If any single piece of legislation can truly be called "omnibus" (the translation from Latin is "for all"), it is the Economic Recovery Tax Act of 1981.
Elsewhere in these pages, you will find a summary of the major elements of the act. These include tax reductions for the wealthy and not-so-wealthy; tax incentives for saving, for retirement planning, for investing; a small break for charitable contributions, a larger break for two-earner families and a very large break for overseas workers; and the elimination of estate tax for almost everyone.
The purpose of this 1982 Tax Guide is the same as it has been for the 10 tax guides that preceded it: not to talk about what might have been or what should be, but rather to help you understand what is.
The 1981 tax act provides for changes in various parts of the tax structure for years to come. As you make your way through the following pages, you will find that the emphasis is on the things you need to know to prepare your 1981 tax return.
But we're already into 1982, so we also will point out changes that affect this year's taxes, to help you develop tax strategy for the current year. And we will also give you a hint, from time to time, of what's ahead in the area under discussion.
We'll try to make crystal clear which tax year or years we're talking about. Please read very carefully, and keep things sorted out -- we don't want to find that your return has popped up for audit because you anticipated a 1982 or 1983 change on your 1981 return.
With those introductory comments out of the way, let's get right to it:
Your federal income tax return for 1981 must be postmarked no later than midnight Thursday, April 15.
If you can't make the deadline, don't ignore it. You can get an extension to June 15 by filing IRS Form 4868 by April 15. But you must estimate your tax on that form, and pay any estimated deficiency when you file the request for extension.
If you're out of the country on April 15, you get an automatic extension to June 15. You don't need to request it, but when you file your return write "Outside United States on April 15, 1982" in the blank space in the "Filing Status" block.
Any payment due should be attached to your tax return unless you have asked the IRS to figure your tax. Make the check or money order payable to "Internal Revenue Service," and enter your Social Security number on the payment. Do not send cash.
If you live in Maryland or the District, send your federal return to the Internal Revenue Service Center, Philadelphia, Pa. 19255.
Federal returns of Virginia residents go to the Internal Revenue Service Center in Memphis, Tenn. 37501.
If you received an instruction booklet from the IRS, use the peel-off label from the booklet on the return. Make any necessary corrections to the information. If you use a professional preparer, provide the preparer with the instruction booklet you received, or at least the page with the label.
This label does not contain any special coding to identify a potentially troubling return. It permits optimum use by the IRS of their expensive automated equipment, saving employe hours and taxpayer money.
Most of the changes in the new law do not apply to 1981. So if you prepared your own 1980 return, you should be able to handle your 1981 return, too. But be prepared to spend considerable time in research, particularly if your return contains anything other than the normal income and deduction items.
If you need more detailed instructions than are given in the information booklet that accompanies your tax forms, pick up a copy of IRS Publication 17, "Your Federal Income Tax," at your local IRS office.
Taxpayers who are more fluent in Spanish than in English should get a copy of Publication 579S.
There are also a number of free IRS pamphlets available, each relating to s specific area of the tax law. Although the language sometimes gets a little technical, for the most part the explanations are easy to follow.
If personalized help seems necessary or you want an answer to a specific question, you can get free advice and assistance from the IRS, either in person at any IRS office or by phone over special taxpayer assistance lines.
Budget restrictions are likely to reduce the number of people assigned to taxpayer assistance this year. You can expect longer lines at IRS offices, more "busy" signals if you phone. So it is even more important than usual to get an early start on your return to beat the last-minute rush.
Taxpayers who live in the District or in Montgomery or Prince George's County, should call 488-3100 for help. Residents of Northern Virginia are served by the Baileys Crossroads office; the number there for taxpayer assistance is 557-9230.
You will generally get good information from the people at the local IRS offices. But during the height of the tax season, the taxpayer assistance staff is augmented by part-time and temporary help with limited training.
It may seem strange, but the government is not bound by the advice you receive. If your return is audited, citing advice from an IRS employe will not get you off the hook if it turns out that the advice was wrong.
Should you decide to use a professional tax preparer, you have a pretty wide choice. Local tax preparation offices pop up every January in homes, offices and stores. An independent preparer may be a housewife or retiree who has read a tax book or taken a short course in tax preparation. Or he or she might be a highly skilled accountant who works for the government or private industry and "moonlights" for a few months for the extra income.
The large chain operations can generally give good service at low cost if you have a fairly routine tax situation. As a rule, however, they are not geared to handle a complex return or an unusual situation. In recent years, a couple of the large chains have offered an "executive service" for more complicated circumstances.
If you think an independent preparer or chain can't handle your return, you can turn to a public accounting firm or a tax attorney. As you might expect, their fees are generally higher than the others.
Tax preparers who are neither attorneys nor certified public accountants may take a comprehensive examination given by the IRS. Those who pass the exam are known as enrolled agents."
An enrolled agent may not have a broad background in general accounting or law, but he is usually competent in tax matters and, in fact, may be more knowledgeable than an attorney or CPA whose area of specialization lies elsewhere.
Whatever level of professional assistance you select, be sure the preparer (or parent firm) will be around all year to assist in answering queries from the IRS. Many of the local operations disappear after April 15.
Whoever prepared your return may accompany you or represent you at an IRS audit. But only a CPA, attorney or enrolled agent may represent you at the higher appeal levels of the IRS or in the tax courts.
There are no federal or state licensing procedures that might eliminte the unscrupulous or incompetent tax preparer, so you're really on your own. The experiences of friends and neighbors may be your best guide to satisfactory service.
Regardless of the qualification of the preparer, you have full and final responsibility for the accuracy and legality of your return. You should understand and agree with every word and number on it.
A qualified preparer should be familiar with many tax avoidance techniques for legally reducing your tax liability. But tax evasion -- the reduction of taxes by deliberate misstatement or omission -- is against the law. So stay away from anyone who tries to tell you what you can "get away with."
If the person who prepares the return cannot or will not answer your question or explain the entries, go elsewhere. Never sign a blank tax return or one that has been filled out in pencil.
Anyone who prepared the tax return for another for pay must sign the return and enter his identification or Social Security number. The preparer must give you a copy of the return at the same time he presents the original for your signature.
Be wary of a preparer whose fee is based on a percentage of your refund or of the "tax savings" he finds for you. Fees should be based on the complexity of the return and the time it takes to prepare it. Who Must File
Liability for filing a federal income tax return is determined by a combination of total taxable income, age and marital status. The rules for 1981 are unchanged from 1980.
Filing minimums for the various categories of taxpayers and the normal number of personal exemptions -- each worth $1,000 -- for each category are shown in the accompanying table.
Special rules. You must file a return regardless of tax liability or income:
* To claim a refund of income tax withheld from your pay.
* If you are entitled to a refund solely as a result of the earned income credit.
* If during 1981 you received advance payments of the earned income credit from your employer.
* If you are eligible to be claimed as a dependent on your parent's return and you had taxable interest, dividends or other unearned income of $1,000 or more.
* If you had net income of $400 from self-employment. Which Form to Use
Any taxpayer who wishes may use form 1040, the long form. But changes in reporting rules have made the short form, 1040A, available for many more taxpayers. You should use 1040A if you meet these requirements:
* Your 1981 income is less than $50,000 (a large increase over the 1980 limit).
* Your income consisted only of wages or other employee compensation, interest, dividends and unemployment compensation. (In 1980 you couldn't use the short form if you had more than $400 of interest or dividend income.)
* You use the zero bracket amount and do not itemize deductions.
* If you don't meet all three of these criteria, you must use form 1040. The long form is also required if you claim any adjustments to income, such as moving expenses, an IRA or Keogh investment, alimony payments or a disability exclusion.
Form 1040 is mandatory if you are entitled to the credit for the elderly, for child or dependent care expenses or for residential energy expenditures. But you can claim the credit for political contributions as well as the earned income credit on form 1040A.
Form 1040 must also be used if you compute your tax liability by income averaging, or if you paid estimated tax for 1981 or wish to apply part or all of any 1981 refund to your 1982 tax liability.(Illegible Word)
Finally, you must use Form 1040 if you may be claimed as a dependent on your parent's return, had $1,000 or more in unearned income and had earned income of less than $2,300 ($1,700 if married filing separately); or if you file as a qualifying widow or widower, as explained elsewhere.
There may be some good news ahead. The IRS is in the middle of a long-term simplification project, directed by Congress in 1978. Some 30,000 taxpayers in Georgia will get a new "short form" with simplified instructions this year.
Use of the new form will be optional; the standard 1040A will also be available. But the IRS hopes that enough people try the new form to provide a good test. Users of the new form will also be asked for comments. Put Down That Pencil
Now that you've decided which form to use, you're ready to turn on the calculator and start entering numbers. Right?
Wrong! Before you put pencil to paper, take a little time to sort out and review all the bits and pieces of information you have been collecting all year.
Separate all your records into the various categories. On the income side, you may have W-2s for wages or salary from your employer; 1099s for interest from banks, S&Ls and credit unions; dividend statements for corporate stock and mutual funds; information returns from a limited partnership or small business corporation; and perhaps distribution statements from an estate or trust.
On the other side of the ledger, you may have information on such things as child care expenses, contributions to an IRA or Keogh plan, moving expenses political contributions, energy expenditures and the various Schedule A deductions.
After you have all the pieces of paper sorted out, take a few minutes to thumb through your checkbook stubs and any budget records you keep for deductions you may have missed.
Then, if you've stated early enough and time is on your side, you may want to wait a couple of days before starting on the actual preparation of the return. Your subconscious mind may just dredge up some major item of perhaps a year ago that you had completely overlooked.
Only then -- when you're satisfied that you have all the pertinent items of information sorted and available -- are you ready to pick up the pencil and begin to work. Your Filing Status
Your filing category is determined by marital status, living arrangements and the people who are dependent on you for support.
This is not simply a matter of checking the right box at the top of the tax return. It determines the column you use in the tax table or the tax rate schedule you use and, of course, finally it affects the amount of your tax.
If you were married on Dec. 31, 1981, you are considered by the IRS to have been married for the entire year, and you may file a joint return. If you are unmarried on that date -- either single, divorced or legally separated -- then for income tax purposes you are considered to have been single for all of 1981. If You Were Married
* You may elect to file separate returns even if you were married, but most couples will pay less tax if they file a joint return. In only a few cases -- usually when both husband and wife have substantial independent incomes -- will separate returns be the better method.
If you do file separate returns, you must both use the same method for computing the tax. That is, if one itemizes deductions, the other must also itemize and may not use the zero bracket amount.
Beginning with the 1982 tax year, a couple filing a joint return when both husband and wife are employed may exclude a part of the income of the lower-earnings spouse. This new provision will eliminate some of what has been called the "marriage tax kpenalty."
* If you and your spouse were living apart but were not legally separated, you may still file a joint return. This may result in a lower combined tax than filing separately -- but each of you is then individually responsible for the entire tax.
* If you were married but living apart from your husband or wife for the entire year, you may file as a single individual if you paid more than half the cost of maintaining your home during 1981 and your home was also the principal home of your dependent child for more than six months of the year. Filing as single will generally produce a lower tax than the "married filing separately" category. If You Were Recently Widowed
* If your husband or wife died during 1981 and you had not remarried by Dec. 31, you may file a joint return and claim the exemption for your deceased spouse. Sign the return yourself, then enter "surviving spouse" under your signature. Write the date of your spouse's death in the name and address space at the top of the form.
If you are due a refund on the joint return, file form 1310 with the return to document your right to the refund. Do not send a copy of the will or death certificate with the return.
If an executor or administrator has been appointed for the estate, he may have filed, or may intend to file, a separate "final return." In any case, the estate tax return, if one is required, is likely to have an impact on your income tax return. If the executor is not himself a professional, you may need help in this situation.
* If your husband or wife died during 1979 or 1980 and you had not remarried by the end of 1981, you may be eligible to file as a "qualifying widow(er)" if you meet all three of these tests:
1) You were eigible to file a joint return in the year of your spouse's death, whether you actually filed that way or not.
2) Your home was the main home during 1981 of a child whom you claim as a dependent.
3) You paid more than half the cost of maintaining that home for the entire year.
If you qualify, use the joint return tax rates, but you may not claim a personal exemption for your deceased husband or wife; the personal exemption can only be taken if death occurred in 1981. If You Were Single
If you were not married on Dec. 31, you may qualify for filing as "head of household" -- and for the lower tax rates that go with that status -- if you meet any one of these tests:
* You paid more than half the expense of maintaining your home which was also the principal home all year of your unmarried child, stepchild, foster child or grandchild, whether or not the child qualified as your dependent.
You paid more than half the cost of up-keep for your home, which was also the principal home of any other relative you claim as a dependent (but not a dependent under a mutual support agreement).
You paid more than half the cost of maintaining a home that was the principle home of your dependent mother or father, even if you didn't live in it yourself. Personal Exemptions
Each taxpayer is allowed a single personal exemption, which eventually is translated into a $1,000 income exclusion on the tax return.
In addition to this basic personal exemption, a person who is 65 or older or legally blind may claim an extra $1,000 exemption. (If your 65th birthday was Jan. 1, 1982, you may take the extra exemption on your 1981 return.)
These additional exemptions for age and blindness are available only to the filing taxpayer (both taxpayers on a joint return). They may not be claimed for a dependent.
To claim an exemption on your tax return for a dependent, he or she must meet five tests:
* Citizenship or residency test. A dependent must be either a U.S. citizen or have resided in the United States, Canada or Mexico during 1981. This test is waived for an alien child adopted by and living with a U.S. citizen in a foreign country.
* Relationship/member of household test. A relative as defined in the instruction booklet (page 7 of the 1040 booklet, page 9 for 1040A users) need not have lived in your home to qualify as a dependent.
If you file a joint return, a dependent meets this test if related to either spouse. Once a qualifying relationship is established, it doesn't end because of death or divorce. For example, if your spouse has died you may continue to claim your former faither-in-law as a dependent, even if you have remarried.
A dependent who is not related must have lived in your home for the entire year. Absence at school or for medical treatment is not disqualifying if your home was his home when not away.
* Income test. To qualify, a dependent must have received less than $1,000 in income during 1981, but count only income subject to tax. Do not include, for example, bona fide gifts, Social Security payments, interest on tax-exempt securities or nontaxable scholarship payments.
The income test is waived for a child who was under the age of 19 on Dec. 31 or who was a full-time student (regardless of age) during any five months of the year.
* Support test. To claim an exemption for a dependent, you must have provided more than half of his support during 1981. Unlike the income test, all income of the dependent (except scholarships), whether taxable or not, must be considered in determining how much the dependent contributed to his own support.
However, only income that was actually spent by the dependent on items of support -- necessary living expenses or capital items such as a car or TV set -- need be included in the calculation.
Do not count as support any money your dependent deposited in a savings account unless he withdrew it later in 1981 and spent it on support. Money paid for life insurance premiums, income tax payments or Social Security contributions by the dependent should also be excluded.
Include, in your contributions to support such basic living expenses as lodging, food, clothing, medical care and education, as well as capital items bought for the dependent's own use (but not items bought for the entire household).
If the dependent lived in your home, count the fair market value of the lodging provided, but only the actual cost of food or other support elements.
If you provided separate living quarters, such as an apartment for an elderly relative, count the cost to you of that housing. But if your parents lived rent-free in a house you owned, use the fair market value based on comparable housing rather than the cost.
* Joint return test. Normally a married person who files a joint return with his or her spouse may not be claimed as a dependent by another taxpayer, except in the case of a joint return filed solely to obtain a refund of taxes withheld.
However, you may claim an exemption for a married dependent who meets the other tests if the dependent's spouse files a separate return and doesn't claim an exemption for your dependent.
As a general rule, a divorced parent who had custody of a child for the greater part of the year may claim the child as a dependent. But the other parent may take the exemption if the divorce decree or separation agreement says so and he or she contributed $600 or more to the child's support during 1981.
In the absence of a specification in the agreement, the noncustodial parent may still claim the exemption if he or she provided at least $1,200 for support and the parent having custody can't prove a larger contribution to the child's support. Reporting Your Income
The first step in arriving at your tax liability is to determine the amount of your income.
Different kinds of taxable income are reported in different ways on your return. The accompanying table lists the principal types of taxable income and tells you where to report each type.
If you want more information about any category, check out the IRS publication shown. These are all available either by mail by using order blanks in your tax package or in person at any IRS office -- and they're free.
Not all income is subject to tax. Here are the major kinds of income that should not be reported on your federal tax return (state requirements may be different):
* Social Security benefits.
* Veterans Administration payments.
* Disability retirement pay from the armed forces.
* Gifts or bequests:
* Interest on state or municipal bonds, and specified dividends from tax-free mutual funds.
* Interest or dividends accumulating in a Keogh or IRA account or a retirement annuity.
* Dividends on a life insurance policy, unless the accumulated total exceeds total premiums paid.
* Military allowances and certain cost-of-living allowances for U.S. civilian employes overseas.
* Child support payments.
* Workman's compensation payments for injury or illness.
* Amounts received in a civil suit as compensatory damages.
Interest received or credited to your account in 1981 on an All Savers tax-free certificate must be reported, on Schedule A if you use form 1040 or on page 2 of the 1040A.
The amount of such interest is not simply omitted from the return. Instead, it must be listed, then balanced against the exclusion ceiling to determine if any part of the interest is taxable.
In addition, you must report and pay tax on all interest you received on an All Savers certificate you redeemed before maturity. Income Adjustments
After you have added up your income, you should check to see if you qualify for any adjustments to income. These adjustments reduce the amount of income on which you pay tax. They may be claimed regardless of whether you itemize deductions or take the zero bracket amount.
Moving expenses. If you changed your residence during 1981 to work at a new location -- either for the same or 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 kgreater than the distance between your old residence and your former job.
2) You must work in the new area, though not necessarily for the same employer, for at least 9 weeks in the 12-month period following the move. If self-employed, you must conduct your business full-time for at least 39 weeks in the first 12 months and a total of 78 weeks during the 24 months after the move.
This test is waived if termination of employment is due to death or disability, transfer for the employer's benefit or discharge other than for willful misconduct.
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 -- transportation, meals and lodging -- may be deducted. If you go by car you may use either out-of-pocket expenses for gas, oil and repairs, or a flat nine cents a mile. In either case you may add tolls and parking fees. Do not claim the cost of miles driven for sight seeing or to visit friends or family.
The cost of moving your household -- including packing and crating, insurance and any necessary storage -- is deductible. But charges for connecting or disconnecting appliances or refitting carpets or draperies are not.
Subject to specified dollar limits, you may deduct the cost of travel, meals and lodging for up to 30 days if you had to stay in temporary quarters after moving to the new area.
Finally, you may count 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.
If you were reimbursed in whole or 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 W-2.
Moving expenses are accounted for on Form 3903 and explained in Publication 521. U.S. citizens or residents who move to a work area outside the United States or its possessions should use Form 3903F.
Employe expenses. An outside salesperson -- one who sells away from his employer's place of business -- may deduct all necessary 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 employe who is not an outside salesperson may be claimed only as itemized deductions on Schedule A. But certain business travel and transportation expenses may be deducted as an adjustment even if you do not itemize.
If you traveled away from home overnight or longer on business, deduct the costs of transportation (to and from your destination plus local travel while there), meals, lodging and reasonable incidentals such as tips.
The cost of communiting between your home and work is not normally deductible. But if you worked at two or more different places on the same day -- either for the same or different employers -- you may deduct the cost of getting from one job to another.
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 vehicle for both business and personal reasons, you must allocate the cost proportionately.
* Personal property taxes paid in 1981, regardless of the year to which it applied.
* Real estate taxes paid in 1981 on your home or other property you own, but not the tax on property held for rental, which goes on Schedule E.
If the financial institution that holds your mortgage pays the real estate tax, deduct only the amount paid on your behalf during 1981, not the monthly tax payments you make into the escrow account.
* General sales tax, either the amount allowed in the table in the IRS instruction booklet or the amount actually paid if you kept a record.
In addition to the amount authorized by the table, you may claim sales tax paid on a major purchase like a car, boat or trailer. This year the IRS has added line 13b to Schedule A for the additional allowance for a motor vehicle.
Not deductible: excise taxes on liquor, cigarettes, gasoline, utility bills or transportation; hunting or fishing licenses; car tags; traffic fines; or penalties for underpayment of federal or state income tax.
Interest expense. You may deduct interest paid on a mortgage on your home or other noninvestment property; on a personal loan; on a life insurance loan if paid in cash, but not if added to the loan; on charge accounts; and interest on late federal or state tax returns.
Interest paid on money borrowed to buy tax-exempt bonds or single-premium life insurance is not an authorized deduction. And there is a ceiling on the deduction for interest paid in connection with investments. See IRS Publication 545 for details.
Prepaid or discounted interest may not be deducted when paid if the loan extends beyond the current year. Instead, the interest cost must be apportioned over the life of the loan. (If you don't know how much of each payment is interest, simply divide the total amount of interest evenly over the scheduled number of payments.)
The amount of any "points" paid by you in connection with purchase of a home normally is considered interest. But if you sold your home, points you paid to induce a lender to provide financing to the buyer is not interest. (The amount you paid, however, is a selling expense that may be used to reduce any profit on the sale.)
On the other hand, a prepayment penalty you as the seller had to pay to your mortgagee for early repayment of a mortgage is deductible as interest in the year paid.
Contributions. A comprehensive list of the types of religious, charitable and educational organizations that qualify for Schedule A deductions is found on page 19 of the IRS instruction booklet, along with the major kinds of contributions that may not be claimed.
You may deduct both cash contributions and the fair market value of property given to qualifying organizations. But there are restrictions. If the information in the instruction booklet is not adequate, see Publication 526.
Unreimbursed expenses incurred while donating personal services to a qualifying organization are deductible, including postage and phone calls, meals while contributing your services and the purchase and upkeep of specialized uniforms not suitable for general wear.
You may also deduct local transportation expenses (nine cents a mile if you use your car) and the cost of travel to attend a convention as an official delegate of a qualifying organization, including meals and lodging if away from home overnight.
But you may not deduct the value of your contributed services even if you are normally paid for the same type of work. Similarly, the value of temporary use of your property is not deductible even if it is normally rented for income.
Casualty losses. 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, not does preventive action, such as removing a dead tree before it falls. The event must be sudden in nature, like a hurricane, tornado, flood, fire, theft, vandalism or accident.
Only the unreimbursed loss is deductible. The amount of any recovery from insurance or another individual must be subtracted from the total loss. In addition, the first $100 of net loss from each separate event must be subtracted.
Employe deductions. Certain business expenses may be taken in the miscellaneous section of Schedule A if they were incurred in the course of your employment and were not reimbursed by your employer.
These include entertainment expenses, professional societies and publications, union dues, small tools and supplies, cost upkeep of specialized uniforms not suitable for wear away from work and protective clothing like hard hats and safety shoes.
If your employer requires you to have a physical examination and doesn't reimburse you for the cost, it may be claimed as a miscellaneous deduction. This may be a better deal than including it as a medical deduction, since it is then not subject to the 3 percent exclusion.
Expenses related to job-hunting may be deducted even if the search was unsuccessful. You may not claim the cost of a certifying examination or a license to practice, but these may be included as business expenses on Schedule C if you were already in business.
Military people on active duty may not deduct the cost of regular uniforms, but may claim items such as insignia and ribbons and both original cost and maintenance of work clothing that may not be worn off duty. Reservists and guardsmen not on active duty may deduct the unreimbursed cost of all uniforms.
Unreimbursed education expenses related to your work are deductible or Schedule A (other than transportation, which may be claimed as an adjustment to income even if you don't itemize).
The education must have been taken to meet the requirements of your employer or of the law to keep your present job, or to maintain or improve 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.
Home offices. If you are self-employed and use a part of your home for business, you may deduct certain expenses if the space used meets these two tests:
1) He area must be used exclusively for business purposes.
2) It must be regularly used by clients or customers or be the principal place for operating the business for which you claim the deduction.
This marks a recent change in the law. Until this year, your home office had to be your principal place of business to qualify for the deduction. So if you had a primary job elsewhere and conducted a part-time business at home, the home office didn't fualify.
Now the requirement has been eased, so you can claim the deduction if the office at home is the principal place of business for that part-time occupation even if your principal occupation is elsewhere.
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 the employer, not for your own convenience.
If the space qualifies, you may deduct expenses directly attributable to its use for business (shelving, a desk, a telephone) plus a proportionate share of general home expenses, such as light and heat.
This deduction may not be used to shelter other income from tax. The total amount of the deduction for expenses (after subtracting the allowable portion of property taxes and mortgage interest, if you own the home) may not exceed net income from business use.
Adoption expenses. A new miscellaneous deduction has been added for 1981, allowing up to $1,500 for expenses in connection with adoption of a "child with special needs."
A child with special needs is one who has been so designated under the laws of your state and who is eligible for adoption assistance payments under the Social Security Act.
Qualifying expenses include adoption fees, court costs and attorney fees. Total expenses must be reduced by all reimbursements received under any federal, state or local government program.
Adoption assistance payments from Social Security are considered "maintenance payments" rather than expense reimbursements and need not be counted as an off-set.
Other deductions. In general, you may claim any personal expense related to the production of taxable income. For example, include the cost of a safety 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. come credit is generally limited to "family" taxpayers; you must be either married and filing a joint return or the head of a household.
And you must have had some form of earned income during 1981 to qualify. In addition to wages and salary, this includes tips as well as earnings from self-employment.
Both your net earned income and your adjusted gross income must be less than $10,000. If you are married, this ceiling applies to your combined totals.
If you qualify, complete the earned income credit worksheet on page 15 of the Form 1040 instruction booklet or page 14 of the 1040A booklet.
The other tax credits discussed above may not exceed your tax liability. But if you qualify for an earned income credit greater than your tax liability, the difference will be sent to you in the form of an IRS refund check. Income Averaging
If your income in 1981 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.
There are two requirements to qualify for income-averaging:
1) You must have been a U.S. citizen or resident during the five-year period from 1977 through 1981.
2) You must have furnished at least half your own support during each of the preceding four years. (There are some exceptions to this test, explained in the instructions that accompany Schedule G, the income-averaging form.)
You may use income-averaging for every year you qualify. Averaging for 1980 or prior years does not disqualify you for 1981 if you meet the tests again this year.
If you use income-averaging, you may not apply the 50-percent tax ceiling on earned income. So if your income puts you in a tax bracket higher than 50 percent, you should compute the tax both ways -- with income-averaging, then without averaging but applying the maximum tax limitation -- to see which produces the lower tax.
The procedure for income-averaging isn't as complicated as it appears when you first look at Schedule G. If you're able to prepare the rest of your return yourself, you should be able to handle Schedule G by following step-by-step instructions.
IRS Publication 506 provides helpful information, including details of some restrictions that might complicate the procedure, particularly if your marital status changed during the five-year period.
To complete Schedule G, you must have copies of your federal income tax returns for the years 1977 through 1980. 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 they originally were filed. '82 Estimated Tax
A taxpayer who is self-employed or who expects to have substantial income during 1982 that is not subject to withholding (income from interest or dividends, for example) must make special arrangements to comply with federal pay-as-you-go rules.
If you expect that you will have a balance due to the IRS of more than $200 when you file your 1982 tax return, you must file a declaration of estimated tax by April 15, 1982, using Form 1040-ES.
This $200 figure is $100 more than the 1981 requirement; and the filing trigger goes up an additional $100 each year until it levels off at $500 in 1985.
When you send in the original estimate, send IRS one-fourth of the total estimated tax deficiency. Then make additional payments of one-fourth each by June 15 and Sept. 15 of this year and Jan. 15, 1983.
The IRS doesn't send quarterly reminders. You are responsible for remembering to send the payments by the due dates. Form 1040-ES is a four-part form with a stub for each quarterly payment.
Each stub has an area for amending your original estimate. If your estimate of eventual tax liability changes during the year, enter the new estimate on the next stub and adjust the remaining payments to correspond to the new balance due.
If you're not liable for estimated tax on April 15 but later determine that you have become liable, file an initial 1040-ES on the next regular payment date, dividing the total amount due into the remaining number of equal payments.
If, in addition to the income on which tax is not withheld, you receive wages or retirement pay subject to withholding, you may file a new Form W-4 with your employer claiming a lesser number of allowances than authorized, instead of filing a 1040-ES.
If you get down to zero allowances and want still more money withheld, you may specify an additional number of dollars to be withheld each payday, and your employer must honor those requests.
If you goofed last year and the balance due on your 1981 tax is $100 or more, you should complete Form 2210 to determine if there is any penalty amount with your tax payment.
However, there are several exceptions that make it possible to avoid the penalty. Form 2210 explains these in detail. If you meet any of the criteria, attach the completed Form 2210 to your return to justify the deficiency and to avoid the penalty. Preparation Tips
The single most important thing you can do to simplify the annual tax preparation chore is to keep good records all year.
A complicated record-keeping system is not necessary. Unless you have some special circumstance, you need only have a file folder or large envelope in which you put tax-related information during the year.
This includes bills, receipts and canceled checks for any transaction with a tax impact, such as charitable contributions, taxes, interest and medical expenses.
If you don't have a supporting document for a transaction, or if its purpose is not self-evident, write an explanatory memo. Don't trust your memory; by tax time you may no longer remember why you gave good old what's-his-name a check for $50 last March.
If you claim job-related expenses, you should have diary or log of daily travel (both mileage and expenses) plus notes of the places, people and business purposes to support claims for entertainment.
In addition, you should have a separate receipt for each individual item of $25 or more. If properly annotated, a credit card charge slip will generally meet this requirement.
Whether you prepare your own return or use a commercial preparer, the quality of your records will be reflected in the tax return. Well-documented and organized records should result in a more accurate return -- and a lower fee if the preparer can spend less time sifting through your data. Bite the Bullet
Don't wait until April 14 to start working on your return. If you get to it now you'll have more time to look for missing papers, sort out half-forgotten transactions and review the completed return.
If you run into a problem, it's easier now, before the last-minute rush by all the procrastinators, to get help, either from the IRS or from a commercial tax preparer.
If you owe additional tax, you can hold your return until April 15. Although Uncle Sam would like to get his hands on your money as soon as possible, it's perfectly legal to delay until the due date.
But if you're due a refund, send the return off as soon as possible. The IRS doesn't pay interest on a normal refund; and if you wait until mid-April your check is likely to take longer because of the heavy workload of last-minute returns. Round Your Dollars
You can simplify your work and reduce the probability of error by rounding all figures to the nearest dollar. Drop all amounts under 50 cents, and raise amounts between 50 and 99 cents to the next dollar. Table Manners
Remember that the tax table and tax-rate schedules already allow for the zero bracket amount. But for tax year 1981, personal and dependent exemptions are not built in and must be subtracted by everyone. Check Your Work
When you're done, check you work; better yet, have someone check it for you. In particular, review all the arithmetic calculations and make sure you have carried the right numbers from each supporting schedule to the proper line on the 1040. Wrap It Up
Finally, sign the return and your check, attach the payment and all W-2s to the tax form, then put the whole package in the mail before April 15.