Publication 17
Your Federal Income Tax

For Individuals

For use in preparing 2002 Returns

Taxable Fringe Benefits

The value of certain fringe benefits you receive from your employer is considered part of your pay. Your employer generally must withhold income tax on these benefits from your regular pay for the period the benefits are paid or considered paid.

For information on fringe benefits, see Fringe Benefits under Employee Compensation in chapter 6.

Your employer can choose not to withhold income tax on the value of your personal use of a car, truck, or other highway motor vehicle provided by your employer. Your employer must notify you if this choice is made.

For more information on withholding on taxable fringe benefits, see chapter 1 of Publication 505.

Sick Pay

Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. To qualify as sick pay, it must be paid under a plan to which your employer is a party.

If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. An agent who does not pay regular wages to you may choose to withhold income tax at a flat 27% rate.

However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld. See Form W-4S, later.

If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where you paid all the premiums), the payments are not sick pay and usually are not taxable.

Union agreements.   If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement may determine the amount of income tax withholding. See your union representative or your employer for more information.

Form W-4S.   If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must fill out Form W-4S, Request for Federal Income Tax Withholding From Sick Pay. Its instructions contain a worksheet you can use to figure the amount you want withheld. They also explain restrictions that may apply.

Give the completed form to the payer of your sick pay. The payer must withhold according to your directions on the form.

If you do not request withholding on Form W-4S, or if you do not have enough tax withheld, you may have to make estimated tax payments. If you do not pay enough estimated tax or have enough income tax withheld, you may have to pay a penalty.

Pensions and Annuities

Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. This rule applies to distributions from:

• A traditional individual retirement arrangement (IRA),
• A life insurance company under an endowment, annuity, or life insurance contract,
• A pension, annuity, or profit-sharing plan,
• A stock bonus plan, and
• Any other plan that defers the time you receive compensation.

The amount withheld depends on whether you receive payments spread out over more than one year (periodic payments), within one year (nonperiodic payments), or as an eligible rollover distribution (ERD). You cannot choose not to have income tax withheld from an ERD.

More information.   For more information on taxation of annuities and distributions (including eligible rollover distributions) from qualified retirement plans, see chapter 11. For information on IRAs, see chapter 18. For more information on withholding on pensions and annuities, including a discussion of Form W-4P, see Pensions and Annuities in chapter 1 of Publication 505.

Gambling Winnings

Income tax is withheld from certain kinds of gambling winnings. For 2003, the amount withheld is 27% of the proceeds paid (the amount of your winnings minus the amount of your bet).

Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.

• Any sweepstakes, wagering pool, or lottery.
• Any other wager, if the proceeds are at least 300 times the amount of the bet.

It does not matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken into account at their fair market value.

Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. However, you may need to provide the payer with a social security number to avoid withholding. See Backup withholding on gambling winnings in Publication 505. If you receive gambling winnings not subject to withholding, you may need to make estimated tax payments. See Estimated Tax, later.

If you do not pay enough tax through withholding or estimated tax payments, you may be subject to a penalty. See Underpayment Penalty, later.

Form W-2G.   If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings, showing the amount you won and the amount withheld. Report the tax withheld on line 62 of Form 1040.

Unemployment Compensation

You can choose to have income tax withheld from unemployment compensation. To make this choice, you will have to fill out Form W-4V, Voluntary Withholding Request, (or a similar form provided by the payer) and give it to the payer. The amount withheld will be 10% of each payment.

Unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to make estimated tax payments. See Estimated Tax, later.

If you do not pay enough tax either through withholding or estimated tax, you may have to pay a penalty. See Underpayment Penalty, later, for information.

Federal Payments

You can choose to have income tax withheld from certain federal payments you receive. These payments are:

1. Social security benefits,
2. Tier 1 railroad retirement benefits,
3. Commodity credit loans you choose to include in your gross income, and
4. Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et. seq.), or title II of the Disaster Assistance Act of 1988, as amended, that are treated as insurance proceeds and that you receive because:
   1. Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or
   2. You were unable to plant crops because of a natural disaster described in (a).

To make this choice, you will have to fill out Form W-4V, Voluntary Withholding Request, (or a similar form provided by the payer) and give it to the payer. For 2003, you can choose to have 7%, 10%, 15%, or 27% of each payment withheld.

If you do not choose to have income tax withheld, you may have to make estimated tax payments. See Estimated Tax, later.

If you do not pay enough tax either through withholding or estimated tax, you may have to pay a penalty. See Underpayment Penalty, later, for information.

More information.   For more information about the tax treatment of social security and railroad retirement benefits, see chapter 12. Get Publication 225, Farmer's Tax Guide, for information about the tax treatment of commodity credit loans or crop disaster payments.

Backup Withholding

Banks and other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. The information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). TINs are explained in chapter 1.

These payments generally are not subject to withholding. However, backup withholding is required in certain situations. Backup withholding can apply to most kinds of payments that are reported on Form 1099.

For 2003, the payer must withhold at a flat 30% rate in the following situations.

• You do not give the payer your TIN in the required manner.
• The IRS notifies the payer that the TIN you gave is incorrect.
• You are required, but fail, to certify that you are not subject to backup withholding.
• The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.

See Backup Withholding in chapter 1 of Publication 505 for more information.

Penalties.   There are civil and criminal penalties for giving false information to avoid backup withholding. The civil penalty is $500. The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both.

Estimated Tax

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or by making estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax, later), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when the penalty applies, see Underpayment Penalty, later.

Who Must Make
Estimated Tax Payments?

If you had a tax liability for 2002, you may have to pay estimated tax for 2003.

Figure 5-A Do You Have To Pay Estimated Tax?

General rule.   You must make estimated tax payments for 2003 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2003 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:

• 90% of the tax to be shown on your 2003 tax return, or
• 100% of the tax shown on your 2002 tax return. Your 2002 tax return must cover all 12 months.

Special rules for farmers, fishermen, and higher income taxpayers.   There are exceptions to the general rule for farmers, fishermen, and certain higher income taxpayers. See Figure 5-A and chapter 2 of Publication 505 for more information.

Aliens.    Resident and nonresident aliens may also have to make estimated tax payments. Resident aliens should follow the rules in this chapter unless noted otherwise. Nonresident aliens should get Form 1040-ES(NR), U.S. Estimated Tax for Nonresident Alien Individuals.

Avoiding estimated tax.   If you receive salaries or wages, you can avoid having to make estimated tax payments by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer.

Estimated payments not required.   You do not have to pay estimated tax for 2003 if you meet all three of the following conditions:

1. You had no tax liability for 2002.
2. You were a U.S. citizen or resident for the whole year.
3. Your 2002 tax year covered a 12-month period.

You had no tax liability for 2002 if your total tax was zero or you did not have to file an income tax return.

Married taxpayers.   To figure whether you must make estimated tax payments, apply the rules discussed here to your separate estimated income. If you can make joint estimated tax payments, you can apply these rules on a joint basis.

You and your spouse can make joint estimated tax payments even if you are not living together.

You and your spouse cannot make joint estimated tax payments if:

1. You are legally separated under a decree of divorce or separate maintenance,
2. Either spouse is a nonresident alien, or
3. You and your spouse have different tax years.

Whether you and your spouse make joint estimated tax payments or separate payments will not affect your choice of filing a joint tax return or separate returns for 2003.

2002 separate returns and 2003 joint return.   If you plan to file a joint return with your spouse for 2003, but you filed separate returns for 2002, your 2002 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2002 joint return and 2003 separate returns.   If you plan to file a separate return for 2003, but you filed a joint return for 2002, your 2002 tax is your share of the tax on the joint return. You file a separate return if you file as single, head of household, or married filing separately.

To figure your share of the tax on the joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2002 using the same filing status as for 2003. Then multiply the tax on the joint return by the following fraction:

Example.   Joe and Heather filed a joint return for 2002 showing taxable income of $48,500 and a tax of $6,898. Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. For 2003, they plan to file married filing separately. Joe figures his share of the tax on the 2002 joint return as follows: