The energy Tax Act of 1978 -- companion measure to the Revenue Act of 1978 -- authorizes a tax credit for specified modifications to residential property. There are really two different credits, each applying to a different technique of energy conservation.
Some general rules apply to both types of tax credit:
The modification has to be installed in your principal residence, located in the U.S. A vacation home does not qualify.
The equipment or modification must be a new installation; that is, you must be the first person to use it.
The residence in which the installation is made must have been substantially completed by Apr. 19, 1977.
The installation or modification had to have been made after Apr. 19, 1977. The energy tax credit remains in effect through 1985; qualifying modifications made in 1979 and later years should be claimed in the year made. But installations made in 1977 go on your 1978 tax return, along with 1978 expenditures; do not file a 1977 amendment.
TAX TIP: You are not required to own the home. If you're a renter, you may claim the credit if it is your main home and you paid for the modification. If you own a condominium or cooperative, you may claim a proportionate share of qualifying expenditures by the management for common-use areas, in addition to any in your own unit.
Energy conservation.The first of the two types of credit covers "energy conservation" installations. This group includes insulation, storm doors and windows, a more energy-efficient furnace or furnace modification, an automatic setback thermostat, and an energy-cost-display meter.
Carpeting, drapes, interior paneling, exterior siding, and fluorescent lighting are specifically excluded from the credit even if the intent was to reduce energy use.
To qualify for the first category of tax credit, the equipment must reasonably be expected to remain in use for at least three years.
The tax credit for Type I modifications is 15 percent of the first $2,000 spent for energy conservation installations. Use lines 1 through 3 of Form 5695 to calculate the amount of the credit.
Renewable energy sources. The second type of credit applies to replacement or supplementary energy installations such as solar collectors and heat exchangers, geothermal heat distribution systems, and wind energy equipment used to produce energy for residential purposes.
To qualify for the credit, equipment in this category must be expected to have a useful life of at least five years.
Heat pumps, wood-burning systems, hydrogen-fueled equipment, greenhouses, and swimming pools used for energy storage do not qualify for the credit.
This second type of credit amounts to 30 percent of the first $2,000 plus 20 percent of the next $8,000 expended for qualifying renewable energy source installations. Calcuations for this category are made on lines 4 through 7 of Form 5695.
The maximum allowable credit for Type I (energy conservation) installation is $300. The ceiling for Type Ii/ (renewable energy source) is $2,200.
If the total credit for 1978 is greater than your tax liability for the year, you may carry the unused balance forward to your 1979 tax return (or later, if necessary as far as your 1987 return). Earned Income Credit
The earned income credit for 1978 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) 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, 1978; and
You have elected irrevocably not to claim the disability 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 credit is generally limited to "family" taxpayers; you must be either married and filling a joint return or the head of a household to qualify. Specifically, the law requires that during 1978:
You paid more than half the cost of maintaining your home in the United States; and
Your home 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 exceed $8,000.If you are married, these ceilings apply to your combined incomes.
You are not eligible for the earned income credit if you are entitled to exclude foreign-source income from your tax return.
If you meet these qualifications, the credit is 10 percent of the first $4,000 of earned income up to a ceiling of $400. This maximum credit must be reduced by 10 percent of the excess over $4,000; thus the credit disappears when earned income (combined earned income on a joint return) reaches $8,000.
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, and the child's name goes on line 10. On either form, 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.
You can get the refund even if no income tax was withheld from your wages, you didn't pay any estimated tax during the year, and in fact you have no tax liability at all.
If you qualify under these rules, complete 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.
TAX TIP: If you are eligible for the earned income credit in 1979, you may be able to receive a pro rata share of the anticipated credit along with your wages. This advance payment procedure will be effective July 1, 1979. Check with your employer before then -- he should have instructions from the IRS on how the system works. 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 1978.
You may claim this credit, using Form 4136, for fuel used boats, aircraft not 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 oil used in stationary engines, machinery, and heavy equipment -- bulldozers and power shovels for instance.
TAX TIP: This credit has been eliminated effective Jan. 1, 1979 -- so don't bother keeping track of off-road fuel use any longer. Excess Social Security Tax
If you worked for more than one employer during 1978 and a total of more than $1,070.85 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 W2s attached.
In adding up the total withheld, do not include more than $1,070.85 from any one employer. If a single employer withheld, by mistake, more than this allowable maximum, you must claim the refund from that employer rather than from the IRS on your return.
TAX TIP: Check FICA withholding carefully if total wages amounted to more than $17,700. Income Averaging
If your income in 1978 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 1974 through 1978; and
You must have furnished at least half 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 every year you qualify. Income averaging for 1977 or prior years does not disqualify you from doing it again in 1978 if you meet the tests.
In order to use income averaging, you must have copies of your federal income tax returns for the four years 1974 through 1977. 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.
Here's how to determine if you can benefit from income averaging:
First calculate your taxable income for 1978 -- 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 your tax was figured -- for each of the preceding four years.
For 1974 this amount is found on line 48 of Form 1040 or line 16 of Form 1040A. For 1975 and 1976 use the amount on line 47 of the 1040; line 15 of the 1976 1040A; or line 5 of the 1975 Form 1040A tax computation worksheet.
For 1977 you must multiply $750 by the number of exemptions claimed, then add that amount to the number on line 34 of the 1040 or line 10 of Form 1040A.
Now add to the separate figures for 1974, 1975, and 1976 an amount to compensate for inclusion of the zero bracket amount in the 1977 and 1978 tax tables and tax rate schedules: $3,200 if you checked Box 2 or Box 5 on this year's 1040; $2,200 for Box 1 or Box 4 people; or $1,600 if you checked Box 3.
Next add together the final figures for all four years (1974 through 1977), and multiply the total by 30 percent (.30). If your taxable income for 1978 (arrived at in the very 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.
The procedure itself really isn't as complicated as it sounds here.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 helpful information about income averaging, including details of some restrictions which might complicate the procedure. Be sure to follow the instructions carefully, particularly if your marital status changed during the five-year period.
TAX TIP: If you use income averaging, 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 -- with income averaging, then without averaging but applying the maximum tax limitation -- to see which method produces the lower tax. Presidential Campaign Fund
Each taxpayer may earmark one dollar 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.
Check the "yes" or "no" block directly under your name and address on either the 1040 or 1040A. On a joint return, each spouse has an independent choice. Estimating 1979 Tax
If you are self-employed (either full-time or part-time) or expect to have substantial income during 1979 that is not subject to withholding (from interest or dividends, for example), you must make special arrangements to comply with federal "pay-as-you-go" tax rules.
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, as a rough rule of thumb you can figure an extra two dollars will be withheld each week for each allowance eliminated.
If you get down to zero allowances and still want 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. 16, 1979, 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, 1979; Sep. 17, 1979; and Jan. 15, 1980.
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 for amending your original estimate. If your estimate of tax 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 new estimate and the number of payments remaining.
If you are not liable for estimated tax on Apr. 16 but determine later that you have become liable, file an initial Form 1040-ES on the next regular payment date, dividing the total amount due into the proper number of equal payments. 'No-Pay-as-You-Go' Penalty
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 1978 return fits the description above, complete Form 2210 either to justify the underpayment or to calculate any penalty payment due. Over-Withholding
You are not required or expected 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, or other items that will reduce your tax.
If you have been consistently getting a large refund, or if your tax situation has changed, ask your employer for a new W-4 and worksheet; you may be able to reduce the amount withheld from your pay for taxes each payday.
But don't reduce it below the correct level, or you may find yourself subject to the penalty described above in addition to having a big tax bill to pay next April.