Important Changes
for 2002
Reporting interest and dividends. Interest or ordinary dividend
income that exceeds a certain amount must be reported on a separate schedule. For 2002,
this amount has increased. If you file Form 1040A, you must now attach Schedule 1 to your
return if your interest or dividend income is more than $1,500; if you file Form 1040, you
must now attach Schedule B to your return if your interest or dividend income is more than
$1,500. Before 2002, you had to attach Schedule 1 or Schedule B if your interest or
dividend income was more than $400.
Interest on New York Liberty bonds. New York Liberty bonds are
bonds issued after March 9, 2002, to finance the construction and rehabilitation of real
property in a newly designated Liberty Zone of New York City. Interest on these
bonds is tax exempt.
Tax shelter disclosure statement. You must file a disclosure
statement for each reportable tax shelter transaction in which you participated, directly
or indirectly, if your income tax liability was affected by the transaction. See Tax
Shelter Disclosure Statement under Investor Reporting in chapter 2.
Important Changes
for 2003
Reportable transactions. You may have to disclose information about
certain transactions (called reportable transactions) in which you participated,
directly or indirectly. This disclosure requirement applies to reportable transactions
entered into after 2002. Reportable transactions include transactions that are the same or
substantially similar to tax avoidance transactions identified by the IRS, transactions
that are offered under conditions of confidentiality, and transactions that result in
large losses. You must disclose information about reportable transactions on Form 8886, Reportable
Transaction Disclosure Statement. For more information, see the instructions for Form
8886.
Sale of DC Zone assets. Beginning in 2003, investments in District
of Columbia Enterprise Zone (DC Zone) assets held more than 5 years will qualify for a
special tax benefit. If you sell or trade a DC Zone asset at a gain, you will not have to
include any qualified capital gain in your gross income. This exclusion applies to an
interest in, or property of, certain businesses operating in the District of Columbia. For
more information, see Publication 954, Tax Incentives for Empowerment Zones and Other
Distressed Communities.
Important Reminders
8% capital gain rate. The 10% capital gain rate was lowered to 8%
for qualified 5-year gain. For more information, see Capital Gain Tax Rates in
chapter 4.
18% capital gain rate. Beginning in 2006, the 20% capital gain rate
will be lowered to 18% for qualified 5-year gain from property.
U.S. property acquired from a foreign person. If you acquire a U.S.
real property interest from a foreign person or firm, you may have to withhold income tax
on the amount you pay for the property (including cash, the fair market value of other
property, and any assumed liability). Domestic or foreign corporations, partnerships,
trusts, and estates may also have to withhold on certain distributions and other
transactions involving U.S. real property interests. If you fail to withhold, you may be
held liable for the tax, penalties that apply, and interest. For more information, see
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Foreign source income. If you are
a U.S. citizen with investment income from sources outside the United States
(foreign income), you must report that 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 1099 from the foreign payer.
Alien's individual taxpayer identification number (ITIN). The IRS
will issue an ITIN to a nonresident or resident alien who does not have and is not
eligible to get a social security number (SSN). To apply for an ITIN, file Form W-7, Application
for IRS Individual Taxpayer Identification Number, with the IRS. Enter your ITIN
wherever an SSN is requested on a tax return. If you must include another person's SSN on
your return and that person does not have and cannot get an SSN, enter that person's ITIN.
An ITIN is for tax use only. It does not entitle you to social security benefits or
change your employment or immigration status under U.S. law.
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 provides information on the tax treatment of investment income and
expenses. It explains what investment income is taxable and what investment expenses are
deductible. It explains when and how to show these items on your tax return. It also
explains how to determine and report gains and losses on the disposition of investment
property and provides information on property trades and tax shelters.
There is a glossary at the end of this publication that defines many of the terms used.
Investment income. This generally includes interest, dividends,
capital gains, and other types of distributions.
Investment expenses. These include interest paid or incurred to
acquire investment property and expenses to manage or collect income from investment
property.
Comments and suggestions. We
welcome your comments about this publication and your suggestions for future editions.
You can e-mail us while visiting our web site at www.irs.gov.
You can write to us at the following address:
Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
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.
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