Both the Economic Recovery Tax Act of 1981 (ERTA) and the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) have some provisions that apply to 1982 tax returns and other provisions that only affect succeeding years.
A number of the changes wrought by the two tax measures are business-related; others are of such complexity that those affected would normally be expected to employ tax accountants or attorneys.
Here are the major items of interest to the average individual taxpayer preparing his own return for 1982, as well as those changes that will have an impact on the current tax year (1983). The applicable tax legislation is identified for those interested in further research. Tax rates
After dropping 1.25 percent in 1981, all tax brackets are adjusted for a further drop of approximately 9 percent for 1982. Tax tables and tax rate schedules reflect the lower tax rates. Another 9 percent reduction is scheduled for 1983, with a final 4 percent to follow in 1984. (ERTA) Marriage tax penalty
Two-earner couples can exclude 5 percent of the earnings of the lower-earning spouse, up to a ceiling of $30,000 and a maximum exclusion of $1,500. In 1983 the exclusion doubles to 10 percent of the same $30,000 ceiling. (ERTA) Maximum tax
The maximum tax on all income regardless of source dropped from 70 percent to 50 percent on Jan. 1, 1982. This change eliminates the need for Form 4726, used in prior years to calculate the maximum tax on "personal service" (earned) income. (ERTA) Minimum tax
Starting in 1982 the minimum tax is broadened by the addition of new items to the list of preference income sources. Some, like mining exploration and development costs, are business-related; of more general interest are the All-Savers interest exclusion and the $100/$200 dividend exclusion. But there is a blanket exemption of $30,000 for single filers and $40,000 on a joint return. Overseas employes
U.S. taxpayers living and working abroad who meet certain conditions can exclude foreign earned income up to $75,000. The exclusion goes up $5,000 a year for 1983 through 1986, after which it remains level at $95,000. (ERTA) Income from tips
Employes in restaurants, bars and similar establishments are still required to report their tip income to their employers. New rule: If reported tips do not equal at least 8 percent of gross receipts from food and beverage sales, the employer must allocate 8 percent of receipts to individual employes, then report sales and tip allocations to the IRS annually. Exempt: Establishements with less than 10 employes; and sales for which a service charge of 10 percent or more is normally added. (TEFRA) All-Savers certificates
Each taxpayer is allowed a total exclusion of up to $1,000 ($2,000 on a joint return) of interest income received on special tax-exempt certificates of deposit. Certificates were sold only during the period Oct. 1, 1981, to Dec. 31, 1982. The exclusion may be taken on 1981, 1982 and 1983 tax returns, depending on the year of receipt--but the total for all three years may not exceed the lifetime ceiling. (ERTA) Interest exclusion
The exclusion of $200 ($400 on a joint return) of interest and dividends allowed on the 1981 return was terminated. For 1982 returns the rule reverts to the old allowance: $100 ($200 joint) exclusion for qualifying dividends only. (ERTA) Utility dividends
For tax years 1982 through 1985, taxpayers may exclude up to $750 a year ($1,500 on a joint return) of qualifying utility stock dividends reinvested in additional shares. (ERTA) Retirement saving
Starting in 1982, an IRA account is available to anyone with earned income, including workers covered by an employer's pension plan or tax-sheltered annuity and self-employed people with Keogh plans. Dollar ceilings went up for IRAs, Keoghs and Simplified Employes Pension Plans. (ERTA) Unemployment benefits
The income floor above which a part of New Laws unemployment benefits is subject to tax dropped in 1982 from $20,000 to $12,000 for singles, and from $25,000 to $18,000 on a joint return. (TEFRA) Dependent care
For 1982, the expense ceiling went up to $2,400 for one dependent, $4,800 for two or more. The percent of expenses allowed is higher, too, but tied to an income test, with the 30 percent maximum deduction going to those with adjusted gross income up to $10,000. (ERTA) Contributions
For 1982 and 1983 taxpayers who do not itemize may claim 25 percent of the first $100 of qualifying contributions. Both the percentage and the dollar ceiling go up in the following years through 1986, after which this special deduction is scheduled to expire. (ERTA) Medical expenses
There is no change for 1982 returns. But for 1983 and later tax years, the excludable portion of medical expenses climbs from 3 percent to 5 percent of adjusted gross income. The separate deduction for half of medical insurance premiums (up to $150) is dropped; premium costs will then be included with other medical expenses subject to the 5 percent exclusion. (TEFRA) Casualty losses
Starting in 1983, only the excess of net casualty and theft losses (after subtracting $100 per incident) above 10 percent of adjusted gross income will be allowed as a deduction. 1982 tax returns are not affected by this change. (TEFRA) Business expense
Up to $5,000 spent in 1982 for normally depreciable capital expenses may be written off at once as an expense. This is optional, not mandatory--the choice is yours. But the investment tax credit is lost on these "expensed" items. The ceiling remains at $5,000 for 1983, doubles to $10,000 for 1984 and later years. (ERTA) Depreciation allowance
Beginning in 1983, the depreciation basis of property must be reduced by 50 percent of the amount of investment tax credit (ITC) taken on that property. As an alternative, the taxpayer may elect instead to reduce the applicable ITC by two percentage points and preserve the full depreciation basis. (TEFRA) Pension withholding
Payers of benefits under a wide range of retirement plans were required to begin income tax withholding on distributions made after Dec. 31, 1982. Included are pension, profit-sharing and stock bonus plans, tax-sheltered and commercial annuities, Civil Service retirement pay and individual retirement accounts. But any recipient, for any reason, may file a request not to have tax withheld. (TEFRA) Interest/dividend withholding
Income tax withholding at a 10 percent rate will be required on most payments of interest and dividends beginning July 1, 1983. Withholding is waived for anyone whose tax liability for the preceding year was not more than $600 ($1,000 for a married person filing a joint return). For those 65 or older the exemption figures are $1,500 and $2,500. Withholding is not required for any account where total interest for the year will not exceed $150. (This $150 exemption does not apply to dividends.) Expanded information reporting
In an effort to reduce the amount of tax revenue lost each year to the "underground economy," the number of institutions required to report financial transactions to the IRS has been increased substantially. Starting this year, brokers, mutual fund managers and commodity dealers are required to report sales by their customers that might result in capital gains. Barter exchanges must report on participants in barter activities. Distributors of merchandise such as cosmetics, jewelry and home-cleaning products for resale by the vast army of independent home salespeople must report gross purchases by any agent of $5,000 or more.