Most individual taxpayers maintain their financial records for tax purposes on a cash basis and for the calender year Jan. 1 through Dec. 31. Income is counted in the year it is received or made available, regardless of when earned; and expenses are deducted in the year paid, regardless of when incurred.
(Exception: Prepaid interest may not be deducted when paid if the loan extends beyond the current tax year. The deduction may be taken only in the year the interest is due.)
The "cash basis" method simplifies tax preparation. With the exception of interest, as just noted, you need only keep track (for tax purposes) of cash receipts and payments.
If you have checked off your filing status, entered your personal and dependent exemptions, and accounted for income, adjustments, and deductions, you're now ready for the tax calculations.
The Internal Revenue Service will figure your tax for you if you file Form 1040A. Simply complete the form through line 12a; attach all W-2; and sign and date the return.
The IRS will calculate the earned income credit (if you are eligible) as well as the income tax liability. It will then mail you a refund of any overpayment, or a bill for any balance due.
If you use Form 1040, the IRS will also compute your tax if:
Your adjusted gross income was $40,000 or less for married taxpayers filing jointly or for a qualifying widow(er), or not over $20,000 for all others;
Taxable income consisted only of wages, salary, tips, dividends, interest, and pension or annuity payments;
You use the zero bracket (standard deduction) amount; and
You do not use Schedule G (income averaging).
If you file a joint return and ask the IRS to figure the tax, show the income of each spouse separately. On Form 1040A enter the figures, identified by "H" and "W," between lines 7 and 8; or in the space under the words "Adjustments to Income" on the 1040.
If you prefer to calculate your own tax or if you are not eligibile for IRS computation, use either the tax table or the tax rate schedule, which ever is applicable, to determine your tax liability.
Use the proper tax table for your filing status and the column that matches your exemptions. Each table is limited by your tax table income (line 34 on Form 1040) and by the total number of exemptions claimed.
If you are filing Form 1040A you must use the tax table (unless you ask the IRS to figure the tax). You should also use the table with Form 1040 if neither your tax table income nor the number of exemptions exceeds the ceilings in the proper table for our filing status.
The tax table figures already take into account your personal and dependent exemptions and the zero bracket amount. Do not subtract these before going to the table to find your tax.
Because the tables allow for the zero bracket amount, if you itemize deductions be sure that on line 33 of Form 1040 you subtract only the excess deductions -- the amount from line 41 of Schedule A.
If you are not eligible to use the tax tables, you muse calculate the tax yourself. Use Part 1 of the Tax Computation Schedule (TC). Figure the amount of the tax from the appropriate tax rate schedule for your filing status.
The zero bracket amount has also been built into the tax rates schedules; so if you itemize, enter only excess deductions from Schedule A. But you must deduct -- on line 2 of Schedule TC -- the dollar amount of your personal and dependent exemption, at $1,000 each.
If the supplementary tax rate (plus percent on the tax rate schedule) is greater than 50 percent, you should go to Form 4726 to see if the application of the maximum tax on earned income will result in a lower tax liability.
Whether you use the tax table or the tax rate schedule, there are a variety of tax credits available. A tax credit is generally more valuable than an adjustment or a deduction, since the amount of the credit is subtracted in full from the tax itself rather than from income. Political Contributions
The Schedule A deduction for political contributions has been eliminated. Instead, you may take a tax credit (on line 38 of Form 1040 or line 12a of the 1040A) for qualifying contributions.
Claim half the amount of your total contributions, up to a ceiling of $100 on a joint return, $50 on all others. (This is double the amount of last year's credit.)
The allocation funds to the Presidential Election Campaign Fund is not a political contribution. It does not affect your tax liability in any way, and should not be deducted as a credit. Tax Credit for Elderly
You may qualify for the tax credit for the elderly if you were 65 or older and had taxable income in any kind during 1979. The credit is calculated on Schedule R.
You start with the initial maximum allowance for your filing status, as shown on Schedule R. From this starting amount you must deduct certain types of pension or annuity payments not included in gross income (principally social security or Railroad Retirement Act benefits).
Then there is a 50 percent offset for adjusted gross income above specified amounts (also shown on the schedule). The tax credit is 15 percent of the amount remaining after these two deductions.
If you were married and lived with your spouse at any time during 1979, you must file a joint return to qualify for this credit.
There is a special tax credit for taxpayers under 65 who are retired under a federal, state, or local government retirement system. This special credit is calculated on Schedule RP.
This initial maximum amount of government retirement pay eligible for the credit is the same as for the tax credit for the elderly. And a similar reduction must be made for social security and Railroad Retirement Act benefits.
But you must then further reduce the base amount dollar-for-dollar by all earned income (not AGI) in excess of considerably lower minimums than apply on Schedule R. Care of a Dependent
The allowance for expense incurred for child or dependent care is a tax credit, and therefore is available even if you use the zero bracket amount and don't itemize.
Moreover, effective Jan. 1, 1979, you may take the credit for payments to any relative (except your child under 19) unless the relative is claimed as a dependent on your (or your spouse's tax return.
There is no income ceiling for this credit. If you otherwise qualify, you may claim the tax credit regardless of the amount of your income. In addition, the credit is available in some circumstances to a married couple even if only one spouse was employed.
Regardless of your marital status, you must have maintained a home of your own during 1979; and the "qualifying individual" for whose care you claim the credit must have been a member of your household. That individual must be one of the following:
A child under the age of 15 for whom you claim an exemption as your dependent;
A spouse who was mentally or physically incapable of self-care; or
Any other person incapable of self-care whom you claim as a dependent, or whom you could claim except that he had income of $1,000 or more.
If you are married, normally you must file a joint return to claim the credit. However, you may file a separate return and still be eligible if you meet all of these requirements:
You were legally separated or living apart from your spouse;
You maintained a home and paid more than half the cost of maintaining that home in 1979;
It was the principal home of the qualifying individual for more than half the year; and
Your spouse was not a member of the household during at least the last six months of the year.
The tax credit is 20 percent of the cost of household services and other expenses incurred for qualifying care in the home and paid during 1979. Care outside the home may also qualify, but only if the expense was incurred for care of a dependent child under age 15.
In either case -- whether care is rendered inside or outside the home, the expense ceiling is $2,000 for care of one qualifying individual or $4,000 for two or more. This equates to a maximum tax credit of either $400 or $800 for the full year, and $33 or $67 a month for a shorter time.
If in 1979 you paid for care provided in 1978, you may claim on your 1979 return any allowable balance for 1978 in addition to the 1979 ceiling.
If you are single, the amount of expenses you may take into account may not exceed the amount of your earned income for the year, less any disability exclusion claimed.
In the case of married taxpayers filing jointly, the amount of expenses claimed may not be greater than the earned income of whichever spouse earned less.
However, if one spouse was incapable of self-care or was a full-time student, for the purpose of this ceiling you may consider that he or she was "employed" with "earned income" of $166 a month if you are claiming care of one dependent, or $333 a month if you have two or more.
You can apply this exception to only one spouse in any month. Thus at least one spouse must have been employed with earned income equal to or in excess of whichever of these amounts is applicable.
In addition, this assumption of earned income applies only for those months in which the spouse was either incapable of self-care or a fulltime student.
The cost of nursing care for a disabled dependent might be claimed for credit under this provision or as a deduction for medical expense. You cannot claim both for the same expenses -- but you may take a qualified deduction wherever it gives you the larger tax benefit.
If you are using the zero bracket amount, then of course you should take the tax credit. But if you itemize and already have enough medical expense to exceed the three percent exclusion, then the choice depends on your tax bracket. Remember that a deduction reduces taxable income, while a credit reduces tax liability.
If you are eligible for either the credit or the deduction, check out both methods to see which gives you the better tax break. If you take the tax credit, any qualifying expenses in excess of the $2,000/$4,000 limit may be added to medical expenses on Schedule A.
If you decide to itemize, include the qualifying costs along with your other medical expenses. If you elect to take the tax credit, attach Form 2441 to your 1040 to document the claim. 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 10 percent of the cost (or other basis) of new or used property acquired in 1979 which has an estimated useful life of at least seven years. For assets with a useful life of between three and seven years, a partial credit may be claimed.
If you claim investment credit, the amount of the credit is disregarded when establishing the basis of the property for depreciation purposes or for determining gain or loss on a later sale.
Because of the complexity of the ruls for claiming the investment credit, if you think you qualify you should carefully review Form 3468 and the accompanying instructions; or consult the IRS or a tax adviser for help.