The tax credit for energy-related expenses initiated in 1978 continues through calendar year 1985. There are two types of energy credits: energy conservation measures and renewable energy sources.
Energy conservation includes insulation; storm windows and doors; a more efficient replacement burner for your furnace or an electronic ignition system in place of a gas pilot light (but not a new furnace or boiler); caulking and weatherstripping; an automatic setback thermostat; and an energy-cost display meter.
A renewable energy source might be a solar, geothermal or wind system to generate energy or to provide hot water, heat or air conditioning.
Each type is subject to its own rules and restrictions, but there are two requirements applicable to both:
* The equipment must be for your principal resience (including a condominium or cooperative, a mobile home or even a rented house or apartment).
* It must be a new installation; that is, you must be the first to use it.
An energy conservation measure must have an expected life of at least three years and the residence to which it is connected must have been built by April 19, 1977. A renewable energy source must be expected to last a minimum of five years.
The credit for energy conservation measures is 15 percent of expenditures up to $2,000, equal to a "lifetime" ceiling of $300 on cumulative credits for the entire period through 1985.
The cumulative ceiling on the credit for renewable energy source installations is $4,000, based on an allowable credit of 40 percent of up to $10,000 in expenditures. Earned tax credit
The earned income credit is generally limited to "family" taxpayers: You must be either married and filing a joint return or the head of a household.
You also must have some form of earned income during 1982 to qualify. This includes earnings from self-employment in addition to wages or salary, tips and commissions.
Both your net earned income and your adjusted gross income must be less than $10,000. If you are married, this ceiling applies to the combined total for both spouses.
You may not claim the other tax credits discussed above in an amount greater than your tax liability. But if you qualify for an earned income credit that exceeds your tax liability, the difference will be sent to you in the form of an IRS refund check.
If you received advanced payments from your employer in anticipation of qualifying for an earned income credit, the amount of those advance payments must be added to your tax liability.
But do not subtract advance payments from the credit itself to come up with a net amount. After you have computed the credit on the worksheet in the 1040 or 1040A instruction booklet, enter the full amount on the proper line on your return.
Then make a separate entry (on line 19b of Form 1040A or line 58 of the 1040) of the total of advance payments, as shown on the year-end Form W-2 from your employer, as an addition to your tax liability. Other taxes
The next section of Form 1040 deals with various other elements that make up your total tax liability.
For example, if you had $400 or more in earnings from self-employment, you must complete Schedule SE to determine if you owe Social Security tax (FICA). Or you may owe FICA tax on tip income not reported to your employer.
If you're a high-income taxpayer with considerable tax-shelter income, you may be liable for a "minimum tax." Recapture of an investment tax credit taken in an earlier year may be required if you dispose of the property soon after purchase.
A tax penalty on early withdrawals from an IRA goes in this section, along with advance payments of earned income credit received from your employer during the year. Overpayment or a balance due
Now you're ready to determine your total tax liability by subtracting all tax credits (except the earned income credit) and adding any of the other taxes you have incurred.
Then you can apply against that total tax all payments or other types of allowable credits. For the majority of taxpayers the most important of these--perhaps the only one--is the amount of federal income tax withheld from your wages by your employer.
This amount comes from the Form W-2 issued to you. If you worked at more than one job during the year, be sure to add the figures from all W-2s. Enter the total on line 8 of Form 1040EZ, line 17b of 1040A or line 60 of the 1040.
On line 61 of Form 1040, enter the total of all estimated 1982 tax payments made plus any part of a 1981 tax refund you asked to be applied to your 1982 tax liability.
Then on line 62 of the 1040 or line 17c of the 1040A, enter the amount of earned income credit for which you qualify from the worksheet in the instruction booklet.
Enter on line 63 any tax payment you had sent in with Form 4868 if you had requested an extension of the due date for filing your return.
If you worked for more than one employer during 1982 and a total of more than $2,170.80 was withheld for Social Security (FICA) tax, you should claim the overpayment on line 64 of Form 1040. The amount claimed must be supported by the W-2 forms attached.
In adding up the total FICA withheld, do not include more than $2,170.80 from any one employer. If a single employer withheld, by mistake, more than this ceiling, you must claim the refund from that employer rather than from the IRS.
Other allowances against your tax liability affect only a relatively few taxpayers in the Washington area: the special fuels credit and the regulated investment credit.
Finally, add up all of these payments or credit allowances and subtract the total from your total tax. If the tax is larger than the payments, you owe Uncle Sam the difference; send a check along with the tax return.
But if the total tax liability is the smaller of the two numbers, smile! You have a refund due. The IRS will send you a check for the full amount if you wish, or you may have all or part of the refund applied against your 1983 estimated tax by entering an amount on line 70. Income averaging
If your income in 1982 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:
* You must have been a U.S. citizen or resident during the five year period from 1978 through 1982.
* 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 1981 or prior years does not disqualify you for 1982 if you meet the tests again this year.
The IRS has revised Schedule G for 1982 to make it easier to complete than in past years. The new instructions are quite clear and lead you by the hand through each step of what might appear to be a complicated procedure.
IRS Publication 506 provides helpful information, including details of restrictions that might require some off-form calculating--particularly if your marital status changed during the five-year period.
For instance, if you were married, divorced, then remarried during the past five years, you may have filed a joint return, then single returns, and now a joint return with your new spouse. It is necessary to identify and track your individual income and your present spouse's income to come up with the correct numbers for a 1982 Schedule G.
But if your income has gone up substantially for 1982, the potential tax savings may make it all worthwhile. Give it a try.
To complete Schedule G, you must have copies of your federal income tax returns for the years 1978 through 1981. 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. 1983 Estimated tax
A taxpayer who is self-employed or who expects to have considerable income for 1983 that is not subject to withholding must make special arrangements to comply with federal pay-as-you-go rules.
New withholding rules established by the Tax Equity and Fiscal Responsibility Act of 1982 should reduce the number of people who will need to file federal tax estimates. (TEFRA does not apply to state income tax, so you may still be liable for a state estimate.)
Starting Jan. 1, income tax was required to be withheld from a wide variety of pension and annuity payments. Some payers who had difficulty getting their accounting systems geared up by Jan. 1 were granted delays until later in the year.
Included for withholding are taxable distributions from pension, profit-sharing and stock ownership programs, IRA accounts and most commercial annuity plans. But any recipient may elect, for any reason, not to have tax withheld from these payments.
The payer for your plan is required to inform you of this option. If you are already retired, you should have been notified by last December and given the opportunity to waive withholding or to file a withholding certificate indicating your tax status if you wanted tax to be withheld.
On July 1, 1983, withholding is scheduled to start on most dividend and interest earnings. Withholding is required whether the dividend or interest payment is distributed to you in cash or credited to your account.
There is a long list of exceptions to the withholding requirement. To the individual taxpayer, the most important of these are IRA, Keogh and employe retirement plans that are in the accumulation stage. Earnings in these tax-deferred programs can grow without being reduced by tax withholding, but later distributions from any of these plans will be subject to withholding.
Low-income individuals will be exempt from withholding on interest and dividend earnings. If your tax liability for the preceding year didn't exceed the amount shown for your filing status, you may request exemption from withholding:
* Single individual under 65: $600.
* Single, 65 or older: $1,500.
* Married persons filing a joint return, both under 65: $1,000.
* Married filing a joint return, one or both spouses age 65 or older: $2,500.
Payers of interest, but not of dividends, may--and probably will--elect not to withhold tax on payments that are not expected to exceed $150 on an annual basis. The payer is not required to combine payments made on different accounts to the same individual in applying this test.
Despite the new withholding rules, however, you may be required to file an estimate if you expect to owe the IRS a balance of more than $300 when you file your 1983 tax return next year.
The requirement for filing an estimate is waived if you fit any one of these categories:
* You expect that your gross income for 1983 will not include more than $500 of taxable income not subject to withholding.
* Your gross income is not expected to exceed $5,000 if you are married but not entitled to file a joint return.
* Your gross income is not expected to exceed $10,000 if you are married, file a joint return and both you and your spouse are employed.
* Your gross income is not expected to exceed $20,000 if you fit any other tax category.
Although the rules specify a $300 deficiency as the trigger for filing an estimate, you may not have to pay any estimated tax even if your figures show an expected deficiency greater than that amount.
That's because you ar not required to pay the full amount of tax that you estimate, but only 80 percent of that amount. So if your estimated withholding for the year will equal or exceed 80 percent of your estimated tax, you can forget the whole thing.
But if your income is uncertain, you may want to pay an amount greater than 80 percent of your estimated tax, to avoid the imposition of a penalty if your total payments turn out to be lower than the 80-percent floor when you file your return in 1984.
And there are further exceptions that can relieve you of liability for any penalty. For example, if the total of tax withholding and estimated tax payments during 1983 equals or exceeds your total tax liability for 1982, there is no penalty. Take a look at Form 2210 for the other exceptions.
If you filed estimated tax for 1982, the IRS probably sent you a 1040-ES package in late January. If not, and you think you may be liable for estimated tax this year, pick up a package at any IRS office.
The 1040-ES package includes a worksheet for estimating your final tax liability. Be sure to use the tax rate schedules in the 1040-ES package, not the 1982 tax tables or schedules. The latter do not reflect the 1983 tax reduction.
In addition to the worksheet, the package contains four payment vouchers. You may pay the entire estimated deficiency with the first voucher by April 15. If you prefer, send one-fourth of the total due with that first voucher, then additional payments of one-fourth each by June 15 and Sept. 15 of this year and Jan. 16, 1984.
If you end up with an overpayment on your 1982 tax, you may elect to have all or part of the overpayment credited against your 1983 tax instead of being refunded to you. Each of the estimated tax vouchers provides a space for claiming credit for that overpayment. The entire credit may be taken on the first voucher of the total spread over all four vouchers.
If your estimate of eventual tax liability changes during year, simply adjust the remaining payments to correspond to the new balance due, whether more or less than your original estimate.
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 of the estimated deficiency into the remaining number of payments.
There is an alternative to filing estimated tax. 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.
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, if your employer agrees.
By this arrangement with your employer you may ensure having enough money withheld to cover your entire tax liability, eliminating the need to file estimated tax.
Incidentally, you may also file a new Form W-4 to reduce the amount withheld from your pay for federal income tax if your tax situation has changed or you have been getting a large refund every year.
When completing the new W-4, you are permitted to claim additional withholding allowances if you expect to have large itemized deductions, an adjustment for alimony payments, a credit for child care expenses or almost any other item likely to reduce your tax bill at year-end.
But don't reduce withholding below the correct level just to generate more current take-home pay. You may find yourself with a big tax bill next April plus an interest penalty for underpayment.
If you goofed last year and the balance due on your 1982 tax is $200 or more, you should complete Form 2210 to determine if there is any penalty due on the shortfall. If there is, include the penalty amount with your tax payment.
However, there are several exceptions which make it possible to avoid the penalty. Form 2210 explains these in detail. If you meet any of the criteria, attach completed Form 2210 to your return to justify the deficiency and the absence of a penalty payment. Preparation tips
The single most important thing you can do to simplify the annual chore of preparing your tax return is to keep good records all year.
You don't need a complicated record-keeping system. Unless there are special circumstances, you need only have a file folder or large envelope in which you put tax-related information during the year.
This means bills, receipts and canceled checks for any transaction with a tax impact, like taxes paid, interest charges, charitable contributions and medical expenses.
If you don't have a supporting document for a transaction, or if its purpose is not self-evident, jot down a brief explanatory memo. Don't trust your memory. By tax time you may no longer remember why you have good old what's-his-name a check for $100 a year ago.
If you claim job-related expenses, you should have a diary or log of daily travel (both mileage and expenses) and notes of the places, people and business purpose to support claims for entertainment.
In addition, you should have a separate receipt for each individual expense of $25 or more. If properly annotated, a credit card charge slip usually will meet this requirement.
Whether you prepare your own return or use a commercial preparer, the tax return will reflect the quality of your records. Well-documented and organized records should result in a more accurate return--and a lower fee, since the preparer will 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.
And if you run into a problem it's easier now, before the last-minute rush by all the procrastinators, to get help from the IRS or from a commercial preparer.
If you owe additional tax, you can hold the return for mailing on 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 you're satisfied that it's complete and correct. 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 chance for 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
Be sure to use the correct column of the tax table or the correct tax schedule for your filing status. Remember that the table and schedules already allow for the zero bracket amount, but personal and dependent exemptions are not built in and must be subtracted by all filers regardless of which tax form is used. Check your work
When you're done, check your work; better yet, have someone else check it for you. In particular, review all arithmetic and make sure you have carried the right numbers from each supporting schedule to the correct line on the return. 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 by the 15th of April.