Total taxable income, age, and marital status determine whether or not you must file a tax return for 1977. The gross income minimums for filing were increased by the Tax Reduction and Simplification Act of 1977.
The new minimums for the various filing situations, and the normal number of $750 exemptions which apply in each case, are shown in the accompanying table.
You should file a return, even if you have no tax liability and paid no taxes during the year, if you are entitled to a "refund" check as a result of the earned income credit. This credit, available to certain taxpayers with annual income of less than $8,000, is explained in more detail in next Saturday's column.
TAX TIP: If you are not required to file under any of the applicable rules, but income tax was withheld from your pay during 1977, you should file a return to claim a refund of the amount withheld.
Any taxpaper may use Form 1040, the so-called "long form." You should use 1040A (often called the "short form") if your income does not exceed $40,000 on a joint return or $20,000 on all others; that income consists only of wages or other employee compensation and $400 or less of either interest or dividends; and you do not itemize deductions.
TAX TIP: This is a change from 1976, when there was no total income limitation on use of Form 1040A.
You must use Form 1040 if your adjusted gross income exceeds the $40,000 or $20,000 ceiling; if you have pension or annuity income, capital gain dividends, or income from rental property, a business, estate, or trust; or if you received more than $400 in either interest or dividend income.
Form 1040 is also required if you itemize deductions; claim any "Adjustments to Income" such as moving expenses, employee business expense, IRA or Keogh investment, or elderly payments; or are entitled to the credit for the elderly, child or dependent care expenses, or the sick pay deduction.
Form 1040 must be used if you compute your tax by income-averaging; if you paid estimated tax for 1977 or wish to apply any part of your 1977 refund to 1978 estimated tax liability; or if the total number of your exemptions exceeds the highest number given on the tax table for your filing status.
Finally, you must use Form 1040 if you may be claimed as a dependent on your parent's return, had $750 or more of unearned income (such as interest or dividends), and earned income of less than $2,200 (1,600 if married filing separately); or if you file as a qualifying widower, as explained later in this column. Joint or Separate Returns?
If you were married on Dec. 31, 1977 you are considered by the Internal Revenue Service to have been married for entire year. If you were unmarried (single, widowed, divorced, or legally separated) on that date, consider yourself single for the year.
Most couples will pay less tax if they file a joint return. In keeping with changing customs, the IRS accepts a joint return from a couple who use different last names; show both names separated by "and."
You may elect to file separate returns even if you are married; but in only a few cases - usually when both husband and wife have substantial independent incomes - will this be the better method.
TAX TIP: If one spouse had major medical expenses during 1977, check separate filing for possible tax savings.
If you do file separately, you must both use the same method for computing the tax. This is, if one itemizes, the other must also itemize and may not use the zero bracket amount.
TAX TIP: In this case, if the total of your itemized deductions (line 39 of Schedule A) is less than the zero bracket amount, you must perform a special calculation on Schedule TC. See page 11 of the instruction booklet.
If you are married but living apart from your husband or wife during the entire year, you may file a separate return as a single individual if you meet both of these tests:
(1) You paid more than half the cost of maintaining your home during 1977; and
(2) Your home was the principal home of your dependent child or stepchild for more than six months of the year.
TAX TIP: In this situation you may qualify to file as head of a household; check the requirements below. If You Are Widowed
If your husband or wife died during 1977 and you hada not remarried by Dec. 31, you may file a joint return and claim both your personal exemption and the exemption for your deceased spouse.
Sign the return yourself, then enter "Taxpaper and surviving spouse" under your signature. If you are due a refund on the joint return, you must also file Form 1310 with the return to establish your right to the refund.
If your husband or wife died during 197 or 1976, you are eligible to use the joint return tax rate for 1977 if you meet all three of these tests:
(1) You had not remarried by dec. 31, 1977;
(2) You were eligible to file a joint return in the year of your spouse's death (whether you actually filed that way or not); and
TZX TIP: If an executor or administrator has been appointed for the estate, he or she may have filed (or may intend to file) a separate "final return." In any case, the content of an estate tax return may have an impact on your income tax return. If the executor is not himself a professional, you are likely to need help in this situation.
(3) Your home was the main home during 1977 of a child or stepchild whom you claim as a dependent.
If you qualify, you may not claim the personal exemption for your deceased husband or wife, even though you are using the joint return tax rate. This personal exemption can only be taken if death occurred in 1977. Head of a Household
If you were single on Dec. 31, you may be eligible to file as "head of a household" if you meet any one of the following tests;
You paid more than half the expense of maintaining your home which was also the principal home all year of your unmarried child, stepchild, foster child, or grandchild, whether or not the child qualifies as your dependent.
You paid more that half the cost of upkeep for your home which was also the principal home of any other relative you claim as a dependent (except a dependent under a mutual support agreement).
You paid more than half the cost of maintaining a home which was the principal home of your dependent mother or father, even if you did not live in it yourself.
A taxpayer filing as head of a household does not get any extra personal exemptions, but does get the benefit of a lower tax rate than other single taxpapers. Extra Exemptions
In addition to the basic personal exemption for each taxpaper, a person who is 65 or older or legally blind may claim an additional $750 exemption regardless of filing status. These extra exemptio s are available only to the filing taxpayer(s); they may not be claimed for dependents.
TAX TIP: If your 65th birthday was on Jan. 1, 1978, you may take the extra exemption for 1977. Dependent Exemptions
The IRS prescribes five tests to determine whether a person qualifies for a dependent exemption on your tax return.
Citizenship or residency test: A dependent must be either a U.S. citizen or have resided in the United States, Canada, or Mexico during 1977. (This test is waived for an alien child
TAX TIP: Once this qualifying relationship has been established, it does not end because of death or divorce. If your husband or wife has died, you may continue to claim your former father-in-law as a dependent if he meets the other tests - even if you have remarried. adopted by and living with a U.S. citizen in a foreign country.)
Relationship or member of household test: A relative (as defined in the IRS instruction booklet) need not have lived in your home to qualify as a dependent. If you file a joint return, a dependent meets this test if related to either spouse.
Dependents who are not related must have lived in your home for the entire year. But a student is considered to have lived with you even though he was away at school much of the year, if he lived in your home when not at school. Similarly, hospitalization is not a disqualifying absence from the home.
Income test: In order to qualify, a dependent must not have received $750 or more in income during 1977 - but you need count only income which is subject to tax. Do not include, for example, bona fide gifts received by the dependent; social security benefits, interest on tax exempt securities; or scholarship payments.
This income test is waived for a child who was under the age of 19 on Dec 31, or who was a full-time student regardless of age.(For this test, a student is defined as one who was enrolled full-time at a regular educational institution during any five months of the year.)
You may claim a dependency exemption for such a child even if he files a tax return on which he claims his own personal exemption, if he meets the other tests.
Support test: In order to claim an exemption for a dependent, you must have provided more than half of his support during 1977. Unlike the income test, all income of the dependent, whether taxable or not, must be considered in determining how much the dependent contributed to his own support.
TAX TIP: There are limitations on the deductions that can be claimed on the tax return of a child who is eligible to be claimed as a dependent on the tax return of another. See the IRS instruction booklet for the applicable rules.
However, only as much of that income as was actually spent by the dependent on items of support - that is, necessary living expenses - need be included in the calculation. For example, if your child used $400 of his income to buy a car, do not include that income as self-support, since a car is not considered essential.
TAX TIP: This rule changes in 1978. After Dec. 31, 1977, capital items such as a car must be included if given to or purchased by the dependent for his own use or benefit.
Scholarship payments received (and spent for that purpose) should not be counted. Any money your dependent paid for life insurance premiums, income tax payments, or social security contributions should also be excluded.
Similarly, do not count as support any money which your dependent deposited in a bank account, unless he withdrew it later in 1977 and spent it on his own support. The amount of income during the year is not the criterion for this test, but rather the amount actually spent by the dependent from his own funds for his own support.
You should include in your contributions to the support of the dependent the cost of such living expenses as lodging, food, clothing, medical care, and schooling. And you may include, for 1977, the cost of capital items such as a car if it is to your advantage to do so.
If the dependent lived in your home, count the fair market value of lodging provided, but only the actual cost of food and other support elements. You may count the value of lodging for the full year even if the dependent was at school part of the year, if the lodging was available to him whenever he came home.
If you provided separate living quarters, such as an apartment for a dependent parent, count the cost to you of that housing.
Joint return test: Normally a married person who files a joint return with his or her spouse, may not be claimed as a dependent by another taxpayer.
However, you may claim an exemption for a married dependent who meets the other tests if the dependent's spouse files a separate return and does not claim an exemption for your dependent.
TAX TIP: The filing of a joint return will not always disqualify a married dependent. If neither your dependent nor the spouse is required to file, but they file a joint return solely to obtain a refund of taxes withheld during the year, you may still claim the exemption. Divorced Parents
The rules for claiming a child as a dependent if you are divorced or separated were changed for 1977. Generally, the parent who had custody of the child for the greater part of the year may claim the exemption.
But the other parent may take the exemption if the decree of divorce or separation agreement says so and he or she contributed $600 or more to the child's support during 1977.
In the absence of a specification in the agreement, the non-custodial parent may claim the exemption if he or she provided at least $1,200 for support during the year and the parent having custody cannot prove a larger contribution to the child's support.
TAX TIP: In applying this rule, a parent having custody who has remarried may include support furnished by the new spouse. Shared Support
Several taxpayers may jointly support a dependent (brothers and sisters caring for a dependent parent, for example) with no single person contributing more than half of the total support.
If together you contributed more than half of the support and the dependent otherwise qualifies, one of the group may take the exemption if he or she providede at least ten per cent of the total support and the others agree to waive their claims.
The taxpayer claiming the exemption must attach to his or her return a separate Form 2120 (agreeing to the waiver) for each other qualified contributor to the total support.