Another year - another tax series - and another tax law, enacted by Congress in the fall of 1976.
The Tax Reform Act of 1976 is a complex piece of legislation with an impact on every taxpayer. The tax reductions that were passed in 1975 are continued through 1977. Some elements of the newest law will mean tax savings for many; others will result in increased tax liability for some.
Today's article takes up some basic rules for completing your tax returns, and highlights the changes made by the Tax Reform Act. The six follow-up articles will explain in more detail how to handle the various items of income and outgo on your 1976 federal inkcome tax return.
And new Sunday, the eight and final article will explore tax returns for Maryland, Virginia and District of Columbia residents.
Your federal income tax return must be postmarked no later than midnight Friday, April 15, 1977. Any payment due must be included with the return, unless you have asked the Internal Revenue Service to figure your tax.
Make any check or money order payable to "Internal Revenue Service." Enter your Social Security number (husband's on a joint return) on the payment to identify it in case it gets separated from the return.
Residents of the District of Columbia and of Maryland should send their returns to the Internal Revenue Service Center, 11601 Roosevelt Blvd., Philadelphia, Pa., 19155. Virginia returns should be mailed to the Internal Revenue Service Center at 3131 Demcorat Rd., Memphis, Tenn. 38110.
If you received an instruction booklet and forms by mail from the IRS, use the peel-off label from the booklet on your return. Make any necessary corrections to your name, address, or Social Security number. If you use a professional tax preparer, bring him the booklet so he may use the label.
The IRS prefers that members of the armed forces use their permanent home address on the return rather than the address of a temporary residence in the area of assignment.
The Tax Reduction Act of 1975 and the Tax Reform Act of 1976 provide tax savings for most middle-income tampayers. But each piece of legislation imposed changes on the tax reporting system that served to further complicate the job of completing your tax return.
Don't blame the IRS; it must did lines and calculations to conform to the laws passed by Congress.
The increasing complexity of the tax code has resulted from the addition of "special provisions" designed to serve some perceived national purpose.
Thus the deduction for mortgage interest was added to encourage home ownership.The $100 dividend exclusion is intended to foster equity investments in industry by the general public and to compensate in part for the taxation fo those same dollars to the corporation before they are distributed.
Certainly our complex tax laws make it more and more diffcult to handle one's own tax returns with some reasonable comfidence that one is doing it properly and taking advantage of all the tax breaks authrized by law.
You still can do your own tax work - but you must be prepared to spend many hours in reading and research if your return will include anything but the normal income and deducions.
If you need more information than is given in the instruction booklet included in your tax package, pick up a copy of IRS Publicatim 17, "Your Federal Income Tax." If you are self-employed, Publication 3 1/4. "Tax Guide for Small Business," will be helpful. Both of these publications are available free at most local IRS offices.
In addition to these two basic publications, the IRS publisies a large number of tax pamphlets, each devoted to E2, Col. 1> a particular subject. There are available - also free - by mail from the IRS District Director or in person at IRS offices.
Some of the commercial tax assistance books offered every year are well-written and useful, offering suggestions and advice not found in government publications, and sometimes organized for easier location of specific information. Others are nothing more than reprints in fancy covers of the government booklets available free from Uncle Sam.
TAX TIP: If you buy any tax assistance books, the cost is deductible on Schedule A (in the year purchased) if you itemize.
If you need personalized help, you can get prefessional assistance at any local IRS office. Although IRS tax payer assistance people generally will not fill in your return for you, they will answer your questions and provide specific advice on how to handle individual tax problems.
The IRS also will respond to telephone requests for information over special lines set up for this purpose. Residents of the District and of Montgemery and Prince Georges counties can call 488-3100. If you live in Northern Virginia call the Baileys Cossroads office the number there for tax payer assistance is 557-9230.
The IRS has been working at improving the quality of its tax assistance. Usually you will get good information from the people at the local offices. However, the government is not bound by that advice if your return is audited, [WORD ILLEGIBLE] advice you received from an IRS employee is not an acceptable defense if it turns out that the advice was wrong.
The Tax Reform Act of 1976 adds some controls over those who prepare tax returns for others for pay in addition to signing the return and entering his or her identification number, the tax preparer now must furnish you with a copy of your tax return at the same time he or she present the original for your signature.
He or she now must maintain for at least three years copies of all completed returns, or at least a list of tax payers for whom tax returns were prepared.
Perhaps most important, professional prepares now are hable for substantial civil penalties for any understatement of a taxpayer's income tax liability either through negligence or deliberate intent.
However, the new law makes no real attempt to eliminate the incompetent tax preparer. There are no examination or licensing procedures authorized - so you are still on your own in selecting a professional to complete your return.
You have a pretty widke choice. Local tax preparation offices spring up every January in stores, homes, and offices. It may be a housewife or a retiree who has read a tax book or taken a short course in tax preparation with the hope of adding a few dollars to family income.
Or the preparer could be a highly qualified accountant who works for the government or private industry and moonlights for a few months to supplement his or her regular income.
The large chain operations - working either in their own stores or offices or in space provided by a department store - generally can give satisfactory service at a reasonable cost if you have a fairly routine tax return.
For a complex return, or one which includes unusual circumstances, you may need the services of a public accounting firm or a tax attorney. As you might expect, their fees are higher than either the chain operations or the local tax prepares, and often tax return preparation in the larger firms is delegated to juniors on the staff.
However, the preparer has access to a comprehensive research library and usually is supervised by an experienced senior, so you are likely to get a good job on a difficult tax return.
In any case, be sure the preparer you select (or his or her parent firm) will be available all year to assist in answering any later queries from the IRS. Many of the local storefront operations that quietly appear in January disappear just as quietly on April 16.
If the preparer will not or cannot answer your questions or explain his or her entries, go elsewhere. You still are personally responsible for the accuracy of the return, and should understand all the entries.
Be wary of a tax preparer whose fee is based on a percentage of your refund or of the "tax saving" he or she finds for you. Tax preparation for others should be considered professional work; fees should be based on the complexity of the return and the time spent in preparing it.
Whether you do it yourself or use a professional, the key to a good tax return with the lowest possible tax liability is edequate records. This doesn't necessarily mean a complicated accounting system.
Most taxpayers need only a file folder or manila envelope in which to keep bills and receipts, cancelled checks, and memos of cash transactions. If you are having trouble with your return because you simply can't remember everything that happened during 1976, make up your mind now to do a better job in 1977.
Don't wait until April 14 to start on your return. If you get to it now, you'll have more time to look for missing papers, sort out half-forgotten transactions, and review the completed return. And if you run into a problem, it's easier now, before the last-minute rush, to get help either from IRS people or from a professional preparer.
Whether you prepare your return now or later, take the time to avoid those errors which the IRS finds occur most frequently.
Check your work carefully for arithmetic errors; or, better yet, have someone else check your computations.
TAX TIP: You can simplify your work and reduce the probability of error by rounding all figures to the nearest dollar. Drop all amonts under 50 cents, and raise amounts between 50 and 99 cents to the next dollar.
Be sure you have signed the return (two signatures on a joint return) and any check enclosed.
Include Social Security number (both numbers on a joint return). It isn't necessary to repeat if if your Social Security number is on the IRS label - but check to be sure it is correct.
Attach Copy B of each W-2 form, but do not sent to the IRS any Form 1099 showing interest, dividends, or similar income.
Check the correct block for your marital and filing status.
Use the correct Tax Rate Schedule or the correct column in the Tax Table if you compute the tax yourself.
TAX TIP: There is only one Tax Table this year; but if you use the table, you first must deduct from your adjusted gross income your personal and dependent exemptions and your deductions - but NOT tax credits, which are subtracted after you have found your initial tax liability.
The Tax Reform Act of 1976 made some major changes which affect your 1976 income tax liability. Here is a brief summary of those changes; details will be found in the appropriate sections of subsequent articles.
The deduction for child care ischanged to a tax credit, thus may be claimed even if you take the standard deduction. In addition, the rules to qualify have been liberalized, and the income ceiling eliminated.
The exemption of as much as $100 a week of income as sick pay has been terminated. This change affects people actively employed and those retired for disability prior to normal retirement age.
The rules for claiming expenses of an office at home have been made much more retrictive. If you work for someone else, generally you cannot claim this deduction unless your employer requires you to do work there and does not provide an alternate location. If you're self-employed, it's a little easier to qualify - but the office must be your principal place of business and may not be used for personal purposes.
If you own a vacation home and rent it part of the time, rules for deducting excess expenses from other income have been tightened. If you use the place yourself for more than two weeks during the year (or for more than 10 per cent of the amount of time it was rented to others), you may claim only maintenance expenses, utilities, and depreciation up to the net amount of income after deducing interest and property taxes (which still are deductible in full).
The tax credit first enacted for 1975 returns (in lieu of larger personal exemptions) is continued and in fact incresed for the 1976 and 1977 tax years.
The retirement income credit for those 65 or older has been simplified and the dollar restrictions liberalized.
Rules governing the minimum tax on so-called "preference" income which includes capital gains - have been modified. If you sell your home, for instance, and realize a substantial profit, part of the 50 per cent of that profit excluded under capital gains rules may be subject to the 15 per cent minimum tax.
Several changes affect investors. Profit or loss from option-writing has been changed from ordinary income or loss to short-term capital gain to loss for option transactions after Sept. 1, 1976. The tax treatment afforded stock options granted to corporation executives is modified.
The ceiling on interest expense in a margin account deductible in any one year is lowered. And the deduction for paper losses in many tax shelters has been curtailed sharply. The effective dates for these provisions vary - if you may be affected, consult the IRS or your tax adviser for the details.
Other changes directed by last year's tax legislation apply only to tax years beginning on or after Jan. 1, 1977. Here is a brief resume to help you with your tax planning, but remember that these changes do not apply to the tax return for 1976 on which you are working.
This year an asset must be owned for more than nine months to qualify for long-term capital gain or loss treatment; beginning in 1978 the holding period must exceed one year.
The ceiling on capital losses that may be deducted in any one year is raised from $1,000 to $2,000 this year, and to $3,000 starting in 1978.
For a homeowner 65 or older, the maximun selling price of a residence on which the total gain may be excluded is raised from $20,000 to $35,000.
It no longer will be neccessary to itemize to claim a deduction for all mony payments; you may deduct the amount from gross income and still take the standard deduction.
There is a relatively minor liberalization of the rules for deduction of moving expenses.
If you are eligible for an Individual Retirement Account and your spouse is not employed outside the home you now may invest up to $875 each in separate IRAs, for a combined total of $1,750.
If you have an IRA, you now have up to 45 days after the end of the tax year to make your investment and still deduct it from the prior year's income. Until now the cutoff date was Dec. 31, and some taxpayers weren't sure of their total annual earnings until they got their W-2 forms.
The Tax Reform Act also made significant changes in estate and gift tax rules. One change in particular may have a substantial impact on income tax liability.
Under the old law, if you sold property which you previously had inherited from one who had died, the fair market value on the date of death generally was the base used for calculating capital gain.
Now, however, you will have to carry forward the original cost basis to the deceased, subject to the "fresh start" rule, as your base for capital gain. If the asset had been acquired by the deceased before Dec. 31, 1976, your basis will be the higher of the original cost or the "stepped up" value on Dec. 31, 1976.