The various kinds of taxable income discussed yesterday are added to arrive at "total income" on line 21 of Form 1040. In tomorrow's column, we will take a look at the choice between the zero bracket amount and itemized deductions.
Regardless of which route you select for deductions, there are a number of items you can apply at this point to reduce the amount of income on which you pay tax. These are called "adjustments to income;" they are taken off the top before you consider personal exemptions or deductions.
An "outside salesperson" -- one who sells away from his employer's place of business -- may deduct all ordinary and necessary business expenses from gross income.
"Business expenses" include travel and transportation costs, entertainment, business gifts (limited to $25 a year to any one customer), telephone calls, stationery and postage, dues to trade associations, subscriptions to business publications, samples and displays, and similar expenses necessary to the conduct of your business.
If you traveled away from home overnight or longer on business, deduct the costs of transportation (including both travel to and from your destination and local transportation while there) plus meals, lodging, and reasonable incidentals such as tips.
You may also deduct the cost of local transportation for your calls to customers even if you are not away from home overnight -- but not meals in this case (unless they are deductible as a part of entertainment expense).
If you stop at your employer's place of business at the beginning or end of each day, transportation cost between your home and place of business are non-deductible commuting expenses.
But if you operate primarily from your home (for example, if you keep all your samples and customer records there), then you may include costs of transportation between your home and your first and last calls.
If you used your car for travel, you may deduct the calculated cost of gas, oil, repairs and maintenance, insurance, registration, and depreciation. If you used the same car for both business and personal reasons, you must allocate the cost proportionately.
If you prefer to avoid these calculations, you need only keep track of business mileage, then deduct 17 cents a mile for the first 15,000 miles plus 10 cents for each mile over that Whichever method you choose, you may add tolls and parking fees -- but not fines for traffic violations.
If you take a customer to lunch occasionally, you may include as entertainment expense the total cost (including your own lunch). But if it is a regular or frequent occurence, you may claim only the expense of your customers' meals, but not your own.
TAX TIP: Be sure to keep a record in which you enter the various expenses as they occur. The IRS expects you to be able to produce, if requested, a diary or log of your daily expenses, and a receipt for any individual item of $25 or more.
Employee Business Expenses
Most unreimbursed expenses of an employe who is not an outside salesperson may be claimed only as intemized deductions on Schedule A. Exception: Travel and transportation expenses (as described above) incurred in the course of your employment may be deducted from gross income as an adjustment even if you do not itemize.
The cost of communting between your home and work is not normally deductible. Even if you use your car only because you need to carry tools only because you need to carry tools or equipment which cannot be stored at work and which are too bulky to at work and which are too bulky to transport any other way, you may claim only additional costs over and above the normal cost of commuting by the same means.
If you worked at two or more different places on the same day, whether for the same or different employers, you may deduct the cost of getting from one job to another. But if you go out of your way to make a personal stop, you may not claim more than the cost of a direct trip.
TAX TIP: A member of the armed forces on permanent duty overseas is not "traveling away from home" and may not claim travel expenses even if he or she is not accompanied by family and must maintain a home in the United States.
If you attend business conventions in foreign countries, you are generally permitted to claim the expenses for not more than two such trips a year. In addition, there are limitations on the types and amounts of expenses you may deduct. There are a couple of minor changes to the rules in the 1978 Act -- see Publication 463 for details.
You may also deduct from gross income the cost of travel to obtain qualified eduction or training. The education must be required by your employer or by law for you to keep your present job; or must be taken to improve prove your skills in performing that job. Education to prepare for a new or different career may not be deduted.
Expenses other than for travel or transportation -- tuition, books, registration fees, etc. -- may be claimed as itemized deductions on Schedule A if you do not use the zero bracket amount.
TAX TIP: If you claim employe business expenses, as either an adjustment to income or an itemized deduction, you must file Form 2106 with your return to document the various expenses.
The disability ("sick pay") exclusion provides for a maximum annual exclusion of $5,200; but only if you were retired tired for total disability, and if you had not reached age 65 by Dec. 31, 1978.
Exception: You are eligible if you retired for any degree of disability and on Jan. 1 of either 1976 or 1977 you were permanently and totally disabled.
The disability exclusion is limited by an income ceiling. The amount of the exclusion must be reduced, dollar for dollar, by any amount by which your adjusted gross income for 1978 (before the sick pay exclusion) exceeded $15,000.
TAX TIP: If your are filing a joint return, the $5,200 ceiling on the exclusion applies to each spouse individually -- but the $15,000 income ceiling applies to the combined adjusted gross.
Veterans Administration payments for disability continue to be excluded from gross income, as well as military disability pensions or disability retirement pay, if you were in the armed forces on or prior to Sep. 24, 1975.
(The term "armed forces" includes, in addition to the military services, the National Oceanic and Atmospheric Administration, the Public Health Service and the Foreign Service.)
If you changed your residence during 1978 to work at a new location, either for the same or for a different employer, you may deduct all or part of the expenses of the move. Two requirements must be met:
(1)The distance between your old residence and your new place of employment must be at least 35 miles greater than the distance between your old residence and your former place of employment.
(2)If you are an employe, you must work at least 39 meeks in the 12-month period following the move -- not necessarily for the same employer, but in the same area. If self-employed, you must conduct your business full-time for at least 78 weeks in the 24-month period after the move, including at least 39 weeks during the first year.
TAX TIP: The second test is waived if termination of employment is due to death or disability; transfer for the employer's benefit, or discharge (except for wilful misconduct).
If you meet the tests, you can deduct from gross income several kinds of moving expenses:
The cost of travel from the old to the new residence for you and your family, including meals, lodging, and transportation. If you go by car, you many deduct out-of-pocket expenses for gas, oil, and repairs -- but not "overhead" such as insurance, depreciation, or license fees.
An easier alternative is to claim seven cents a mile for the actual distance traveled. In either case you may add tolls and parking fees; but do not claim the cost or mileage for side trips to visit relatives or for sightseeing.
The cost of moving your household hold including packing and crating, insurance, and any necessary storage; but not the cost of disconnecting or reconnecting appliances, refitting carpeting or draperies, etc.
The next three items are limited to a maximum deduction of $3,000; and of that amount, the total of the first
The cost of travel, meals and lodging for househunting trips to the new area before the move but after getting the new job.
The cost of meals and lodging for up to 30 days in the new area if you had to stay in temporary quarters. Only out-of-pocket expenses may be claimed; if you stayed with family or friends, you may not include the value of meals and lodging provided unless you made a bona fide cash payment in return.
The costs associated with selling your old residence and buying (or renting) a new home, including such expenses as broker commissions and legal fees, but not a loss sustained on the sale.
Tax tip: s/ome of these costs may be deducted as either a moving expense or a cost related to the sale of a home. If you select the latter, you will reduce your capital gain -- only half of which is taxable.
By claiming these costs as moving expenses (to the extent allowable), you get the benefit of a 100 percent deduction from income. And any balance ance over the ceiling on such moving expenses may still be applied against the house transaction.
If you rented your residence in either the new or old area, you may deduct expenses incurred in settling your old lease or acquiring a new lease; but prepayment of rent or a security deposit doesn't qualify.
You may claim the deduction for moving expenses on your 1978 return if you meet the 35-mile requirement and expect to meet the 39-week rule, even though 12 months have not yet passed since the move.
If you later fail to complete the necessary 39 weeks of work in the new area, you will then have to file an amended return for 1978 (on Form 1040X) to eliminate the deduction and to pay the extra tax due.
You were self-employed during 1978 and made payments to a qualified retirement investment program. You may deduct the amount of those payments -- up to 15 percent of your net earnings with a maximum of $7,500 -- from gross income.
The plan must have been established by Dec. 31, 1978. However, you may claim the deduction for payments made as late as April 16, 1979, on behalf of 1978 earnings.
TAX TIP: If you had net income from self-employment of $5,000 or less and your adjusted gross income (before the Keogh deduction) was $15,000 or less, you may invest up to $750 -- but not more than the total income from self-employment -- without regard to the 15 percent limitation.
If you maintain a Koegh plan in which you, as the owner of the business, are the only participant, you no longer need to file an annual Form 5500-K to support the deduction. Simply claim the amount of your payment on line 25 of Form 1040 on line 25 of Form 1040.
The Individual Retirement Account provides a tax-deferred savings program for an employe who is not covered by a retirement plan where he works, either because the employer doesn't provide one or because the employe isn't eligible.
An IRA is also authorized for an employe who is eligible for a voluntary retirement plan at work but chooses not to participate.
If you were eligible for an IRA last year, you could have deposited up to 15 percent of 1978 earnings with a maximum contribution of $1,500. The account must have been established and the funds deposited either during 1978 or not later than April 16, 1979
TAX TIP: Although the ceiling on contributions is lower than for a Keogh plan, if you are self-employed you may elect to use an IRA to avoid the requirement under Keogh to cover your employes to the same extent as your own participation.
If you qualify for an IRA and your spouse didn't work for pay during the entire year, you may contribute to your plan 15 percent of your total wages up to a maximum of $1,750 (instead of the normal $1,500 ceiling).
However, a jointly owned IRA is not authorized. You must establish separate accounts for yourself and your spouse -- and the spouse has a vested (irreversible) interest in his or her own account immediately upon establishment. (A single "common fund" with subaccounts for each spouse meets this requirement.)
There is an important restriction. You may not deposit into one IRA any greater amount than you deposit into the other. Thus if you qualify for the maximum $1,750, you may deposit up to $875 into each separate IRA.
If your spouse had any earned income during the year, or if you do not wish to open an equal IRA for your spouse, you are bound by the basic $1,500 ceiling. (The spouse may, of course, open an individual IRA if he or she qualifies independently.)
Volunteer firemen, even if covered by a government pension plan, may establish an IRA if they qualify at their primary jobs.
There is a restriction, however. The value of the accrued benefit under the government plan must not have exceeded an annual benefit of $1,800 (based on a single life annuity beginning at age 65) at the beginning of 1978. Sound complicated? Your plan trustee should be able to tell you if you are eligible for an IRA.
Similarly, a reserve or national guard member who had not served on extended active duty for mor than 90 days in 1978 (not counting training days) may set up an IRA if he or she otherwise qualifies.
Form 5329 (the annual report on IRAs) is no longer required unless there was some activity in the account which generates a tax liability, such as an excess contribution or premature distribution.
TAX TIP: For both Keogh and IRA plans, you may invest, early in the year, the full amount expected to be eligible by year-end. The income earned by the plan is then sheltered from income tax from the date of deposit, giving you extra months of tax-deferred earnings.
If you find later that you had deposited more than the qualifying amount, you may withdraw the excess (plus any income already earned on that excess) by the closing dates above without penalty.
Periodic alimony or separate maintenance payments to your former spouse required by a decree of divorce of support, or a written separation agreement is an "adjustment to income" and may be claimed even if you use the zero bracket amount and do not itemize deductions.
Payments specifically designated as support for a minor child are not deductible even if paid to your former spouse rather than directly to the child. But such payments may be a factor in determining who may take the dependency exemption for the child.