The earned income credit for 1977 is essentially unchanged from last year. As the name implies, you must have had earned income (wages, salary, commissions, tips, net earnings from self-employment) in 1977 to qualify for the credit.
Disability retirement pay may be considered earned income if you meet both of these tests:
You had not reached age 65 by Dec. 31, 1977, and
You have elected (irrevocably) not to claim the disability (sick pay) exclusion.
If you meet these requirements, you may count as earned income only disability pay received before you reached minimum retirement age at your place of employment, and only to the extent that the income was included on line 17 of Form 1040 or line 5 of Schedule E.
The earned income credits is generally limited to "family" taxpayers; 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 1977:
You paid more than half the cost of maintaining your home in the United States; and
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 not required that such a child qualify as your dependent.
You may also claim the credit if you had an adult son or daughter in your home who was disabled and qualified for a dependent exemption on your return.
There is an income limitation. Neither your net earned income (as defined above) nor your adjusted gross income can equal or exceeds $8,000. If you are married, these ceilings apply to your combined incomes.
If you meet these qualifications, the credit is equal to ten percent of the first $4,000 of your earned income (combined earned income on a joint return) up to a ceiling of $400. This maximum credit must be reduced by 10 percent of the excess over $4,000 of either earned income or adjusted gross income, whichever is larger.
If you qualify, complete the earned income credit worksheet on page 2 of the instruction booklet. Enter the amount of the credit on line 57 of Form 1040, together with the name of the child who makes you eligible, if you use Form 1040A, the credit is entered on line 11c, but the child's name goes on line 10.
(Note: If you have more than one child in your home, you need enter only one name)
None of the other tax credits discussed here or in yesterday's article may exceed your tax liability. But if you qualify for the earned income credit in an amount which is greater than your tax liability, the difference will be sent to you in the form of an IRS refund check.
TAX TIP: You can get the refund even if no income tax was withheld from wages, you didn't pay any estimated tax during the year, and in fact you have no tax liability at all.
If you qualify, complete the form 1040A (entering "zero" on line 13); or simply complete lines 1 through 11a and the IRS will calculate the earned income credit for you. Fuel for Off-Road Vehicles
If you operate 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 fuel, jet fuel and lubricating oil purchased (and paid for) during 1977.
You may claim this credit, using Form 4136, for fuel used in boats, aircraft used in commercial aviation, powered equipment such as lawn mowers and chain saws, and farm equipment and machinery.
Lubricating oil used in any of the above also qualifies for the credit, as well as toil used in stationary engines, machinery, and heavy equipment - bulldozers and power shovels, for instance. Excess Social Security Tax
If you worked for more than one employer during 1977 and a total of more than $965.25 was withheld for Social Security tax (FICA), you should claim the overpayment as a credit against income tax on your return. The claim must be supported by the W-2s attached.
In adding up the total withheld, do not include more than $965.25 from any one employer. If a single employer withheld, by mistake, more than his allowable maximum, you must claim the refund from that employer rather than from the IRS on your tax return. Investment Credit
If you are self-employed, you may claim a credit for your investment in certain depreciable personal property used in your business or profession.
The full credit is equal to ten percent of the cost (or other basis) of new or used property acquired in 1977 with an estimated useful life of at least seven years. For assets with a useful life between three and seven years, a partial credit may be claimed.
You need not consider the investment credit when establishing the basis of the property for depreciation purposes or for determining gain or loss on later sale.
Because of the complexity of the rules for claiming the investment credit, you should carefully review Form 3468 and the accompanying instructions, or consult the IRS or a tax accountant. Income-Averaging
If your income in 1977 was substantially higher than it had been in previous years, you may be able to reduce your tax liability by using the income-averaging method of computing the tax. You must meet both of these tests:
You must have been a U.S. citizen or resident during the five-year period from 1973 through 1977; and
You must have furnished at least half of your own support during each of the preceding four years. (There are exceptions to this test; these are explained in the instructions which accompany Schedule G, the income-averaging form.)
TAX TIP: You may use income-averaging for every year you qualify. Income-averaging for 1976 or prior years does not disqualify you from doing it again in 1977 if you meet the tests.
In order to income-average, you must have copies of your federal income tax returns for the four years 1973 through 1976. 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 originally filed.
TAX TIP: If you don't have the necessary information in time to file your return by Apr. 17, 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 Apr. 15, 1981) using income-averaing to claim a refund for the over payment.
Here is a quick test to determine if you can benefit from income-averaging:
First calculate your taxable income for 1977 - the amount you arrive at on line 3, Part I of Schedule TC. Next find the comparable figure - the final amount of income on which you tax was figured - for each of the preceding four years.
(For 1973 and 1974 this amount is found on line 48 or Form 1040 or line 16 of the 1040A, for 1975 and 1976 use the amount on line 47 of the 1040, line 5 of the 1975 Form 1040A tax computation worksheet, or line 15 of the 1976 1040A).
Add together the figures for those four years. Then add to that total an amount to compensate for the inclusion of the zero bracket amount in this year's tax tables and tax rate schedule; $12,800 if you checked Box 2 or Box 5 on this year's 1040; $8,800 for Box 1 or Box 4; or $6,400 if you checked Box 3.
Multiply the grand total by 30 percent (30). If your taxable income for 1977 (arrived at in the first step) exceeds the amount just calculated by more than $3,000, then you're a candidate for income-aveaging. The larger the excess over $3,000, the more you can expect to save.
TAX TIP: If you income-average, you may not apply the tax ceiling on earned income described in an earlier column. If the majority of your income consisted of wages, salary, or other earned income which adds up to more than $40,000, you should compute the tax both ways - first with income-averaging, then without averaging but applying the maximum tax limitation - to determine which method produces the lower tax liability.
If your'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 changed during the five-year period. Energy Tax Credit
When the IRS designed the 1977 tax forms, the Congress was considering a tax credit for energy-saving expenditures. Lines 45 and 61a of Form 1040 were resreved for this credit.
Since legislation authorizing an energy credit was still not on the books at the time of writing this article, the current advice is to make no entry on either of these two lines.
If legislation retroactive to 1977 should be enacted, instructions will be printed in these pages. At that time, if you qualify and had already filed your 1977 tax return, you will be able to file Form 1040X to amend the return an claim any refund due. Presidential Campaign Fund
Each taxpayer may earmark $1 from his or her income tax payment to help provide financing for the 1980 presidential election campaign. Payments will be assigned to a general fund, to be made available then to qualifying candidates for the offices of president and vice president.
This is not an additional tax on your income. It requires no payment of any kind on your part, nor will it reduce any refund you have coming. You simply are directing the federal government to set aside one dollar of your regular income tax payment for the campaign fund. Estimating 1978 Tax
If you are self-employed (either full-time or part-time) or expect to have substantial income during 1978 that is not subject to withholding (from interest and dividends, for example), you must make special arrangements to comply with federal "pay-as-you-go" income tax requirements.
If you are employed and paid wages subject to withholding, you may file a new Form W-4 with your employer claiming a lesser number of allowances than authorized.
TAX TIP: Although the exact amount varies with your marital status and income level, you can figure an extra $2.00 to $2.25 will be withheld each week for each allowance eliminated.
If you get down to zero allowances and still want 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 Apr. 17, 1978, 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, 1978; Sept. 15, 1978; and Jan. 15, 1979.
TAX TIP: The IRS doesn't send quarterly reminders. You're responsible for remembering to send the original and follow-on payments by the due dates.
Each stub of the payment form has an area of amending your original estimate. If your estimate oftax liability changes during the year - either up or down - enter the new estimate on the next stub and adjust your payments to correspond to the amount of the new estimated deficiency and the number of payments remaining.
If you are not liable for estimated tax on Apr. 17, but determine later that you have become liable, you may file an initial Form 1040-ES on any of the other three payment dates, dividing the total amount due into the proper number of equal payments. Penalty for 'No-Pay-As-You-Go'
If, after subtracting all payments and credits from your tax liability, there is a balance due the IRS of $100 or more, and that balance is more than 20 percent of the total tax liability, you may be subject to a penalty for underpayment of tax.
However, there are a number of exceptions. If the tax liability on your 1977 tax return fits this situation, you should complete Form 2210 to justify the underpayment or to calculate any penalty payment due. Over Withholding
You are not required 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 withholding allowances if you expect to have large itemized deductions, an adjustment for alimony paid, a credit for child care expenses or other items.
If you have been consistently getting tax refund, or if your tax situation has changed, ask your employer for a new W-4 and worksheet. You may be able to reduces the amount withheld for taxes each payday. But don't reduce it below the proper level, or you may find yourself subject to the penalty described above.