The zero bracket amount (ZBA) was increased effective Jan. 1, 1979. For 1978 returns, however, it remains unchanged from the 1977 allowances:
$3,200 if you are married filing jointly, or a qualifying widow(er) with a dependent child.
$2,200 if you are filing as a single person or an unmarried head of a household.
$1,600 if you are married filing separately.
For most people, the decision on whether to itemize deductions or to take the zero bracket amount is a relatively simple one. If your deductions are greater than the amount given above for your filing status, you should itemize; if not, then use the ZBA.
If you decide to itemize, you should be able to support every deduction with a receipt, cancelled check, or similar evidence. However, you should claim every deduction which you honestly believe qualifies even if you don't have proof of payment.
If your return is audited and a deduction questioned, allowance of an unsubstantiated deduction will be a matter of judgment on the part of the IRS examiner.
Both the tax tables and the tax schedules already allow for the proper ZBA for all categories of taxpayers. When you work on Schedule A, therefore, a special calculation is required.
After adding all itemized deductions (on line 39 of Schedule A) you must subtract from the total the ZBA for your filing status. The resulting "excess of itemized deductions is the number to be carried to line 33 of Form 1040 -- not your total deductions.
As a general rule, medical expenses may be deducted only to the extent that they exceed 3 percent of adjusted gross income (line 31 of Form 1040). Expenses for drugs and medicines are further limited: You first must deduct one percent of adjusted gross income, then include the balance with other medical costs.
There is one exception. Half of your medical insurance premiums up to a maximum of $150 may be deducted (on line 1 of Schedule A) without regard to the 3 percent limitation; the balance should then be entered on line 5 to be added with other medical expenses.
You may count your own medical expenses plus qualifying expenses paid by you on behalf of all dependents claimed on the return (including a dependent you claim as the result of a multiple support agreement).
TAX TIP: You may claim medical expenses you paid for any person you otherwise could claim as a dependent except that he or she had taxable income of $750 or more.
For example, you may be contributing more than half the support for a parent who is disqualified as your tax dependent because of having received $1,000 in taxable interest during the year. If part of your support payment was designated specifically to pay medical bills, you may include that part with your other medical expenses.
The net cost -- after subtracting any insurance reimbursement -- of all normal medical expenses such as payments to hospitals, doctors, and nurses can be included.
You may claim the unreimbursed costs of acupuncture treatments; prosthetics such as false teeth, hearing aids and batteries, and glasses or contact lenses; orthopedic shoes, sacroiliac belts, crutches and similar aids; and purchase or rental of special equipment for the handicapped.
TAX TIP: The cost of a legal abortion or a procedure for sterilization is deductible as a medical expense. But illegal drugs or medical or surgical treatment which is against the law may not be included.
You also may claim premiums for medical insurance, including supplementary (medical) insurance under Medicare but not basic Medicare itself; and such specialized insurance as protection against loss of contact lenses.
Transportation to obtain medical care is deductible, including ambulance hire, bus, taxi, train, or plane fares, and seven cents a mile for use of your car plus tolls and parking fees. Expenses of a parent accompanying a child or of a nurse accompanying a patient may also be claimed.
TAX TIP: When adding up medical expenses on Schedule A, be sure to include on line 7 the amounts from all of the appropriate lines: 4, 5 and 6.
Claim as deductions on Schedule A all of the following:
State and local income taxes actually paid or withheld from your wages during 1978, not the tax on 1978 income.
TAX TIP: Do not subtract here any refund received in 1978 on your 1977 or earlier state income tax. The amount of the refund is entered as income on line 11 of Form 1040 -- but only if you itemized deductions for the year when it originally was paid.
Personal property taxes.
Property taxes paid during 1978 on your home and on other real estate you own (other than the tax on property held for rental, which goes on Schedule E).
If the financial institution that holds your mortgage pays the real estate taxes, you may deduct only the amount paid on your behalf during 1978 -- not the monthly tax escrow payments you made.
General sales taxes -- the amount allowed in the IRS table in the instruction booklet, or (if you kept a record) the total amount actually paid.
TAX TIP: If you use the tax table, add to your adjusted gross income such nontaxable income as VA and Social Security benefits, the untaxed portion of capital gains and tax-exempt bond interest.
In addition to the deduction authorized by the table, you may claim -- on line 16 of Schedule A -- sales tax paid on purchase of a car or motorcycle, boat, plane, mobile or prefabricated home, or trailer.
Gasoline taxes -- again either the amount allowed by the IRS for the number of miles driven or the actual amount spent. (The gasoline tax for 1978 was 10 cents a gallon in the District, and 9 cents in Maryland and Virginia.)
The following are not deductible: excise taxes on liquor or cigarettes, utility bills, or transportation; hunting or fishing licenses; car tags; traffic fines; or penalties for underpayment of federal or state income tax.
You may deduct interest paid on a mortgage on your home or other non-rental property, a personal loan; a life insurance loan if paid in cash but not if added to the loan, charge accounts, a margin account at your broker (unless the funds were used to buy tax-exempt securities), and interest (but not penalty charges) on late federal or state tax returns.
TAX TIP: There is a ceiling on interest paid in connection with investments. If you have substantial interest expense related to investment property, see IRS Publication 545.
You may deduct the interest actually paid in 1978 on your install ment accounts. Finance charges on revolving charge accounts, bank credit cards and overdraft checking accounts are deductible in full as interest, but service charges or special fees are not.
Prepaid or discounted interest may not be deducted when paid if the loan extends over more than the tax year for which the deduction is taken. Instead, the interest must be apportioned over the life of the loan; the deduction is limited to the interest chargeable for use of the money in 1978.
If the interest applicable to each payment is not stated separately, then the total interest must be divided evenly over the scheduled number of payments.
Interest paid on money borrowed to buy tax-exempt (municipal) bonds or to purchase single-premiun life insurance is not an authorized deduction.
The amount of any "points" paid by you in connection with purchase of a home is considered interest if it was charged as additional compensation to the lender for use of the money.
The total amount of the interest deduction for points normally may be taken in the year of payment, but it must be apportioned over the life of the mortgage if these three conditions are not met:
The home is your principal residence.
The payment of points is an established business practice in your area.
The points charged are in line with the amounts generally charged in your area.
If you sold your home in 1978, points you paid to induce a lender to provide financing to the buyer are not interest. However, the amount paid is a selling expense which may be subtracted from the proceeds of sale.
On the other hand, a prepayment penalty that you the seller had to give to your mortgagee for early repayment of the mortgage is deductible as interest in the year paid.
Contributions to Charity
Contributions to qualifying organizations are deductible on Schedule A, but gifts or contributions to individuals, no matter how worthy, never are deductible. The following types of crganizations generally qualify:
The United States or any lower level of government if the contribution was made for public purposes.
Dues or donations to a church, synagogue, or similar religious institution, but not tuition for your child at a parochial school.
A community chest or united fund, the various nonprofit health foundations, the Red Cross, Salvation Army, USO and similar service organizations, and scouting and other girls' and boys' clubs.
Contributions but not dues to veterans' associations and their auxiliaries, and to domestic fraternal societies if the money is to be used for charitable, scientific, educational or literary purposes.
You may deduct cash contributions and the fair market value of property given to qualifying organizations. But there are rules and restrictions; see IRS Publication 526, "Income Tax Deduction for Contributions."
TAX TIP: If you own property which is now worth more than it cost, contribute the property itself.You generally will get a deduction for the fair market value without having to report any capital gain.
But if the property has depreciated in value, sell it and donate the cash. You then will be able to claim a capital loss which wouldn't be available if you contributed the property directly.
Unreimbursed expenses you incurred while rendering personal services (without pay) to a qualifying organization are deductible, including postage and phone calls, meals while contributing your services and transportation (seven cents a mile if you use your car).
You also may deduct the cost of travel to attend a convention as an official delegate, including meals and lodging if away from home overnight, and the purchase and upkeep of required uniforms if they are of a specialized nature and have no general use.
You may not deduct the value of your contributed services even if you normally are paid for the same type of work. Similarly, the value of temporary use of your property, even if it is normally rented for income, is not deductible.
The destruction of or damage to nonbusiness property resulting from a sudden, unexpected or unusual event may provide a tax deduction. Gradual deterioration such as a termite infestation does not qualify. The event must be in the nature of a hurricane, tornado, flood, fire, theft, vandalism or accident.
Only the unreimbursed loss is deductible. The amount of any recovery from insurance or from an individual found at fault must be subtracted from the total loss. In addition, the first $100 of loss from each separate event must be subtracted.
If you could have recovered all or part of your loss through insurance coverage and elect not to file a claim, you may not deduct the amount that could have been recovered.
Example: You drive your car into a fire hydrant and have a $300 loss. Your collision coverage has a $200 deductible clause, but you choose not to ask for reimbursement of the remaining $100 and instead pay the entire loss yourself.
On your tax return, you may claim the $200 equal to the amount of the deductible (less the $100 exclusion), but not the $100 the insuror would have paid if you had entered a claim.
You may deduct certain business expenses incurred in the course of your employment, if not reimbursed. These include entertainment expenses, business gifts (limited to $25 per recipient), professional societies and publications, union dues, small tools and supplies, and postage, stationery and telephone.
You may deduct expenses relating to job-hunting even if the search was unsuccessful. A professional may not claim on Schedule A the cost of a certifying examination or a license to practice, but these may be included properly as business expenses on Schedule C if you were already in business when the costs were incurred.
Stringent rules cover the deductibility of expenses associated with conferences and conventions outside the United States. In general, you are limited to no more than two such conventions a year, and there are further restrictions on specific items of expense. See IRS Publication 465 for details.
The cost of purchase and upkeep of uniforms, special clothing such as safety shoes, and special equipment may be deducted if they are required for your work, not provided by your employer and not generally usabie when away from the job.
Military people on active duty may not deduct the cost of regular uniforms, but may claim the cost of insignia, ribbons, etc., and of work clothing which may not be worn off duty. Reservists and guardsmen not on active duty may deduct the unreimbursed cost of all uniforms.
Unreimbursed education expenses (other than transportation, which should be claimed as an adjustment to income) are deductible on Schedule A. The education must have been taken to meet the requirements of your employer or of the law to keep your skills in that job.
Education to qualify for a job initially, to train for a new profession or for your own pleasure does not qualify. But the possibility that improved skills may lead to a pay raise or promotion does not disqualify the deduction.
TAX TIP: Reimbursement of education expenses received from the Veterans Administration should not be deducted from allowable expenses, nor should such payments be reported as income on your return.
Business Use Of Home
There are important restrictions on a deduction for use of a part of your home for business purposes. If you are self-employed, the space for which a deduction is claimed must meet these tests:
It must be used exclusively for business purposes.
It must be your principal place of business or regularly used by clients or customers.
If you are an employe rather than self-employed, there is a third requirement: Use of space in your home must be for the convenience of your employer, not your own.
This deduction may not be used to shelter other income from tax. The total amount of the deduction for expenses may not exceed income from business use (after subtracting the allocable portion of property taxes and mortgage interest, if you own your home).
TAX TIP: If you sell home products, cosmetics, etc. and your home is the only business location from which you operate, the requirement for "exclusive use" is waived. You may deduct the allocated cost of storage areas regularly used for product inventory.
You may deduct cash contributions made to a candidate for elective office, to a political committee or newsletter fund of a candidate or an elected public official, or to the local, state, or national committee of a national political party.
For 1978, political contributions may be claimed either as a miscellaneous deduction on Schedule A or as a tax credit. Of course, you may not claim both. If you do not itemize, then the tax credit -- explained in tomorrow's column -- is the only way to go.
(Starting in 1979, the deduction option is eliminated, but the credit ceiling is doubled.)
If you do itemize, your choice of method will depend on the size of the contribution and your marginal tax bracket. You should make a rough calculation both ways to see which method gives you the larger tax saving.
The deduction is limited to $100 ( $200 on a joint return). If you decide to go this route, enter "political contribution" on line 31 of Schedule A. You are not required to identify the individual or party but, in the event of an audit, this information might be required to confirm the validity of the deducation.
Other Personal Expenses
In general, you may claim any expense reasonably related to the production of taxable income. For example, include the cost of a safe deposit box if it held stocks or corporate bonds or the deed to rental property, but not if it contained only personal papers or tax-free bonds.
Fees for investment advisory services and subscriptions to investment periodicals may be deducted even if you lost money on your investments.
You also may deduct fees paid for preparation of your personal tax returns, fees paid to your bank or broker for the collection of taxable interest on notes or coupon bonds (but not brokerage commissions, which should be added to the cost of securities bought or deducted from the proceeds of securities sold) and legal fees associated with the production of taxable income such as attempts to collect alimony or back wages.