The Economic Recovery Tax Act of 1981 was enacted to roll back federal taxes across a broad front. In addition, ERTA has an impact on the tax structures of most states because of adherence to the principle of "tax conformity."
Tax conformity means that a state bases its own income tax regulations on the federal law. That is, a taxpayer starts his state tax return with the numbers on the federal return, then makes adjustments up or down to arrive at state taxable income.
For example, all three local jurisdictions will conform to the new federal guidelines on depreciation of business assets--the Accelerated Cost Recovery System.
In the area of individual tax returns, the increased exclusion of gain on the sale of a residence by a taxpayer age 55 or older will also be honored by the three jurisdictions, as well as the extended waiting period for replacement of a principal residence.
But only Maryland and Virginia will go along with the exclusion of interest on tax-free All Savers certificates. Interest earned on these certificates by D.C. taxpayers must be included in income on the D.C. tax return.
In all three jurisdictions, the interlocking nature of the tax regulations requires that you complete your federal return first.
Maryland and Virginia taxpayers simply transfer various totals from the federal to the state returns. Residents of the District must provide itemized supporting data--but the information needed in most cases can be taken from related schedules of the federal return.
Suggestion: Don't complete your federal return until you have finished the state or D.C. return. Sometimes the additional research you do will trigger a change on the federal return.
The accompanying tables provide the basic filing instructions for each of the three area jurisdictions. Note that Maryland filing requirements are the same as federal; but the District and Virginia have lower dollar minimums than Uncle Sam.
So if you live in the District or Virginia, you may find you are required to file a state or D.C. return even though you are exempt from filing a federal tax return.
All three jurisdictions provide a tax benefit for a married couple (living together) when each spouse has separate income. Whether to file a joint return or combined separate returns depends on the amount of income attributable individually to each spouse.
None of the three jurisdictions will compute your tax (as the IRS offers to do under some circumstances) so you must complete the entire return yourself. Make the calculations easier by rounding all figures to whole dollars.
On a District or Virginia return use the peel-off label from the instruction booklet on your return, making any necessary corrections. Use the Maryland label only if all the information is correct.
The District, Maryland and Virginia all have "pay-as-you-go" tax systems requiring that you file an estimated return and make quarterly payments if you have taxable income in excess of specified limits not subject to state tax withholding.
If you moved your legal residence into or out of any of the three local jurisdictions during 1981, you must file a part-year return for the period of residence. Although each jurisdiction has somewhat different rules for a part-year return, in general you prorate exemptions and allocate income and deductions to the period in which they occured.
Now let's move on to a jurisdiction-by-jurisdiction look, with particular attention to those areas where the local rules differ from federal tax regulations.
District of Columbia
Filing status. You have a choice of five different filing categories. The first four are essentially the same counterparts on the federal return: single, head of a family, married filling jointly and married filing separately.
The fifth filing category permits a married couple to file separate returns on the same form. This category should be used if each spouse had gross income of more than $750 in 1981.
If you file using this status, enter the data pertaining to the husband in Column A and that of the wife in Column B. All other filers should use Column B only.
Exemptions. Personal exemptions are almost the same as on the federal return: one per taxpayer (and spouse on a joint return) plus one for age 65+ and one for legal blindness.
Only difference: If you file as head of a family you get an extra exemption not available on the federal return.
One exemption is allowed for each dependent claimed on your federal return. On a combined separate return you may allocate the dependents to husband or wife as you wish.
The District allowance is $750 for each personal and dependent exemption for a full year; or $62.50 per month on a part-year return.
Income. The District requires that you modify federal income to fit D.C. requirements, then enter D.C. income by categories on page 2 of Form D-40. Here are the principal modifications:
* A reduction of salary made, by agreement with your employer, to purchase a tax-sheltered annuity may not be excluded from gross wages for D.C. If not included in wages on your W-2, you must add it.
* There are major differences between federal and D.C. handling of income from a pension to which you contributed. You should report as income each year 3 percent of the total amount you had paid until you have recovered tax-free an amount equal to your contribution. Show the year-to-year computations on D.C. Schedule E.
After you have recovered your cost, the entire amount received is taxable as ordinary income and reported on Form D-40.
* The federal dividened/interest exclusion is not authorized. Show all taxable interest and dividends on Schedule B. Exclude interest on obligations of the U.S. government, any federal agency, any state or municipality. But include interest received in 1981 on All Savers certificates, which is taxable in D.C.
* A state tax refund shown as income on the federal return should be excluded. Omit also any unemployment compensation you included as income on the federal return; such payments are not taxed by the District.
Adjustments to Income. The District allows the same federal adjustment for employe business expenses, alimony payments and the disability income exclusion. But no adjustment is authorized for payments to either an IRA or Keogh retirement plan.
Moving expenses may be claimed only as an itemized deduction, not as an adjustment. And you may only claim expenses equal to the amount of any reimbursement from your employer that is included in income.
Deductions. The standard is 10 percent of adjusted gross income (line 6 of Form D-40), up to a maximum of $1,000 ($500 for a married person filing separately). But you may itemize on your D.C. return whether you itemized or used the ZBA on the federal return.
Deductions for medical expense and interest may be transferred without change from the federal return. (Caution: When computing the deduction for medical expense, keep in mind that adjusted gross income for D.C. purposes may be different than on the federal return.)
The deduction for taxes is similar to the federal deduction except that you must eliminate any amount claimed for state or local income taxes paid: and any D.C. recordation taxes paid may be added.
D.C. tax rules limit the deduction for charitable contributions to qualified organizations that carry on a substantial part of their activities in the District. The total deduction for contributions cannot exceed 15 percent of D.C. adjusted gross income. Any unused remainder may not be carried over to succeeding years.
Moving expenses may be claimed as a miscellaneous deduction, but--as noted earlier--not more than the amount of any reimbursement from your employer that is included in reported income.
Tax credits. The District provides a tax credit for child or dependent care similar to that authorized on the federal return. While the allowable expenses are essentially the same, the D.C. credit is limited to six percent of those expenses, not the 20 percent permitted by federal rules.
There is also a tax credit for 50 percent of campaign contributions to specified political candidates. (The list of authorized offices is on page 4 of the instruction booklet.) Maximum credit is $50 on a joint return, $25 per taxpayer on all others.
Property tax credit. Residents of the District with household gross income of $20,000 or less during 1981 may be eligible for a property tax credit. The requirements to qualify are on page 7 of the instruction booklet.
Use Schedule H to claim the credit. If you file a D.C. income tax return, take the credit on line 19 of Form D-40, and attach Schedule H to the return. Remember to include the Social Security numbers of everyone in the household.
You can claim the property tax credit even if you have no tax liability and do not file a D.C. return. File Schedule H by itself; if you qualify, you will receive a cash payment for the amount of the credit.
Dollar-saver. The tax people are trying a new idea that may save the D.C. government and, in turn, D.C. taxpayers quite a few dollars. If you customarily have your tax return prepared by a professional--who doesn't use your instruction booklet--you can check a block just above the signature space.
Then next year instead of getting a complete booklet and set of forms you will receive in the mail only a postcard with the mailing label to be used on the tax return. If the system works, it will save money on both printing and postage.
Filing status. Maryland offers five filing categories. Four of these are defined in the same way as on the federal return: single, married filing jointly, married filing separately and qualifying widow(er). Maryland does not provide a special filing status for a head of household.
The fifth category for Maryland taxpayers--married filing combined separate returns--is for a married couple who filed a joint return and wish to file separate Maryland returns.
You should use this category only if both husband and wife had Maryland taxable income. Figure your tax both ways (joint and combined separate) then use the method that provides the lower total tax.
If you file combined separate returns, use a single Form 502 and enter the husband's data in Column A, the wife's in Column B. All other filers use Column B only.
Exemptions. Maryland residents claim $800 per exemption ($66.67 a month for less than a full year). You are entitled to one exemption for each personal and dependent exemption claimed on the federal return.
In addition, on the Maryland return you get an extra exemption for each dependent who has reached the age of 65. But the additional exemption for blindness is only allowed for the taxpayer and spouse.
Income. Using Schedule C of Form 502, add to federal income any interest received on obligations of state and local governments other than Maryland. Other miscellaneous additions are listed on page 19 of the instruction booklet.
On the federal return you may exclude up to $200 ($400 on a joint return) of otherwise taxable income from dividends and interest. Maryland does not allow a dividend exclusion (if taken) back to income. But Maryland has had its own interest exclusion, while the federal tax laws didn't provide one prior to 1981.
In view of the new--and 1981 only--federal interest exclusion, Maryland has eliminated its own for this year. But the dividend add-back still stands.
The federal exclusion does not differentiate between sources; that is, the $200 (or $400) deduction may be applied against interest, dividends or the total of both.
But Maryland taxpayers must make that distinction for the state return. If you reported on your federal return more than $200 ($400) of income from taxable interest alone, no addition is required in Schedule C of the Maryland return. But if you reported less than $200 ($400) in interest income, any balance of the exclusion taken is attributable to dividend income. That balance--the difference between taxable interest reported and total exclusion claimed on the federal return--must be entered on line 51 of Schedule C of Maryland Form 502.
Then on Schedule D subtract from federal income interest on U.S. obligations and any state tax refund reported as income on your federal return.
Also exclude--to the extent it was included in federal income--any capital gain realized on sale of bonds issued by the State of Maryland or any of its political subdivisions.
Maryland allows the exclusion of up to $7,400 of pension income if you were 65 or older or totally disabled on Dec. 31, 1981--but reduced by any Social Security or Railroad Retirement benefits received.
Then you may subtract 20 cents a mile for the use of your car in volunteer work for certain charitable purposes, if unreimbursed. This item is expanded for 1981 to include transportation assistance provided to handicapped students in a state community college, other than commuting to and from the college. Use From 502-V to show your calculations.
The Maryland tax benefit for dependent care expenses is an adjustment to income rather than a tax credit. Subtract from income an amount equal to five times the amount of the federal tax credit taken.
You may also reduce your income by an amount equal to one-half of all political and newsletter fund contributions, up to a maximum of $50 ($100 on a joint return).
Deductions. The standard deduction is equal to 13 percent of Maryland adjusted gross income (line 5 of Form 502) up to a ceiling of $1,500 per taxpayer ($3,000 on a joint return).
If you use the standard deduction on a combined separate return, it must be computed on the income of each spouse separately.
You may itemize even if you used the ZBA on your federal return--but then total itemized deductions may not exceed the federal ZBA amount.
Itemized deductions on the Maryland return are the same as on the federal return with two exceptions. You must eliminate the deduction for state and local income taxes. And a qualifying artist may include as a deduction the value of his own art works donated to certain Maryland museums. (See Form 502-AC for details.)
Tax computation. After computing the Maryland tax from either the tax table or tax rate schedule, you must add the local "piggyback" assessment to determine your total tax liability.
The local rate is 50 percent of the state tax in every county (and Baltimore City) except for the following: Calvert County, 20 percent; Charles County, 45 percent; Queen Anne's, 40 percent; Talbot, 30 percent; and Worcester, 20 percent.
In addition to the income reduction for political contributions, Maryland makes provision on its tax forms for each taxpayer to contribute voluntarily $2 to the State Fair Campaign Financing Fund. If you elect this payment, the $2 must be added to your normal tax liability.
Property tax credit. Maryland does not offer a property tax credit as a part of the income tax system. But for your convenience an application for the Maryland homeowner's property tax credit (Form HTC-60) is included in the insruction booklet.
Do not attach Form HTC-60 to your income tax return, and do not forward it in the same envelope with the tax return. Two separate envelopes are included in the instruction booklet--gray for your income tax return, blue for mailing the homeowner's tax credit application.
There is a Maryland personal property tax credit available on the income tax return--but it applies only to state personal property tax paid on property used in a trade or business.
If you are eligible for this credit, use Maryland Form 502-CR; and include the amount of the tax for which credit is claimed in Schedule C of Form 502, as an addition to federal adjusted gross income.
Virginia taxpayers have a choice of four filing categories: single, married filing jointly, married filing separate returns or married filing separately on a combined return.
A Virginia joint return is only authorized if you filed a joint federal return or if neither of you was required to file a federal return.
You may use the "combined separate" category regardless of whether you filed your federal return jointly or separately.
Combined separate filing is usually the better method if both spouses had Virginia taxable income. But try both joint and combined separate returns to see which gives you the lower total tax.
If you file using the combined separate status, use Column A for the wife's calculations, Column B for the husband. All other filers should use Column B only.
Exemptions. The number of personal and dependent exemptions--each worth $600 a year--is the same as on the federal return. But in addition to the normal extra exemption for age, there is a further $400 allowance for each taxpayer (but not dependent) who was 65 or older on Dec. 31, 1981.
Income. There are very few changes required to adjust federal income for Virginia tax purposes. You need only add to federal income any interest received on bonds or other obligations issued by other states, and all or part of a lump sum distribution reported on federal From 4972 or 5544.
Then subtract interest received on federal obligations; any state tax refund reported as income on the federal return; and the $400 allowance for being 65.
If you received retirement income from the State of Virginia, its agencies or any Virginia jurisdiction, all of such income is exempt from Virginia income tax.
Adjustments to income. Virginia automatically allows all adjustments you claimed on your federal return. The starting figure on the Virginia return is federal adjusted gross income after adjustments.
Deductions. The standard deduction is equal to 15 percent of adjusted gross income (line 5 of Form 760) not to exceed $2,000--but at least $1,300 regardless of income. For married filing separately, the maximum is $1,000, the minimum $650.
Note: If you reported a lump sum distribution, the 15 percent is applied against the total of adjusted gross income (line 5) and such distribution (line 23).
You may itemize only if you itemized your federal return. If itemized deductions on the federal return exceeded the ZBA, you must itemize your Virginia return.
Itemized deductions (or the standard deduction, if used) may be allocated to either spouse on a combined return, and should be used for the one having the greater income.
Virginia deductions are the same as federal except for the exclusion of any deduction taken on the federal return for state or local income taxes paid.
Since you only transfer a single figure for deductions from the federal to the state return, be sure to use the total from line 39 of federal Schedule A rather than the excess (after subtracting the ZBA) on line 41.
Child care. Virginia authorizes a separate deduction for child and dependent care, available even if you take the standard deduction and do not itemize.
Since this is a deduction and not a tax credit, multiply the federal credit by five to get the Virginia deduction. Use Part V of Form 760, and attach a copy of federal Form 2441 to your Virginia return.
Tax credit for the elderly. You may qualify for a tax credit if you were at least 62 on Dec. 31, 1981, had adjusted gross income of less than $16,062, and had less than a specified amount of Social Security or Railroad Retirement Act benefits.
The credit base for each age group and the instructions for claiming the credit are found in Part VII of Form 760. Additional information and detailed qualifying rules are on page 8 of the tax instruction booklet.
Nongame wildlife program. A new line has been added to the Virginia tax return to permit you to donate any part or all of your tax refund (if one is due) to support the state conservation program for wildlife.
If you enter an amount on line 10 of Form 760S or line 20 of the 760, that amount will be deducted from your tax refund and turned over to the Commission of Game and Inland Fisheries. If you itemize next year, your contribution may be deducted on your 1982 federal tax return.