Itemized Deductions

To figure your taxable income, you must subtract either your standard deduction or your itemized deductions from adjusted gross income. For information on the standard deduction, get Publication 501.

Itemized deductions are figured on Schedule A (Form 1040). This chapter discusses itemized deductions of particular interest to members of the Armed Forces. For information on other itemized deductions, get the publications listed below.

• Publication 502, Medical and Dental Expenses
• Publication 526, Charitable Contributions
• Publication 547, Casualties, Disasters, and Thefts
• Publication 550, Investment Income and Expenses

Miscellaneous Itemized Deductions

You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. For information on deductions that are not subject to the 2% limit, get Publication 529.

Employee Business Expenses

Deductible employee business expenses are miscellaneous itemized deductions subject to the 2% limit. For information on employee business expenses, get Publication 463.

Generally, you must file Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, to claim these expenses. You do not have to file Form 2106 or Form 2106-EZ if you are claiming only unreimbursed expenses for uniforms, professional society dues, and work-related educational expenses (all discussed later). You can deduct these expenses directly on Schedule A (Form 1040).

Reimbursement.   Generally, to receive advances, reimbursements, or other allowances from the government, you must adequately account for your expenses and return any excess reimbursement. Amounts that are not excess reimbursements that you receive under an accountable plan are not included on your Form W-2. Your reimbursed expenses are not deductible.

If your expenses are more than your reimbursement, the excess expenses are deductible (subject to the 2% limit) if you can prove them. You must file Form 2106 to report these expenses.

You can use the shorter Form 2106-EZ if you meet all three of the following conditions.

• You are an employee deducting expenses related to your job.
• You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
• If you claim car expenses, you use the standard mileage rate.

For 2002, the standard mileage rate is 36.5 cents a mile for all business miles driven. This rate is adjusted periodically for inflation.

Travel expenses.   You can deduct unreimbursed travel expenses only if they are incurred while you are traveling away from home. To be deductible, your travel expenses must be work related. You cannot deduct any expenses for personal travel, such as visits to family while on furlough, leave, or liberty.

Away from home.   Home is your permanent duty station (which can be a ship or base), regardless of where you or your family live. You are away from home if you are away from your permanent duty station substantially longer than an ordinary day's work and you need to get sleep or rest to meet the demands of your work while away from home.

Examples of deductible travel expenses include:

• Expenses for business-related meals (generally limited to 50% of your unreimbursed cost), lodging, taxicabs, business telephone calls, tips, laundry, and dry cleaning while you are away from home on temporary duty or temporary additional duty, and
• Expenses of carrying out official business while on No Cost orders.

You cannot deduct any expenses for travel away from home if the temporary assignment in a single location is realistically expected to last (and does in fact last) for more than one year. This rule may not apply if you are participating in a federal crime investigation or prosecution. For more information, see Publication 463 and the Form 2106 instructions.

Transportation expenses.   Transportation expenses are the ordinary and necessary costs you have to get from one workplace to another while not traveling away from home and for certain other business-related transportation. These expenses include the costs of transportation by air, bus, rail, taxi, and driving and maintaining your car. Transportation expenses incurred while traveling away from home are travel expenses. However, if you use your car while traveling away from home overnight, see the rules in chapter 4 of Publication 463 to figure your car expense deduction.

If you must go from one workplace to another while on duty (for example, as a courier or to attend meetings) without being away from home, your unreimbursed transportation expenses are deductible. However, the expenses of getting to and from your regular place of work (commuting) are not deductible.

Temporary work location.   If you have one or more regular places of business away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location.

Generally, if your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary.

If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes.

If you do not have a regular place of business, but you ordinarily work in the metropolitan area where you live, you can deduct daily transportation expenses between your home and a temporary work site outside your metropolitan area. However, you cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. These are nondeductible commuting costs.

Uniforms.   You usually cannot deduct the expenses for uniform cost and upkeep. Generally, you must wear uniforms when on duty and you are allowed to wear them when off duty.

If military regulations prohibit you from wearing certain uniforms off duty, you can deduct the cost and upkeep of the uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.

Expenses for the cost and upkeep of the following articles are deductible.

• Military battle dress uniforms and utility uniforms if you cannot wear them off duty.
• Articles not replacing regular clothing, including insignia of rank, corps devices, epaulets, aiguillettes, and swords.
• Reservists' uniforms if you can wear the uniform only while performing duties as a reservist.

Professional dues.   You can deduct dues paid to professional societies directly related to your military position. However, you cannot deduct amounts paid to an officers' club or a noncommissioned officers' club.

Example.   Lieutenant Margaret Allen, an electrical engineer at Maxwell Air Force Base, can deduct professional dues paid to the American Society of Electrical Engineers.

Educational expenses.   You can deduct work-related educational expenses if they meet certain rules.

Qualifications.   You can deduct the costs of qualifying education. This is education that meets at least one of the following two tests.

1. The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer.
2. The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying education if it:

• Is needed to meet the minimum educational requirements of your present trade or business, or
• Is part of a program of study that will qualify you for a new trade or business.

You can deduct the expenses for qualifying education even if the education could lead to a degree.

Example 1.   Lieutenant Colonel Mason has a degree in financial management and is in charge of base finances at her post of duty. She took an advanced finance course. She already meets the minimum qualifications for her job. By taking the course, she is improving skills in her current position. The course does not qualify her for a new trade or business. She can deduct educational expenses that are more than the educational allowance she received.

Example 2.   Major Williams worked in the military base legal office as a legal intern. He was placed in excess leave status by his employer to attend law school. He paid all his educational expenses and was not reimbursed. After obtaining his law degree, he passed the state bar exam and worked as a judge advocate. His educational expenses are not deductible because the law degree qualified him for a new trade or business, even though the education maintained and improved his skills in his work.

Travel expenses.   You cannot deduct the cost of travel that is itself a form of education, even if it is directly related to your duties in your work or business. However, if your educational expenses qualify as a deduction, travel for that education, including transportation, meals (subject to the 50% limit), and lodging, can be deducted. Educational services provided in kind, such as base-provided transportation to or from class, are not deductible.

If you need more information on educational expenses, get Publication 508.

Credits

After you have figured your taxable income and tax liability, you can determine if you are entitled to any tax credits. Most tax credits do not have special rules for members of the Armed Forces. However, the earned income credit and the child tax credit may be of interest to you.

Earned Income Credit

The earned income credit (EIC) is a special credit for certain persons who work. The credit reduces the amount of tax you owe (if any) and is intended to offset some of the increases in living expenses and social security taxes.

If you claim the EIC and it is later disallowed, you may have to complete an additional form if you want to claim the credit in a following year. See chapter 5 in Publication 596 for more information, including how to claim the EIC after disallowance.

Persons With a Qualifying Child

If you have a qualifying child, you must meet all the following rules to claim the earned income credit.

1. You must have earned income during 2002.
2. Your earned income and adjusted gross income (AGI) must each be less than:
   1. $33,178 ($34,178 for married filing jointly) if you have two or more qualifying children,
   2. $29,201 ($30,201 for married filing jointly) if you have one qualifying child, and
   3. $11,060 ($12,060 for married filing jointly) if you do not have any qualifying children.
3. Your filing status cannot be married filing separate.
4. You (or your spouse, if filing a joint return) cannot be a qualifying child of another person.
5. Generally, your qualifying child cannot be the qualifying child of another person with a higher AGI. See Qualifying child of more than one person, later.
6. You cannot file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, to exclude income earned in foreign countries, or to deduct or exclude a foreign housing amount. See Publication 54 for more information.
7. You must be a U.S. citizen or resident all year unless:
   1. You are married to a U.S. citizen or a resident alien, and
   2. You choose to be treated as a resident alien for the entire year. See Publication 519 for more information.
8. Your investment income must be $2,550 or less during the year. For most people, investment income is taxable interest and dividends, tax-exempt interest, and capital gain net income.
9. You must have a valid social security number for yourself, your spouse (if filing a joint return), and any qualifying child.

Qualifying child of more than one person.   Sometimes, a child meets the rules to be a qualifying child of more than one person. However, only one person can treat that child as a qualifying child and claim the EIC using that child. The paragraphs that follow will help you decide who can claim the EIC when more than one person has the same qualifying child.

For tax year 2002, you can choose which person will claim the EIC.   If you and someone else have the same qualifying child, you and the other person(s) can decide who will claim the credit using that qualifying child. However, if you and the other person(s) cannot agree and more than one person claims the credit using the same child, the tie-breaker rule (explained in the next paragraph) applies. If the other person is your spouse and you file a joint return, this rule does not apply.

Tie-breaker rule.   Under the tie-breaker rule, the child will be treated as a qualifying child only by:

1. The parent, if only one of the persons is the child's parent,
2. The parent with whom the child lived for the longest period of time during the year, if two of the persons are parents of the child and they do not file a joint return together.
3. The parent with the highest AGI if the child lived with each parent for the same amount of time during the tax year, and they do not file a joint return together.
4. The person with the highest AGI, if none of the persons is the child's parent.

Adjusted gross income (AGI).   AGI for most people is the amount on line 35, Form 1040, or line 21, Form 1040A. See Publication 596 if you file Schedule E or you are claiming a loss from the rental of personal property not used in a trade or business.

If another person claims the EIC using this child.   If your qualifying child is treated under this rule as the qualifying child of another person for 2002, you cannot take the EIC using this qualifying child. You may be able to take the EIC using a different qualifying child, but you cannot take the EIC for people who do not have a qualifying child. If you do not have another qualifying child, you cannot take the EIC.

See Rule 8 in Publication 596 for more help in determining whether you can claim the EIC when you and someone else have the same qualifying child.

Qualifying child of another person.   If you are a qualifying child of another person, you cannot claim the credit - no matter how many qualifying children you have.

How to report.   If you meet all these rules, fill out Schedule EIC and attach it to either Form 1040 or Form 1040A. Also, complete the worksheet in the instructions for Form 1040 or Form 1040A to figure the amount of your credit. If you have a qualifying child, you cannot claim the credit on Form 1040EZ.

Enter NO directly to the right of line 64 (Form 1040) or line 41 (Form 1040A) if you cannot claim the credit because:

• Your total taxable earned income or adjusted gross income was $29,201 ($30,201 for married filing jointly) or more if you have one qualifying child, or $33,178 ($34,178 for married filing jointly) or more if you have more than one qualifying child),
• You were a qualifying child for another person in 2002,
• Generally, your qualifying child was also the qualifying child of another person whose AGI is higher than yours (as explained under Qualifying child of more than one person, earlier), or
• You, your spouse, or qualifying child does not have a valid social security number.

Social security number.   You must provide a correct and valid social security number (SSN) issued by the Social Security Administration for yourself, your spouse, and any qualifying child. If a social security card for you, your spouse, or your qualifying child says Not valid for employment, you cannot get the credit.

If you need to get an SSN, file Form SS-5 with your local Social Security Administration office. It takes approximately two weeks to receive an SSN. If the filing deadline is approaching and you do not have an SSN, you can:

• Request an automatic extension to August 15 using Form 4868, or
• File the return on time without claiming the credit. After you receive the SSN, file an amended return (Form 1040X) claiming the credit (and attach a filled-in Schedule EIC if needed).

If an SSN for you, your spouse, or your qualifying child is missing from your tax return, or is incorrect, you may not get the credit.

Married persons.   Married persons usually must file a joint return to claim the earned income credit. Even though you are married, you may file as head of household and claim the credit on your return if:

1. Your spouse did not live in your home at any time during the last 6 months of the year,
2. You paid more than half the cost to keep up your home for the entire year, and
3. You and your child lived in the same main home for more than half the year. You also must be entitled to claim an exemption for your child.

You will meet (3), even if you cannot claim your child, if:

• You gave that right to your child's other parent by filling out Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or similar written statement, or
• There is a pre-1985 agreement (decree of divorce or separate maintenance or written agreement) granting the exemption to your child's other parent.

Qualifying Child

You have a qualifying child if your child meets three tests:

1. Relationship,
2. Residency, and
3. Age.

Relationship test.   To meet the relationship test, the child must be your:

• Son, daughter, stepson, stepdaughter, or adopted child (or a descendant of your son, daughter, stepson, stepdaughter, or adopted child - for example, your grandchild),
• Brother, sister, stepbrother, or stepsister (or the child or grandchild of your brother, sister, stepbrother, or stepsister), or
• Eligible foster child.

Adopted child.   A child you legally adopt or who is placed with you by an authorized placement agency for adoption is treated the same as your child by blood.

Married child.   Generally, a married child can be your qualifying child only if you can claim an exemption for the child. If you cannot claim an exemption for your married child, he or she still can be your qualifying child if the only reason you cannot claim the exemption is one of the following.

• You gave the right to claim the child's exemption to your child's other parent by filling out Form 8332, or a similar written statement, or
• You gave the right to claim the child's exemption to your child's other parent in a pre-1985 agreement (such as a separation agreement or divorce decree).

If you need more information about either of these exceptions or when you can claim an exemption for your child, see Publication 501, or Publication 504, Divorced or Separated Individuals.

Residency test.   To meet the residency test:

• A qualifying child must have lived in your home for more than half the year, and
• The home must be in the United States. (U.S. military personnel stationed outside the United States on extended active duty are considered to be living in the United States.)

Birth or death of a child.   The child is considered to have lived with you for all of 2002 if:

• The child was born or died during the year, and
• The child lived with you for the part of the year he or she was alive.

Temporary absences.   Count time that you or the qualifying child is away from home on a temporary absence due to a special circumstance as time lived at home. Examples of special circumstances include:

• Illness,
• Attending school,
• Detention in a juvenile facility,
• Business,
• Vacation, or
• Military service.

You may be eligible for the earned income credit if you are absent temporarily only because of military service. To be eligible for the credit, you must plan to return to your main home where your qualifying child lives, at the end of your assignment. Service in a combat zone is a temporary absence.

Age test.   The age test is met if your child is:

• Under age 19 at the end of the year,
• A full-time student under age 24 at the end of the year, or
• Permanently and totally disabled at any time during the tax year, regardless of age.

Persons Without a Qualifying Child

If you do not have a qualifying child, you can take the credit if you meet all the following rules.

1. You must have earned income during 2002.
2. Your earned income and adjusted gross income must each be less than $11,060 ($12,060 for married filing jointly).
3. Your filing status cannot be married filing separate return.
4. You (or your spouse, if filing a joint return) cannot be a qualifying child of another person. See Qualifying child of another person, earlier.
5. You (or your spouse if filing a joint return) must be at least age 25 but under age 65 at the end of your tax year.
6. You (or your spouse, if filing a joint return) cannot be claimed as a dependent by anyone else on that person's return.
7. Your main home must be in the United States for more than half the year. (U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States.)
8. You cannot file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.
9. You must be a U.S. citizen or resident alien all year unless:
   1. You are married to a U.S. citizen or a resident alien, and
   2. You choose to be treated as a resident alien for the entire year.
10. Your investment income must be $2,550 or less during the year. For most people, investment income is taxable interest and dividends, tax-exempt interest, and capital gain net income.
11. You (and your spouse, if filing a joint return) must have a valid SSN. In either case, you can use only a valid SSN issued by the Social Security Administration. If a social security card for you or your spouse says, Not valid for employment, you cannot get the credit.

How to report.   If you meet all of these rules, fill out the worksheet in your tax forms instructions for EIC to figure the amount of your credit.

Enter No directly to the right of line 64 (Form 1040), next to line 41 (Form 1040A), or on line 8 (Form 1040EZ) if you cannot claim the credit because:

• Your total taxable earned income or adjusted gross income was $11,060 ($12,060 for married filing jointly) or more,
• You (or your spouse, if filing a joint return) were under age 25 or age 65 or more,
• Your home was not in the United States for more than half the year,
• You (or your spouse, if filing a joint return) were a qualifying child of another person in 2002, or
• You (or your spouse, if filing a joint return) did not have a valid SSN.

Earned Income

For purposes of the earned income credit, earned income includes:

• Wages, salaries, and tips,
• Net earnings from self-employment, and
• Anything else of value, if included in gross income, that you received for providing services.

For purposes of the earned income credit, earned income does not include:

• Basic pay or other incentive pays earned in a combat zone,
• Basic Allowance for Housing (BAH),
• Basic Allowance for Subsistence (BAS),
• Interest and dividends,
• Social security and railroad retirement payments,
• Certain workfare payments,
• Pensions or annuities,
• Veterans' benefits (including VA rehabilitation payments),
• Workers' compensation,
• Unemployment compensation, or
• Alimony and child support.

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