedule C, Profit or Loss from Business (Sole Proprietorship), or Schedule C–EZ, Net Profit From Business. Taxes of a farmer are deducted on Schedule F, Profit or Loss From Farming.

  2. Taxes and fees cannot be deducted unless they fall into one of the specifically allowable categories stated above. Nondeductible taxes and fees include, but are not limited to:

    • Federal income taxes

    • Social security taxes

    • Estate, inheritance, legacy, or succession taxes

    • Fines (e.g., parking and speeding)

    • General sales tax, tax on gasoline, car inspection fees, etc.

    • Gift taxes

    • License fees for personal purposes (e.g., marriage, driver's, dog, etc.)

21.6.4.4.1.6  (10-01-2008)
Deductible and Nondeductible Interest Paid

  1. The types of deductible interest are:

    • Home mortgage interest on up to two residences

    • Points paid for a home. Points may be reported on Form 1098, Mortgage Interest Statement, but not all points reported on Form 1098, are deductible.

    • Home refinancing interest and home equity loan interest is restricted. Refer to Publication 17,Your Federal Income Tax for Individuals and Publication 936, Home Mortgage Interest Deduction , for details.

    • Qualified mortgage insurance premiums you paid under a mortgage insurance contract issued after December 31, 2006, in connection with home acquisition debt that was secured by your first or second home. Box 4 of Form 1098 may show the amount of premiums you paid in 2008.

    • Investment interest—limited to the amount of net investment income Form 4952, Investment Interest Expensemay be required

    • Periodic rental payments on a redeemable ground rent

      Note:

      Educational loan interest is subject to two percent miscellaneous deduction limit.

  2. The following types of interest are NOT deductible:

    • Points—If you are a seller paying points for the benefit of the buyer.

    • Non-redeemable ground rent

    • Service charges

    • Annual fees for credit cards

    • Loan fees

    • Credit investigation fees

    • Interest relating to tax-exempt income

    • Interest to purchase or carry certain straddle positions

    • Finance charges on personal credit cards and interest on personal car loans

21.6.4.4.1.7  (01-03-2006)
Gifts to Charity

  1. A charitable contribution is deductible if it is:

    • A properly substantiated donation or gift to, or for the use of, a qualified organization

    • Voluntarily made without receiving, or expecting to receive, anything of equal value in return. If something of value is received in return, and is of lesser value than the amount given to charity, a deduction is allowed for the excess of the amount given over the value of what was received.

  2. The Katrina Emergency Tax Relief Act of 2005 (KETRA, Pub. L. 109-73) enacted on September 23, 2005, provides temporary suspension of limitations on charitable contributions. Generally, qualified contributions by individuals are exempt from percentage limitations and the phase-out of itemized deductions if:

    1. contribution is made in cash

    2. contribution is made on or after August 28, 2005, and before January 1, 2006

    3. contribution is made to organizations described in IRC Section 170(b)(1)(A) (religious institutions, public charities, governments, and certain private operating foundations.

  3. The Gulf Opportunity (GO) Zone Act of 2005, ( Pub. L. 109-135) enacted on December 21, 2005, provides temporary suspension of limitations on charitable contributions made on or after August 28, 2005, and before January 1, 2006, for relief efforts related to Hurricanes Rita or Wilma. Contributions are subject to the same limitations and qualifications as those enacted in KETRA as listed above.

  4. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma, for additional information on relief provisions enacted by KETRA and GO Zone legislation. See Publication 526, Charitable Contributions, for more information on reporting and claiming charitable contributions not related to disasters.

  5. A law enacted on January 7, 2005, permits taxpayers to claim as charitable contributions in tax year 2004 donations made during January 2005 to assist victims of the tsunami disaster. The deduction is limited to cash gifts made specifically for the tsunami disaster relief and must meet all charitable contribution requirements. Taxpayers may choose whether to claim the deduction for tax year 2004 or tax year 2005.

21.6.4.4.1.8  (10-01-2005)
Non-Cash Charitable Contributions

  1. The substantiation rules for non-cash charitable contributions were changed by The American Jobs Creation Act of 2004 (Pub. L. 108-357).

  2. Noncash charitable contributions over $500 must be supported by Form 8283, Noncash Charitable Contributions. Verify the Form 8283, Noncash Charitable Contributions.

  3. Form 8283, Section B, Donated Property Over $5,000, must be completed and the Declaration of Appraiser (Part III) must be signed for contributions (of other than publicly traded securities) claimed over $5,000. The appraisal date must NOT be:

    • Earlier than 60 days before the date of the contribution of the property

    • Later than the due date of the return, including extensions, unless the deduction is first claimed on an amended return, then it is the date that the amended return is filed. See Treas. Reg. § 1.170A-13(c)(3)(i)(A).

  4. For contributions made after June 30, 2004, a qualified appraisal must be attached to a return for contributions of over $500,000. See IRC § 170 (f)(11)(D).

  5. Taxpayer inquiries may be received regarding balance due and disallowance notices relating to missing or incomplete Forms 8283, Noncash Charitable Contributions.

    1. Secure the related return.

    2. Determine the reason for issuance of the notice.

    3. Inform the taxpayer the issue will be given further consideration if IRS receives an accurately completed Form 8283, Noncash Charitable Contributions, within 90 days of the request.

      Exception:

      A deduction over $5,000 is disallowed due to the time frames stated in (3) above.

    4. Refile the return.

    5. Recompute the tax if a properly completed Form 8283 is received.

21.6.4.4.1.9  (01-03-2006)
Standard Mileage Rate for Charitable Services

  1. For tax years 2006, 2007 and 2008, the standard mileage rate for use of the taxpayer's care in giving services to a charitable organization is 14 cents per mile.

  2. For 2005 the standard mileage rate for use of the taxpayer's car in giving services to a charitable organization is 14 cents per mile, other than activities related to Hurricane Katrina relief.

  3. Special rates apply for Hurricane Katrina related charitable miles:

    • For the period August 25 - August 31, 2005, the rate for charitable miles driven providing Hurricane Katrina relief is 29 cents per mile for deduction purposes.

    • For the months of September through December 2005 the rate for charitable miles driven providing Hurricane Katrina relief is 34 cents per mile for deduction purposes.

    • For 2006, the rate for charitable miles driven providing Hurricane Katrina relief is 32 cents per mile for deduction purposes.

  4. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma, for additional information on relief provisions enacted by KETRA and GO Zone legislation. See Publication 526, Charitable Contributions, for more information on reporting and claiming standard mileage rates for charitable services.

21.6.4.4.1.10  (10-01-2008)
Casualty and Theft Losses

  1. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, such as a fire, shipwreck or storm, not compensated for by insurance or otherwise. Taxpayer must file Form 4684, Casualties and Thefts, to support the deduction.

  2. A theft is the unlawful taking and removing of property or money with the intent to deprive the owner of it. The loss is allowable to the extent not compensated for by insurance or otherwise. Loss must be supported by Form 4684.

  3. The Katrina Emergency Tax Relief Act of 2005 (KETRA Pub. L. 109-73) enacted on September 23, 2005, the Gulf (GO) Zone Opportunity Act of 2005 (Pub. L. 109-135), enacted on December 21, 2005, and the Food, Conservation and Energy Act of 2008 (also referred to as the Kansas Disaster Area) (Pub. L. 110-234), enacted May 22, 2008, provide suspension of certain limitations on personal casualty losses. These provisions removed two limitations on personal casualty or theft losses to the extent the losses arose in the Hurricane Katrina disaster area on or after August 25, 2005, the Hurricane Rita disaster on or after September 23, 2005, the Hurricane Wilma disaster on or after October 23, 2005 and were attributable to the hurricane or in the Kansas Disaster Area on or after May 4, 2007 and were attributable to the storms and tornados. The two limitations removed are:

    • Casualty and theft losses need not exceed $100 per casualty or theft.

    • Losses are deductible without regard to whether the aggregate net losses exceed 10 percent of the taxpayer's adjusted gross income (AGI).

  4. KETRA, GO Zone, and Kansas Disaster Area legislation treat personal casualty or theft losses from Hurricanes Katrina, Rita, Wilma, and the Kansas Disaster Area as a deduction separate from all other casualty losses.

    • For tax year (TY) 2005, Form 4684,Casualties and Thefts, is revised to reflect the new legislation for Hurricanes Katrina, Rita and Wilma losses.

    • For TY 2004, taxpayers filing or amending tax returns to claim casualty and theft losses caused by Hurricanes Katrina, Rita or Wilma are instructed to write "Hurricane Katrina" , "Hurricane Rita" , or "Hurricane Wilma" in red ink at the top of the form. Taxpayers must attach Form 4864, Casualties and Thefts, and write "Hurricane Katrina" , "Hurricane Rita" , or "Hurricane Wilma" on the dotted line next to line 11 (the smaller of line 10 or $100), and either "0" on lines 11 and 17 (10 percent of AGI).

    • Victims of Hurricanes Katrina, Rita or Wilma have until October 16, 2006 to claim disaster-related losses on 2004 federal income tax returns. The original deadline for individuals choosing to claim disaster-related losses on prior year federal income tax returns was April 17, 2006.

  5. The law, enacted May 22, 2007, lifts the $100 and the 10 percent loss for the Kansas Disaster Area struck by severe weather in May 2007. As a result, many individuals and couples who originally showed disaster losses on either their 2006 or 2007 return may now be eligible to report a larger deduction and thus claim an additional refund by filing an amended return for tax year 2007. In addition, those barred from claiming a loss because of the regular $100 and 10 percent limits can now claim a deduction on either an original or amended return for tax year 2007. To speed processing, those claiming this relief should write, "Kansas Disaster Area," in red, at the top of their Form 1040 or Form 1040X.

  6. Taxpayers filing or amending tax returns with additional casualty and theft losses not related to Hurricane Katrina must complete Form 4684 following normal procedures. If the taxpayer has both normal casualty and theft losses in addition to Hurricane Katrina, Rita, Wilma or the Kansas Disaster Area casualty and theft losses, two Forms 4684 must be submitted.

  7. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma, for additional information on relief provisions enacted by KETRA and GO Zone legislation. See Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes, for additional information on relief provisions enacted. See Publication 547,Casualties, Disasters, and Thefts; Publication 584, Casualty, Disaster, and Theft Loss Workbook; and Rev. Proc. 2006–32,Internal Revenue Bulletin 61 for additional information.

21.6.4.4.1.11  (10-01-2003)
Job Expenses and Other Miscellaneous Itemized Deductions Subject to Two Percent Floor

  1. Certain expenses (e.g., unreimbursed employee expenses) can be claimed as miscellaneous itemized deductions on lines 20–22 of Schedule A, Form 1040, and are deductible to the extent that such expenses exceed 2% of AGI. Attach Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, if required.

21.6.4.4.1.12  (10-01-2003)
Other Itemized Deductions Not Subject to Two Percent Reduction

  1. Some other expenses listed as miscellaneous deductions are not subject to the 2% limit. These expenses include, but are not limited to:

    • Deductible Gambling losses (to the extent of winnings claimed as income)

    • Impairment-related work expenses of a disabled individual

21.6.4.4.1.13  (10-01-2008)
Limitation on Itemized Deductions

  1. There is an overall limitation on itemized deductions which applies to individuals whose income from line 37 (AGI) of the Form 1040, U.S. Individual Income Tax Return, exceeds the amounts listed below. These taxpayers must reduce the amount of their otherwise allowable itemized deductions by the lesser of:

    • 3% of the excess of AGI over the applicable amount, or

    • 80% of the amount of otherwise allowable itemized deductions


    SCHEDULE A Phase-Out
    FILING
    STATUS    		 2008 2007 2006 2005
    Single, Head of Household, Married Filing Joint, Qualifying Widow(er) 159,950 156,400 150,500 145,950
    Married Filing Separate 79,975 78,200 75,250 72,975

    Note:

    When determining the overall limitation, the term itemized deduction does not include the deduction under:

    IRC Section Deduction For
    IRC§213 Medical Expenses
    IRC§163(d) Investment Interest
    IRC§165(a), IRC§165(c)(2) or (3) Casualty or Theft Losses from personal property
    IRC§165(d) Wagering Losses

21.6.4.4.2  (10-01-2008)
Standard Deduction

  1. The standard deduction depends on the year of the return and taxpayer's filing status.

  2. If the taxpayer and or his/her spouse is over 65 (for TY 2008, born before January 2, 1944) and/or blind a higher standard deduction applies. Taxpayer checks a box on the Form 1040 to indicate the reason for the additional standard deduction. Refer to the table below to determine the correct standard deduction amount.

    FILING
    STATUS for    		 # of Boxes Checked The Standard Deduction for 2008 is The Standard Deduction for 2007 is The Standard Deduction for 2006 is The Standard Deduction for 2005 is
    SINGLE 1
    2     		$6,800
    $8,150     		$6,650
    $     		$6,400
    $7,650     		$6,250
    $7,500
    MARRIED FILING JOINT 1
    2
    3
    4     		$11,950
    $13,000
    $14,050
    $15,100     		$11,750
    $12,800
    $13,850
    $14,900     		$11,300
    $12,300
    $13,300
    $14,300     		$11,000
    $12,000
    $13,000
    $14,000
    MARRIED FILING SEPARATE 1
    2
    3
    4     		$6,500
    $7,550
    $8,600
    $9,650     		$6,400
    $7,450
    $8,500
    $9,550     		$6,150
    $7,150
    $8,150
    9,150     		$6,000
    $7,000
    $8,000
    $9,000
    HEAD OF HOUSEHOLD 1
    2     		$9,350
    $10,700     		$9,150
    $10,450     		$8,800
    $10,050     		$8,550
    $9,800

    Note:

    Certain individuals are not eligible to claim the Standard Deduction. See Form 1040 instructions for additional information.

21.6.4.4.3  (10-01-2008)
Tax Computation

  1. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates the reduction for the marginal tax rates for individuals originally scheduled for a 5 year phase-in under the Economic Growth and Tax Relief Reconciliation Act of 2001.

    If Then ...
    Taxpayer does not elect to itemize deductions Taxable income is:
    AGI minus the Standard Deduction, and the deduction for personal exemptions provided in
    § 151.
    Taxpayer elects to itemize deductions Taxable income is
    AGI minus excess itemized deductions and personal exemptions provided in § 151.

  2. Compute tax on the taxable income.

    1. Use the Tax Table to compute the tax on taxable income under $100,000.

    2. Use the Tax Computation Worksheet to compute the tax on taxable income of $100,000 or over.

  3. Consider the following when computing tax:

    • Schedule D,Capital Gains and Losses

    • Schedule D, Tax Worksheet

    • Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,800

    • Form 8814, Parent's Election to Report Child's Interest and Dividends

    • Form 6251, Alternative Minimum Tax—Individuals

    • Schedule J,Income Averaging for Farmers and Fishermen

    • TY 2001 Tax Computation Worksheet for Certain Dependents

    • Form 4972, Tax on Lump Sum Distributions

  4. Self-Employment Tax rules usually apply if taxpayer had net earnings from self-employment of $400.00 or more. See Publication 17,Your Federal Income Tax, and Publication 334, Tax Guide for Small Business for exceptions.

    Note:

    Use the Capital Gains work sheet from Form 1040,US. Individual Income Tax Return, instructions if applicable.

21.6.4.4.4  (10-01-2005)
Applying Capital Gains and Losses Provisions for Sales After 5/6/97

  1. For sales after 5/6/97:

    • The capital gain tax rates vary from 8% to 28%, depending on the year of gain, holding period, type of property sold, and the taxpayer's taxable income. (The 8% did not apply until 2001.) See Publication 544, Sales and Other Dispositions of Assets, and Publication 550, Investment Income and Expenses, for more information.

    • Generally, the property must have been held for more than one year for the lower 20/10% capital gain tax rates to apply.

      Exception:

      For sales after 7/28/97 and before 1/1/98, there is an 18–month holding period for the 20%/10% rates to apply.

    • Capital gain distributions from mutual funds or real estate investment trust must be reported on Schedule D for 1997 and 1998. After 1998, a taxpayer whose only capital gain is from these distributions may be able to use the Capital Gain Tax Worksheet ( Form 1040,U.S. Individual Income Tax Return Instructions).

    • If a taxpayer has more than five entries on line 1 or 8 of the Schedule D, additional items are listed on Schedule D–1, combined, and then carried to Schedule D.

  2. The IRS issued Notice 2002–67 on October 21, 2002, addressing the federal tax treatment of payments from the Department of Agriculture to peanut quota holders. Recent agricultural legislation repealed the marketing quota program for peanuts and directs the Department of Agriculture to make payments to peanut quota holders for the lost value of the quota resulting from the repeal. Notice 2002–67 states that the peanut quota holders who held a quota for investment purposes generally should treat a gain as a capital gain and a loss as a capital loss. For more information, see Notice 2002–67 dated October 21, 2002.

  3. The Service issued Notice 2005–51 on July 11, 2005, addressing the federal tax treatment of payments from the Department of Agriculture to tobacco quota holders.

  4. Use RC 013 for changes to Schedule D, investment gains/losses. Use RC 043 for changes to Schedule D tax computation.

21.6.4.4.5  (10-01-2006)
Reduction in Taxes on Dividends and Capital Gains for 2003 and Later

  1. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the 10 and 20 percent rate on adjusted net capital gains to 5 and 15 percent respectively. The Tax Increase Prevention and Reconciliation Act of 2005 extended the dates of this provision. This is effective in taxable years ending on or after May 6, 2003, and beginning before January 1, 2011. For taxable years beginning in 2008 only, the 5 percent rate is reduced to zero.

  2. For taxable years that include May 6, 2003, the lower rates apply to adjusted net capital gains properly taken into account for the portion of the year on or after that date. Generally, this has the effect of applying the lower rates to capital assets sold or exchanged on or after May 6, 2003.

  3. Reporting Capital Gains on Form 1040, U.S. Individual Income Tax Return:

    1. For tax year 2003, capital gain or loss was reported on Form 1040, Line 13a, including capital gain distributions.

    2. For tax year 2003, Line 13b was added to Form 1040 to report capital gain distributions received on or after May 6, 2003, qualifying for the 5 or 15 percent rate.

    3. A taxpayer not required to file Schedule D should use the Qualified Dividends and Capital Gain Tax Worksheet to compute the Form 1040, Line 41 entry for tax year 2003. See the 2003 Form 1040 instructions for more information on completing the worksheet.