The various kinds of taxable income discussed yesterday are added to arrive at "total income" on line 22 of Form 1040. In tomorrow's column we Form 1040. In tomorrow's column we the zero bracket amount (standard deduction) and itemizing deductions.
Regardless of which route you select for deduction, 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.
If you changed your residence during 1979 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 employee, you must work in the new area (though not necessarily for the same employer) for at least 39 weeks in the 12-month period following the move. 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.
If you meet both 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 may deduct out-of-pocket expenses for gas, oil, and repairs -- but not "overhead" such as insurance or license fees.
An easier alternative is to claim eight cents a mile for the actual distance traveled. In either case you may add tolls and parking fees; but do not claim the cost of mileage for side trips to relatives or for sightseeing.
The cost of moving your household, including packing and crating, insurance, and any necessary storage; but not the cost of disconnecting or reconnecting appliances, refitting carpets 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 two may not exceed $1,500.
The cost of travel, meals and lodging for househunting trips to the new fore 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 stay with family or friends, you may not include the value of meals and lodging unless you made a bona fide cash payment.
The costs associated with selling your old residence and buying a new home, including such expenses as broker commissions and legal fees (but not a loss on the sale).
Some of these costs may be deducted as either a moving expense or a cost related to sale of a home. If you select the latter, you will reduce your capital gain -- only 40 percent 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 over the ceiling on some moving expenses may still be applied against the house transaction.
If you rented your residence in either the old or new 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 1979 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 1979 (on Form 1040x) to eliminate the deduction and to pay the extra tax due.
If you were reimbursed, in whole or in part, by your employer, you must subtract the amount of the reimbursement. But claim the total expense without reduction if your employer included the reimbursement as income on your Form W-2.
Use Form 3903 to account for the moving expense adjustment; or Form 3903F if you moved outside the United States or its possesions. Employe expenses
An "outside salesperson" -- one who sells away from his employer's place of business expenses from gross income. If you're a salesperson, you should review IRS Publication 463 for a detailed explanation of the various expenses you may claim.
Most unreimbursed expenses of an employee who is not an outside salesperson may be claimed only as itemized deductions on Schedule A. But travel and transportation expenses may be deducted from gross income as an adjustment even if you do not itemize.
If you traveled away from home over night or longer on business, deduct the costs of transportation (both travel to and from your destination and local transportation while there) plus meals, lodging, and reasonable incidentals such as tips.
The cost of commuting between your home and work is not normally deductible. But 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 the other.
If you used your car, 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 18.5 cents a mile (up from 17 cents last year) for the first 15,000 miles plus 10 cents a mile for anything over that. Whichever method you choose, tools and parking fees may be added -- but not fines for traffic violations.
You may deduct the cost of travel and transportation associated with obtaining qualifying education or training as an adjustment to income even if you use the zero bracket amount. But other education expenses -- tuition, books, etc. -- may be claimed only as itemized deductions on Schedule A.
To qualify, the deducation must be required by your employer or by law for you to keep your present job: or must be taken to improve your skills in preforming that job. Education or training to prepare for a new or different career may not be deducted.
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. See Publication 463 for details.
To claim employee business expenses (as either an adjustment to income or an itemized deduction), file Form 2106 or similar statement with your return to document the expenses.
Be sure to keep records of the various expenses as they occur. If your return is audited, the IRS will expect you to have a diary or log of your daily expenses; notes of the places, people, and business purpose to support entertainment expenses; cancelled checks and credit card records; and a receipt for any individual item of $25 or more. IRA and Keogh
If you were self-employed during 1979and 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.
The plan must have been established by Dec. 31, 1979. However, you may make payments on behalf of 1979 earnings as late as April 15, 1980, and still take the deduction on your 1979 tax return.
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.
Although the ceiling on contributions to an IRA is lower than for a Keogh plan, if you have earnings from self-employment you may elect to use the IRA to avoid the requirement under Keogh to cover your employees to the same extent as your own participation.
If you eligible for an IRA last year, you could have deposited up to 15 percent of 1979 earnings with a maximum contributions of $1,500. The account must have been established and the funds deposited either during 1979 or by the date your return was due, including extensions you may have gotten.
If you quailfy for an IRA and your spouse didn't work for pay during the entire year, you may contribute 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.
There is an important additional restriction. You may not deposit into one IRA any greater amount than you deposit into the other. Thus if you qualify for the $1,750 maximum, you may deposit $875 into such separate IRA.
If your spouse had any earned income during the year, or if you do not wish to open an equal-amount 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.)
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 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 date without penalty. Alimony Payments
Periodic alimony or separate maintenance payments to a former spouse required by a decree of divorce or of separate maintenace, a decree 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 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. Disability
The disability exclusion provides for a maximum annual exclusion of $5,200; but only if you were retired for total disability and if you had not reached age 65 by Dec. 31, 1979.
Exception: You are eligible if you were under 65 and had retired for any degree of disability, and you were permanently and totally disabled on Jan. 1 of either 1976 or 1977.
The disability exclusion is limited by an income ceiling. If you qualify, use Form 2440 to determine the amount of any authorized exclusion.
Veterans Administration payments for disability continue to be excluded from gross income. Military disability pensions and disability retirement pay are also exempt from tax if you were in the military service (or similar organization such as Public Health) on or prior to Sept. 24, 1975.