The earned income credit originally authorized for 1975 tax returns has been extended for the 1976 and 1977 tax years.
The rules are essentially unchanged from last year. The credit is generally limited to families: you must either be married and filing a joint return or be the head of a household to qualify. Specifically, the law requires that during 1976:
(1) You paid more than half the cost of maintaining your home in the United States; and (2) The home in which you lived was also the home of your child under 19 (or a student of any age) for the entire year (except for temporary absences for school, vacation. or hospitalization). It is no longer required that such a child qualify as your independent.
A liberalization of rule (2) above permits you to claim his credit if you had an adult son or daughter in your home who was disabled and qualified for a dependency exemption on you return
There is an income limitation. Neither your net earned income (wages, salary, tips, and income from self-employment) nor your adjusted gross income can equal or exceed $8000. If you are married, these ceilings apply to your combined incomes.
If you meet all of these qualifications, the credit is equal to 10 per cent of your earned income (combined earned income on a joint return) up to a ceiling of $400.
None of the other tax credits discussed here or in yesterday's article may exceed your income tax lability. But if you qualify for an earned income credit which is greater than your tax liability, the difference will be sent to you in the form of an IRS "tax refund" check.
TAX TIP: You can get the refund if you qualify even if no income tax was withheld form your wages, you didn't pay any estimated tax during the year, and you have no income tax liability at all. The IRS has made provision for filing a simplified Form 1040A for those not other wise required to file a return who are eligible for the earned income credit.
It you operated heavy equipment or a vehicle which is neither used on a public highway nor required to be licensed for such use, you may be entitled to a credit of from two to seven cents a gallon for gasoline, diesel chased during 1976.
TYou may claim this credit for fuel used in boats; aircraft not used in commercial aviation, powered equipment and machinery.
Lubricating oil used in any of the above also qualifies for the credit, as well as oil used in stationay engines and machinery and haavy equipemetn like bulldozers and power shovels.
The creddit is equal to 10 per cent of the cost (or other basis) of new or used property acquired in 1976 with an estimated useful life of a least three years. For essests with a useful life between thee and seven years, only a part of the credit may be claimed.
You need not consider the investment credit when establishing the basis of the property for depreciation purpose or for determing gai or loss on later sale.
Because of th complex rules for claiming the investiment credit, you should carefull revies IRS Publication 572 or consuit the IRS or your tax accountant.
If your income in 1976 was substantially years, you may be aside to reduce your tax liability by using the income-averaging method of computing the tax You must meet both of the Settlers.
(1) You must have been a U.S. citizen or resident during the five-year-period from 1972 through 1976; and (2) You must have furnished at least half of your own support during each of the preceding four years.
(There ae exceptions to this instructions, which accompany Schedule G. the income-averaging form).
In order to use Income averaging, you must have copies of your federal income tax returns for the four years 1972 through 1975. If you can't find them copies of returns for prior years may be obtained for a small fee from the Internal Revenue Service Center where the returns were filled.
TAX TIP: If you don't have the necessary information in time to file your return by April 15, file without income-averaging and pay any tax due.Then when you get the missing data, you may file an amended return on Form 1040X (not later than April 15, 1980) using income-averaging and claim a refund for the overpayment.
Here is a quick test to determine if you can benefit from income-averaging:
First calculate your taxable income for 1976 - the amount you arrive at on line 47 of Form 1040. Next, find the comparable figure - the final amount of income on which your tax was figured - for each of the four years 1972 through 1975.
(For 1972, this figure is found on line 55 of Form 1040 or line 18 of 1040A; for 1973 and 1974, line 48 of 1040 or line 16 of 1040A; and for 1975, line 47 of 1040 or line 15 of 1040A).
Then add together the taxable income for those four years and multiply the total by 30 per cent (30). If your taxable income for 1976 (arrived at in the first step) exceeds the amount just calculated by more than $3,000, then you're a candidate for income-averaging. The larger the excess over $3,000, the more you can expect to save.
TAX TIP: If you use income averaging, you may not apply the tax ceiling on earned income described in an earlier article.If the majority of your income consisted of wages, salary, or fees which added up to more than $40,000, you should compute the tax both ways (that is, firt with income-averaging, then without averaging but applying the maximum tax limitation) to determine which method produces the lower tax liability.
If you're able to prepare the rest of your tax return yourself, you should be able to handle Schedule G. IRS Publication 506 provides much useful information, including details of some restrictions which may complicate the procedure. Be sure to follow the instructions carefully, particularly if your marital status has changed during the five-year period.
If you are self-employed (either full-ti me or part-time) or expect to have substantial income during 1977 that is not subject to withholding, you must make specil arrangements to comply with federal "pay-as-you-go" tax requirements.
If you are employed and paid wages subject to withholding, you may file a new Form W4 with your employer claiming a lesser number of allowances than authorized.
If you get down to zero allowances and still need to have more money withheld, you may specify an additional number of dollars to be withheld each payday (if your employer agrees).
If you do not receive wages subject to withholding, or if you cannot arrange to have enough tax withheld from your pay, you must file a declaration of estimated tax by April 15, 1977, using Form 1040-ES. Forward one-fourth of the estimated tax deficiency with the initial declaration. Then make additional payments of one -fourth each by June 15, 1977; and Jan. 16, 1978.
TAX TIP: The IRS does not send quarterly reminders. You're responsible for remembering to send the follow-on payments by the due dates.
Each stub of the payments form 1040-ES has an area for amending your original estimate. If your estimate of tax liability changes during teh year, enter the new estimate on the stub and adjust your payments to correspond to the amount of the new estimated deficiency and the number of payment quarters remaining.
If you are not liable for estimated tax on April 15 but determine later that you have become liable, you may file an initil Form 1040-E on any of the other three payment dates, dividing the total amount due into the proper number of equal payments.
If, after subtracting all payments and credits from your initial tax liability, there is a balance due the IRS of $100 or more, and that balance is more than 20 per cent of the tax liability, you may be subject to a penalty for underpayment of tax.
However, there are a number of exceptions. If you find youself in this situation, you should complete Form 2210 to justify the underpayment - or to calculate any penalty payment due.
TAX TIP: You are not requird to have more money withheld from your pay than is needed to meet your estimated tax bill at year-end. When completing Form W-4 for your employer, you are permitted to claim additional withholding allowances if you expect to have large itemized deductions, an adjustment for alimony paid, a credit for child care expenses, etc.
NEXt: Filing your District, Maryland or Virginia tax return.