In 1981, Congress enacted the Economic Recovery Tax Act, redeeming a pledge to cut taxes made by candidate Ronald Reagan during the 1980 presidential campaign. The main thrust of ERTA was a major reduction in tax rates, to take effect over several years; but there were a number of other changes in the rules also.
ERTA was followed in 1982 by TEFRA -- the Tax Equity and Fiscal Responsibility Act. In 1983, Congress enacted the Social Security Amendments -- designed primarily to rescue the Social Security program from the apparent brink of bankruptcy -- including a new income tax imposed on the more affluent recipients of benefits.
And, finally, the Tax Reform Act -- a part of the Deficit Reduction Act of 1984 -- made its appearance last summer. But "finally" may be a poor choice of words, because major new tax legislation is expected this year, with perhaps a complete retooling of the entire federal tax structure.
The flood of tax legislation over the last four years, compounding change on top of change, has made the preparation of one's individual tax return even more difficult and confusing than it had been, and has sent people flocking to the commercial tax preparers.
But that's not an ideal solution, either. In the first place, even the professionals are having a difficult time keeping track of the changes. And if you use a tax preparer, you still must provide all the basic information -- and to do that, you need to know what information pertains in this new and confusing tax climate.
We present The Washington Post Tax Guide XIII, with explanations and examples dedicated to making this annual chore a little easier. We'll cover the most frequently used forms and try to anticipate -- and answer -- the most commonly asked questions. And we will place particular emphasis on those areas that have seen the most significant changes.
In addition to the federal tax returns, we will provide some basic information on the filing of District, Maryland and Virginia returns, paying special attention to those items where state requirements differ from federal rules. GET A PRO, OR DO IT YOURSELF?
Because of the recent proliferation of changes in the rules, the temptation is greater than ever this year to look for professional help. But if you were able to prepare your 1983 tax return yourself, you should be able to do it again this year.
If you used a professional preparer for 1983 but have a fairly uncomplicated return this year, you might want to take a crack at doing it yourself.
You will have to spend some time reviewing the forms and instructions. But as mentioned earlier, even if you use a professional tax preparer, you have to accumulate all the data anyway -- and to do that you need to be familiar with the requirements.
Help is available. If you need more detailed instructions than are given in the information booklet that accompanied your tax forms, pick up a copy of the "blue book" -- IRS Publication 17, "Your Federal Income Tax" -- free at local IRS offices or by mail from the address given in your booklet.
If you operate a business, either full-time or part-time, Publication 334, "Tax Guide for Small Business," also will prove helpful. Taxpayers who are more fluent in Spanish than in English should get a copy of IRS Publication 579S.
There are also a number of free pamphlets available from the IRS, each relating to a specific area of tax law. Although the language gets a little technical sometimes, for the most part the explanations are easy to follow. Some of these pamphlets are mentioned elsewhere in this tax guide.
If personalized help seems necessary or if you want to get an answer to a specific question, you can get free advice or assistance from the IRS, either on a walk-in basis at any IRS office or by phone over special taxpayer assistance lines.
Taxpayers who live in the District, Montgomery County or Prince George's County should call 488-3100 for help. Residents of Northern Virginia are served by the Baileys Crossroads office at 557-9230.
Hearing-impaired persons who have access to TTY equipment can get help from the IRS by calling 1-800-428-4732 any day between 8 a.m. and 6:45 p.m. EST.
See page 27 for more information on where to go if you need assistance.
You generally will get good information from the people at the local IRS offices. During the height of the season, however, the taxpayer assistance staff is augmented by part-time and temporary help with limited training -- one more reason for getting started early.
Keep in mind that the government is not bound by the advice you receive at its own offices. 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.
If you decide you need the assistance of a professional tax preparer, you have a pretty wide choice. A "tax preparer" may be a highly skilled accountant who works for the government or private industry and moonlights for a few months for the extra income.
But he or she may just be someone who has read a tax book or taken a short course in tax preparation. There are no federal or state rules establishing standards of training or experience -- anyone who wants to may hang out a shingle as a tax preparer. The welter of recent changes makes the choice of a competent preparer particularly important.
The large chain operations generally can give good service at low cost if you have a routine tax situation. And some of the chains offer an "executive service," often in your own home or office, for complicated returns.
As a rule, however, the storefront offices are not geared to handle a complex return or an unusual situation. If you face that problem, you may want to go to a public accounting firm or a tax attorney. As you might expect, their fees generally are higher than the fees of the commercial preparers.
Qualified tax preparers who are neither attorneys nor certified public accountants may become "enrolled agents" by passing a comprehensive examination given by the IRS. Although an enrolled agent may not have a broad background in accounting or law, you can expect that he or she will be competent in tax matters.
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. Whoever prepared your return may accompany you or even represent you at an IRS audit. (But only a CPA, attorney or enrolled agent may represent you at the higher appeal levels or in the tax courts.)
Regardless of the qualifications of the preparer or the size of the fee, you have full and final responsibility for the accuracy and legality of the return. The preparer can only work from the data you provide and the statements you make.
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 tells you what you can "get away with," or who promises a refund before examining your tax information. And be wary of a preparer whose fee is based on a percentage of your refund or of the "tax savings" he found for you. The fees should be based on the complexity of the return and the time it takes to prepare it.
Be sure you understand and agree with every entry on your return. If the person who prepares the return cannot or will not answer your questions and explain the entries, go elsewhere. And never sign a blank return or one that has been filled out in pencil.
Any person who prepares a tax return for another for pay must sign the return and enter an identification or Social Security number. The preparer must give you a copy of the return at the same time the original is presented for your signature.
As you might expect, both civil and criminal penalties may be imposed for willful tax evasion. What you may not know is that penalties may also be assessed -- against both the taxpayer and the tax preparer -- for carelessness in gathering data and for material omissions of significant data, even if unintentional.
Whether you use a preparer or complete your own tax return, you have a legal responsibility to pay every nickel of tax that is required. On the other hand, you also have a responsibility to reduce your tax to the lowest amount possible within the law.
So read carefully, and relate what you read to your personal situation. Your responsibility as a taxpayer does not extend to overstating your income tax liability by reporting nontaxable income or omitting any deductions or credits. If you really want to pay a little extra, there is a mechanism for contributions for the specific purpose of reducing the national debt, explained later. Who Must File
The rules for filing an individual tax return for 1984 are unchanged from 1983 requirements. Your liability for filing a federal income tax return generally is determined by a combination of your age and marital status and your total taxable income.
The accompanying table lists the income floor for each category of taxpayer. If your income equals or exceeds the amount shown for your filing status, you are required to file a federal tax return. (State requirements may differ.)
There are some special rules. Even if your income is below the specified minimum, you must file a return under any of the following circumstances:
* To claim a refund of income tax withheld from your pay.
* If you are entitled to a refund as a result of the earned income credit.
* If you received advance payments from your employer in anticipation of qualifying for an earned income credit.
* 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 or more from self-employment. How to File
Your federal income tax return for 1983 must be in the mail and postmarked not later than midnight Monday, April 15. If you can't make that deadline, don't simply ignore it -- penalties may be assessed for failure to file or to pay your tax on time.
By filing IRS Form 4868 by April 15, you can get a four-month extension, to Aug. 15. But that extension applies to filing only, not to the payment of any tax due. You must estimate your eventual tax liability on Form 4868 and pay any deficiency when you file the request for extension.
If you take advantage of the extension period, then later when you do file your return you must use Form 1040, and may not use either the 1040A or 1040EZ. Attach a copy of the completed Form 4868 to your tax return when you file.
If you're out of the country on April 15, you get an automatic extension to June 15 without having to file Form 4868 or any written request at all. But when you file your return later, attach a statement explaining the reason for the delay.
Unless you have asked the IRS to figure your tax, you should attach to the return any payment due. Do not send cash. Enclose a check or money order payable to the Internal Revenue Service, and enter your Social Security number on the payment.
Use the envelope that came with your tax package. If you don't have it, send the return as follows:
* A resident of the District or Maryland using Form 1040 with a balance due should mail the return to the Internal Revenue Service Center, Philadelphia, Pa. 19255-2222. (The IRS has requested the use this year of ZIP-plus-four.)
* District or Maryland residents filing returns using forms 1040, 1040A or 1040EZ without payment or seeking a refund should send them to Internal Revenue Service Center, Philadelphia, Pa. 19244-4444.
* Federal returns of Virginia residents using Form 1040 with a balance due go to the Internal Revenue Service Center, Memphis, Tenn. 37501-2222.
* Federal returns of Virginia residents using forms 1040, 1040A or 1040EZ without payment or seeking a refund should send them to Internal Revenue Service Center, Memphis, Tenn., 37544-4444.
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 on the label. If you go to a professional preparer, take along the booklet, or at least the cover page with the label.
This label contains no special coding to identify a potentially troubling return or to flag your return in any way. Use of the label is not mandatory, but it permits optimal use by the IRS of their expensive automated equipment, saving employe hours and taxpayer money. Which Form?
Again this year, you have a choice of three different tax forms: the standard or "long" Form 1040, the "intermediate" 1040A and the "short" Form 1040EZ.
You may use Form 1040EZ only if you file as a single taxpayer without dependents; do not claim an additional exception for either age or blindness; have less than $50,000 in taxable income, all of which came only from wages, salary and tips and interest income of $400 or less; and have no dividend income.
If you don't meet all of these restrictions, you must go to either the 1040A or the standard 1040. You should use the 1040A if you meet these principal requirements:
* Your 1983 income was less than $50,000.
* That income was derived from wages or similar employment earnings, interest and dividends (in any amount) and unemployment compensation.
* You use the zero bracket amount and do not itemize deductions.
You may use 1040A and still claim a deduction for qualifying payments to an IRA (but not a Keogh plan), as well as the deduction allowed for a two-earner couple. Although you may not itemize deductions on Form 1040A, a limited deduction for charitable contributions is available along with the tax credit for political contributions, the earned income credit and the credit for child and dependent care expenses.
A Schedule 1 for Form 1040A is provided, to show interest and dividend income in excess of $400 (each) and to calculate the two-earner and child-care deductions.
You must use Form 1040 if you don't qualify for either of the two shorter forms. Here is a checklist of major tax considerations, any one of which will require the use of Form 1040:
* Income from self-employment (with or without a corresponding Keogh deduction).
* Adjustments to income such as moving expenses, alimony payments, disability income, employe business expenses or a penalty on early termination of a certificate of deposit.
* Income averaging -- either the regular four-year method on Schedule G or the special 10-year method for a lump-sum distribution from a qualified retirement plan.
* Any payment of estimated tax made for 1984.
* Filing a delayed return after requesting an extension on Form 4868.
* Filing as a "qualifying widow/widower."
* Taxable Social Security or Tier 1 Railroad Retirement benefits.
* Liability for alternative minimum tax on Form 6251.
* Unearned income of $1,000 or more, together with earned income of less than $2,300, if you may be claimed as a dependent on your parent's return.
Any taxpayer who wishes may use Form 1040, and some tax counselors recommend its use by everyone to avoid missing any possible adjustments or credits. Of the three forms provided, I suggest you use the simplest one that matches your tax situation. Given the same facts, your tax will be the same regardless of the form used. The progressively simpler Forms 1040A and 1040EZ make the job easier and reduce the possibility of errors by reducing the number of line entries to be made.
However, you should not let their relative simplicity con you into using either short form if the use of Form 1040 will save you tax money. Don't pass up what might be substantial tax savings because you're intimidated by the long form. Put Down That Pencil
Before you turn on your calculator and pick up your pencil to start writing numbers, take a little time to sort out the bits and pieces of information you have been collecting all year.
Separate your notes and records into the various categories indicated by the line items on the tax forms. On the income side, for instance, you may have W-2 forms for wages or salary from your employer; Form 1099s for interest and dividends; distribution statements from a limited partnership, small business corporation, estate or trust; and perhaps your own records of tips, consulting fees or other personal sources of income.
On the other side of the ledger, you may have receipts, canceled checks or memos of such things as charitable or political contributions, child-care expenses, energy conservation additions to your home, payments to an IRA, Keogh or other retirement plan, medical expenses, interest on your home mortgage or other loans, etc.
Some documents may contain more than one item. For example, a year-end credit union statement may show both interest earned on your share account and interest you paid on a loan. You may want to note any "extra" item on a separate piece of paper to go with other statements for that category, so that you don't miss it later.
After you have all the pieces of paper sorted out and categorized, 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 started early enough, you may want to wait a couple of days before beginning the actual preparation of the return: During that period you may remember some major item of perhaps a year ago that you had overlooked.
Only then, when you're satisfied that you have all the pertinent items of information available and sorted, are you ready to pick up the pencil and begin to work. Your Filing Status
Your filing category is determined by marital status, household living arrangements and the people who are dependent on you for support.
Picking the right category is not simply a matter of checking a box at the top of the tax form. Filing category determines which column you will use in the tax tables or which tax rate schedule to use, which in turn has a major impact on the amount of tax you will pay.
Your marital status for tax purposes is determined by the circumstances on Dec. 31, 1984. That is, if you were married on that date, you are considered to have been married for the entire year, and you may file a joint return.
Conversely, if you were unmarried on that date -- whether you were divorced, legally separated, widowed (before 1984) or never married -- then you are considered to have been single for all of 1984. 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. You must file a joint return to take advantage of the two-earner deduction on Schedule W or the tax credit for the elderly on Schedule R (unless you and your spouse lived apart for the entire year).
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 also must itemize and may not use the zero bracket amount.
If you and your spouse were living apart but were not legally separated, you may elect to file a joint return anyway. This may result in a lower combined tax than filing separately; but each of you is then individually responsible for payment of the entire tax.
If you were married but lived 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 1984 and your home was also the principal home of your dependent child for more than six months of the year. (The rules have been eased for 1985 and later years.) Filing as single generally will result in a lower tax than using the married-filing-separately category. If You Were Recently Widowed
If your husband or wife died during 1984 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. (If you are not the executor or administrator of the estate, the personal representative must sign also.) Write the date of your spouse's death in the name and address block at the top of the form.
Do not send a copy of the will or death certificate with the return. If anyone other than the surviving spouse files for the deceased and claims a refund, Form 1310 must accompany the return to document the right to the refund.
If a personal representative 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, may have an impact on your income tax return. If the personal representative is not a professional, you may need help in this situation.
If your husband or wife died during 1982 or 1983 and you had not remarried by the end of 1984, you may be eligible to file as a "qualifying widow(er)" if you meet all three of these tests:
* You were eligible to file a joint return in the year of your spouse's death, whether or not you actually filed that way.
* Your home was the principal residence during 1984 of a child whom you claim as a dependent.
* 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 do not claim a personal exemption for your deceased husband or wife. The personal exemption may be taken only if your spouse died in 1984. If You Were Single
If you were not married on Dec. 31, 1984, generally you must file as a single person. However, you may qualify for filing as "head of a household" and enjoy 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 that was also the principal home all year of your unmarried child, stepchild, adopted child or grandchild, whether or not the child qualified as your dependent. (In 1985, you will qualify if your household is the principal home of the child for more than half the year.)
You paid more than half the cost of upkeep for your home that was also the principal home of any other relative you claim as a dependent (but not a dependent under a multiple support agreement).
You paid more than half the cost of maintaining a home that was the principal home of your dependent mother or father, even if you didn't live in the home yourself. Personal Exemptions
Each taxpayer is allowed a single personal exemption, which eventually is translated into a $1,000 reduction in income on the 1984 tax return. (For 1985, the value of each personal exemption will incerase to $1,040 as a result of the introduction of tax indexing.)
In addition to this basic personal exemption, a person who is age 65 or older or legally blind may claim an extra $1,000 exemption. If your 65th birthday was Jan. 1, 1985, you may take the extra exemption for age on your 1984 return.
The additional exemptions for age and blindness are available only to the filing taxpayer, or to both taxpayers on a joint return. Neither exemption may be claimed for a dependent. Exemptions for Dependents
These are the five tests that must be met before a person can be claimed as a dependent on your tax return:
Citizenship or residence test. A dependent must either be a U.S. citizen or have resided in the United States, Canada or Mexico during 1984. This test is waived for an alien child adopted by and living the entire year with a U.S. citizen in a foreign country.
Relationship/member of household test. A relative (as defined in the instruction booklet) 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 has been established, it doesn't end because of death or divorce. For example, if your former father-in-law meets the other tests, you may claim him as a dependent even if your wife has died and you have remarried.
A dependent who is not related must have lived in your home for the entire year; but absence at school or for medical reasons is not disqualifying if your home was the dependent's home when he was not away.
An exchange student living in your home may not be claimed as a dependent. However, you may claim up to $50 a month of unreimbursed living expenses as a charitable contribution on Schedule A.
Income test. To qualify, a dependent must have received less than $1,000 in taxable income during 1984. Do not count income not subject to tax, such as nontaxable Social Security benefits, interest on tax-exempt securities, bona fide gifts or nontaxable scholarship payments.
(Beginning in 1985, you may also exclude income earned by a permanently and totally disabled person in what is generally known as a "sheltered workshop," where the income from workshop activities is incidental and the principal purpose of attendance is the availability of medical including rehabilitative care.)
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 1984.
Support test. To claim an exemption for a dependent, you must have provided more than half of his or her support during 1984. 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 (or by others on behalf of the dependent) on items of support -- necessary living expenses and capital items such as a car or stereo 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 1984 and spent it on support. Money paid for life insurance premiums, income tax or Social Security payments by the dependent also should be excluded.
Count as a part of your contributions to support such basic living expenses as food, lodging, 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, include 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 parent, count the cost to you of that housing. But if your parent lived rent-free in a house you owned, use the fair market value based on comparable housing rather than the cost.
Joint return test. A married person who files a joint return with his or her spouse may not be claimed as a dependent by another taxpayer, unless the joint return had been 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. Divorced Parents
The Tax Reform Act of 1984 introduced major changes in the rules for determining which parent may claim a child as a dependent after divorce. However, these new rules apply only for tax years beginning after 1984; for most individual taxpayers, that means for 1985 and later years. To avoid any confusion, we will provide here only the 1984 rules.
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. The other parent, however, may take the exemption if it is specified in the divorce decree or separation agreement and he or she contributed at least $600 to the child's support during 1984.
In the absence of a specification in the agreement, the noncustodial parent may still claim the exemption if he or she provided $1,200 or more for support and the parent having custody can't prove a larger contribution to the child's total support costs. Joint Support
Several taxpayers may jointly support a dependent (brothers and sisters caring for a parent, for example) with no single person contributing more than half of the total support.
If together you contributed more than half the support and the dependent otherwise qualifies, one of the group may take the exemption if he or she provided at least 10 percent of the total support and the others agree to waive their claims.
Each year a different taxpayer may claim the exemption, so it may be rotated among the several contributors from year to year. The taxpayer claiming the exemption must attach to the return a separate Form 2120, agreeing to the arrangement, from each qualified contributor. REPORTING YOUR INCOME
The table "Reporting Income," at right, tells you where to report the various types of taxable income. However, not all income is reportable on your federal tax return. (State requirements may vary.)
So the first step in determining your eventual tax liability is to go through your income data and pull out those income items that should not be reported to the IRS. Nontaxable Income
Here is a checklist of the major types of nontaxable income:
* Interest on state and municipal bonds, and specified dividends from tax-free mutual funds. (However, see the "Interest" category under "Taxable Income.")
* Workman's compensation payments for injury or illness.
Disability retirement pay from the armed forces.
* Veterans Administration payments.
* Military allowances and certain cost-of-living allowances for U.S. civilian employes overseas.
* A part of the pay received by U.S. citizens living and working in foreign countries, if they meet certain time-and-place requirements.
* Gifts and bequests.
* Child support payments, but not alimony. (The rules for distinguishing between the two were changed beginning in 1985 by the Tax Reform Act.)
* Amounts awarded in a civil suit for damages.
* Dividends on a life insurance policy, unless the accumulated total exceeds total premiums paid.
* Proceeds from a life insurance policy received because of the death of the insured. (Life insurance proceeds received in the form of periodic payments generally include some interest as well as principal; the interest component may be taxable. But if you're a surviving spouse receiving installment payments of insurance proceeds after the death of your husband or wife, up to $1,000 a year of this interest may be excludable. See IRS Publication 525.)
* Payments under a property or casualty insurance policy for living expenses after a fire or other disaster, except to the extent such payments exceed normal living expenses. Taxable Income
Most other kinds of income must be included in the total income reported on your tax return. But different categories of taxable income are reported in different ways and in different places in the return.
Turn now to the "Reporting Income" table, which lists the principal types of taxable income and tells you where each type is to be reported on each of the three tax forms. (If a particular tax form is omitted from the table, you may not use that form to report that type of income.) The IRS publication applicable to each kind of income is shown, should you wish more detailed information.
Here are some special considerations to keep in mind when working on the various categories of income.
Interest income. If you received a Form 1099INT from any payer of tax-free interest, report the amount of that interest on line 2 of Schedule B. A few lines above line 3 enter the subtotal of all interest received; then on the next line print "tax-exempt interest" and show the amount of that interest (in brackets).
If you sold your home and took back a zero-interest or low-interest mortgage on which you receive installment payments, a part of those payments must be considered interest income rather than principal. The Tax Reform Act changed the rules for loans made after June 6, 1984, but with a 1985 effective date; see IRS Publication 545, "Interest Expense," and 550, "Investment Income and Expenses," for the current rules.
The broker's confirmation slip for any bonds purchased during 1984 probably included a charge for "accrued interest." That amount refers to interest accrued between the last interest date and the date of your purchase -- interest that properly belongs to the seller rather than the buyer. But on the next interest date you -- the purchaser -- should have received the full period interest, and the 1099INT should reflect that amount.
On Schedule B, enter the full amount shown on the 1099INT. Then on a separate line write "accrued interest" and show the amount from the confirmation slip (in brackets). When you add up all the interest income in Part I of Schedule B, be sure to subtract, not add, this bracketed amount as well as any tax-exempt interest listed.
Dividend income. Up to $100 of qualifying dividend income may be subtracted from total dividends received. The exclusion doubles to $200 on a joint return regardless of who owns the shares. (Payments identified as "nonqualifying" on an annual mutual fund statement are not eligible for this exclusion.)
Foreign accounts. If you use Schedule B for interest or dividends, be sure to complete Part III asking for information about any foreign accounts or foreign trusts in which you have an interest.
Utility stock dividends. Up to $750 a year ($1,500 on a joint return) of dividends from many utility companies may be excluded from taxable income if the dividend proceeds had been invested in additional shares under a qualifying company reinvestment plan.
You must account for these dividends; do not simply omit them from your return. Instead, include the amount of the dividend on line 4 of Schedule B and write "DR" (for dividend reinvested) next to the payer's name. Then enter the amount to be excluded on line 8 of Schedule B, where it eventually is deducted from taxable dividends.
Business income. If you have reported on Schedule C $400 or more of net income from self-employment, you must file Schedule SE to determine the amount of Social Security tax due, if any.
Rental property. Income-producing rental real property placed in service after March 15, 1984, must be depreciated over 18 years rather than the more favorable 15-year period previously allowed. (Low-income housing continues to qualify for 15-year depreciation.)
Capital gain dividends. These are normally reported on line 15 of Schedule D; but if Schedule D is not otherwise needed, report 40 percent of total capital gain distributions on line 14 of Form 1040.
Barter income. If you engaged in barter transactions, either independently or as a member of an organized barter exchange, you must report as income the fair market value of goods and services received from others in exchange for your own.
State tax refund. If in 1984 you received a refund of state or local income tax that you had claimed as a Schedule A deduction on a prior year's return, you must report the refund as income to the extent that it reduced your adjusted gross income on that prior return.
Gambling. Gambling winnings must be reported in full; losses may not be offset directly against winnings to come up with a net figure. Instead, losses may be claimed as a miscellaneous deduction on Schedule A (if you itemize) -- but only to the extent of winnings reported.
Lump-sum pension payment. If you received a lump-sum payout from your employer of the total amount of your pension or retirement plan, you can reduce the tax bite substantially or even avoid the tax entirely.
Any part of the payout that represents a return to you of your own previously taxed contributions is yours without tax consequences.
You may roll over all or a part of the proceeds representing employer contributions into an IRA within 60 days of receipt and defer any tax liability until the funds are later withdrawn from the rollover IRA.
If you keep all or part of the distribution, you may end up paying a much smaller amount of federal income tax than you anticipate. The tax can be reduced by using a technique known as 10-year averaging, on Form 4972.
Social Security benefits. As a result of the Social Security Amendments of 1983, a part of your Social Security or Tier 1 Railroad Retirement benefits may be taxable this year for the first time. Low-income beneficiaries are excluded; tax liability begins at a floor of $32,000 for married taxpayers filing a joint return and $25,000 for single taxpayers.
If you're married, this new tax may have an impact on the filing status you select. If you wish to file separately but have lived together at any time during the year, the income exclusion for determining taxability of Social Security benefits drops to zero. (If you have not lived together, you may file separately and use the $25,000 floor of a single taxpayer.)
Sometime in January you should have received from the Social Security Administration Form SSA-1099 showing the total benefits paid to you in 1984. The comparable form for recipients of Tier 1 Railroad Retirement benefits is RRB-1099.
Along with the 1099, you should also have received IRS Notice 703, which will help tell you whether any of your benefits are taxable. If so, you can sort out the details on the worksheet on page 11 of the Form 1040 instruction booklet. (The instructions for the worksheet start on page 10.) If it turns out that you have no tax liability for Social Security or Railroad Retirement benefits, you may use Form 1040EZ or 1040A (if you otherwise qualify). But if any part of your benefits is taxable, you must use Form 1040.
On the worksheet, you start with one-half of your total 1984 benefits from all SSA-1099s and RRB-1099s. To that amount you add your total taxable income (not including any SSA or RRB benefits) and all nontaxable interest received during the year. (The nontaxable interest itself will not be taxed; the amount is only used to determine if any part of your SSA or RRB benefits is subject to tax.)
Then you must add back all adjustments to income claimed on your return except for the deduction for a two-earner married couple (from Schedule W) and any foreign housing deduction taken.
From the total of all of these, you then subtract whichever of the "floors" mentioned above applies to you. If you have a positive balance left, you must report on line 21b of Form 1040 the smaller of one-half of that balance, or one-half of your Social Security/Railroad Retirement benefits.
Capital gains and losses. The holding period for distinguishing between long-term and short-term gains and losses was reduced from one year to six months for any asset acquired after June 22, 1984. Schedule D doesn't look any different; just be sure to apply the correct holding period for any sales, so that short-term gains and losses end up in Part I, long-term in Part II.
No capital gain or loss is recognized on the transfer of property as part of a settlement between divorcing spouses in 1984 and later years. The spouse receiving the property must carry forward the same adjusted cost basis as the property had at the time of the transfer, without any step-up in basis.
Foreign earned income. The ceiling on the annual exclusion of income earned abroad (by other than government employes) was scheduled to go to $85,000 in 1984, with additional increases in 1985 and 1986. The Tax Reform Act froze the ceiling at the 1983 level of $80,000 through 1987, with annual increases now scheduled starting in 1988.
Market discount bonds. When interest rates rise, previously issued bonds can generally be bought at a discount to compensate for the coupon yield, which is now lower than the yield available on new bonds.
Formerly, if you bought a market discount bond, then sold it at a profit (after holding it long enough to go long-term), the profit was treated as a long-term capital gain, so only 40 percent was subject to tax.
The Tax Reform Act ended this tax break for taxable bonds issued after July 18, 1984. Any gain realized -- either on sale or on redemption at maturity -- will be treated as ordinary interest income to the extent of the market discount.
Furthermore, if you borrow to buy market discount bonds, there are now restrictions on the amount of interest deduction you may claim. A part of the deduction may have to be deferred until the year you report the income from the appreciated value. IRS Publication 550 has more information on this subject.
Option-writing. If you practice writing covered call options -- particularly "in-the-money" calls, a sophisticated investment strategy -- talk to your broker or tax consultant about changes in the tax rules.
Tax shelters. The new law requires that all tax shelters be registered with the IRS and that each investor to whom an interest is sold after August 31, 1984, be notified of the registration number. If you are in this group, you must attach to your tax return Form 8271, on which you report this number. INCOME ADJUSTMENTS
After you have added up all your taxable income, 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.
The table headed "Reporting Adjustments," below, lists the various adjustments to income, tells you where to enter each item and identifies the IRS publication to look at for more information than is provided in the following explanations.
Moving expenses. If you changed your residence during 1984 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:
* The distance between your old residence and your new place of employment must be at least 35 miles greater than the distance between your old residence and your former job.
* You must work in the new area, though not necessarily for the same employer, for at least 39 weeks in the 12-month period after 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.
(The work test is waived if employment was terminated because of death or disability, transfer for the employer's benefit or discharge other than for willfull misconduct.)
If you meet both tests, you may deduct from gross income several kinds of moving expenses.
The cost of direct travel from the old to the new residence for you and your family -- transportation, meals and lodging -- may be deducted. But do not claim any expenses for sightseeing or to visit family or friends en route.
If you go by car, you may use either out-of-pocket expenses for gas, oil and repairs, or a flat 9 cents a mile. In either case, you may add tolls and parking fees.
The cost of moving your household is deductible, including packing and crating, insurance and any necessary storage. But charges for such expenses as disconnecting or connecting appliances or refitting carpets or draperies may not be claimed.
Subject to specified dollar limits, you may deduct the cost of travel, meals and lodging for househunting trips before the move but after getting the new job. You may also include the cost of meals, lodging and miscellaneous expenses for up to 30 days (90 days for an overseas move) 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 a loss on the sale may not be claimed.
In this situation you have a choice. Some of the selling costs on the old home may be deducted as either a moving expense or a selling expense. If you choose the second option, you will reduce the capital gain on the sale, but you may be deferring tax on the gain anyway by buying a new home.
In any case, only 40 percent of the gain is taxable income (assuming you owned the home for longer than a year). By claiming these costs as a moving expense (to the extent allowable), you get the benefit of a 100 percent deduction from income. And any balance over the ceiling on this type of moving expense may still be applied against the sale.
If you were reimbursed for any moving expenses by your employer, you must subtract the amount of the reimbursement from your allowable expenses. But claim the total without reduction if the reimbursement was included as income on your Form W-2. Your employer should give you Form 4782 with details of any reimbursements.
Employe expenses. If you're an "outside salesperson" -- one who sells away from his employer's place of business -- you may deduct all "ordinary and necessary" business expenses from gross income.
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 travel to and from your destination, local transportation while there, meals, lodging and reasonable incidentals such as tips.
You may deduct a standard $14 a day for meals for each day if you are away from home for less than 30 days on any one trip. If your stay is 30 days or more, the standard rate for the entire trip is limited to $9 a day.
On the first and last day of each trip, the standard allowance is prorated in six-hour chunks. That is, for each six-hour period (or portion thereof) you are allowed to claim one-fourth of the total daily allowance.
Use of the standard meal rate is optional: if your substantiated meal expenses are greater than the standard rate, you may claim actual costs. But if you elect the standard rate, you must use it for all travel during the year -- you may not apply a different method for each separate trip.
If you claim the standard allowance you do not need to keep any records of meal expenses; but you still must be able to substantiate the time and business purpose of the travel itself, as well as any other expenses claimed.
The cost of commuting between your home and work is not normally deductible. But if you worked at two or more different locations on the same day, for either the same or different employers, you may deduct the cost of getting from one job to the other.
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 costs in proportion to the mileage for each purpose.
You can avoid complicated record-keeping by simply keeping track of business mileage. Keep a small diary or memo book in the glove compartment in which you jot down mileage for each business trip. You may then take a deduction of 20.5 cents a mile for the first 15,000 miles of business use, but only 11 cents for each mile over that amount.
If you use the optional method, your mileage deduction is limited to 11 cents a mile for all travel after the car has been fully depreciated. A car placed in service after 1979 for which the optional mileage rate has been claimed is considered fully depreciated after 60,000 miles of business travel has been claimed at the standard rate.
When adding up the annual mileage to reach the 60,000 figure, count the actual business miles driven each year but only up to an annual ceiling of 15,000 miles. That's because the reduced rate of 11 cents a mile is allowed for miles above 15,000 each year, rather than the higher standard rate.
Whether you use the actual expense method or the optional mileage rate, tolls and parking fees should be added, but fines for traffic violations may not be claimed.
For 1985: The Tax Reform Act tightened the rules on record-keeping for business expenses, particularly travel and entertainment. To substantiate these deductions, you must keep records that are both "adequate" to describe the circumstances and "contemporaneous" -- that is, made at the time the expense is incurred.
Failure to support a deduction with proper records may subject you to a penalty for negligence. If you use a tax preparer next year, he or she will be required to obtain from you a written statement that you have kept the necessary records: A fine may be levied against any preparer who fails to comply.
IRA and Keogh. If you have earned income, you may claim an adjustment on your income tax return for contributions to an IRA for up to 100 percent of that income but not more than $2,000.
On a joint return with one spouse having no earnings, the ceiling increases to $2,250, divided between two separate accounts in any desired proportion but with no more than $2,000 in either account.
If you have earnings from self-employment, the rules were changed on Jan. 1, 1984, to provide higher ceilings on the amount that may be deposited in a Keogh account. Although the new rules have not been finally defined, as a rule of thumb you may figure the ceiling as 20 percent of net earnings from self-employment with an annual limit of $30,000.
You may open an IRA account and make payments as late as April 15 and still claim the deduction on your 1984 tax return. In a change from earlier years, a four-month extension for filing your return will not get you a similar extension for your IRA deposit; that April 15 date is a firm deadline.
The April 15 cutoff date applies also for payments into a Keogh account, but the account must have been established by Dec. 31, 1984, with at least a token payment for the contribution to be deductible on your 1984 return. Unlike the IRA, a filing extension for your tax return will provide a corresponding extension for 1984 Keogh deposits.
An annual report, on Form 5500-C, is now required for Keogh plans, including those plans in which the only participant is the owner. Form 5500-C does not go with your tax return; it must be filed separately, not later than July 31, 1985 (for calendar year plans).
Early CD withdrawal. If you redeemed a certificate of deposit before its maturity date, you were probably assessed an interest penalty that the savings institution withheld from the proceeds.
Do not subtract the penalty from interest earned. Instead, report the full amount of interest income as stated on the Form 1099INT provided to you by the issuer. Then enter the amount of the interest penalty on line 28 of Form 1040, where it is combined with other adjustments and eventually subtracted from gross income.
Alimony payments. Periodic alimony or separate maintenance payments to a former spouse required by a decree of divorce or of separate maintenance, a decree of support or a written separation agreement may be deducted by the payer as an adjustment to income.
Payments specifically designed as support for a minor child are not deductible, even if they are paid to your former spouse rather than directly to the child. However, such payments may be a factor in determining who may claim the dependent exemption for the child. (See "Divorced Parents" in the section on "Exemptions for Dependents.")
The rules governing alimony and child support and the dependent exemption for the child of divorced parents have been changed, generally for divorces occurring after Dec. 31, 1984. However, some changes may affect earlier divorces; if you're in this situation, you should consult your attorney or tax counselor to determine if any of the changes apply to you.
Two-earner families. To qualify for the deduction for a two-earner couple, you must file a joint return and both spouses must have "earned" income -- that is, salary or wages, tips, commissions or net earnings from self-employment. (Wages paid to one spouse by the other are not eligible for the two-earner credit.)
Total earned income for each spouse must be reduced by any work-related deductions, such as employe business expenses or payments into an IRA or Keogh plan.
The adjustment allowed is 10 percent of the net earned income of whichever spouse earned less, up to a maximum of $3,000 (equal to 10 percent of an earnings ceiling of $30,000).
The allowance is computed on Schedule W, then carried to line 30 of Form 1040. (Attach Schedule W to your return.) If you are using 1040A, the calculations are made in Part III of Schedule 1 and the credit entered on line 12.
Disability. The old $5,200 disability exclusion has been eliminated, beginning with the 1984 tax year. A tax credit for a person under 65 who retired for permanent total disability is available; it is combined with the tax credit for the elderly, and is computed on Schedule R. This provision is explained more fully in the section headed "Tax Credits." Special Charity Deduction
A taxpayer who does not itemize deductions may still claim a special reduction of income for a part of his contributions to religious, charitable and educational institutions. (If you itemize, you should continue to list all qualifying contributions on Schedule A, as in the past.)
The deduction for 1984 is somewhat more generous than it was in 1983. The maximum allowance is $75, equal to 25 percent of qualifying contributions up to a $300 ceiling (the maximum for a married person filing separately: $37.50). This allowance for charitable contributions is available to all taxpayers regardless of which of the three tax forms is used. Your Deductions
For most people, the decision on whether to itemize deductions or to take the zero bracket amount (ZBA) is a relatively simple one. If the total amount you can claim by itemizing is greater than the ZBA for your filing category, you should itemize. If the total is less, use the ZBA.
The zero bracket amounts for 1984 tax returns are the same as they were for 1983:
* $3,400 if you are married filing jointly or if you file as a qualifying widow(er) with a dependent child.
* $2,300 if you are filing as a single person or an unmarried head of a household.
* $1,700 if you are married but filing a separate return.
Because of indexing, the ZBA values will be increased for 1985 by 4.08 percent (rounded), to $3,540, $2,390 and $1,770, respectively; but indexing does not affect your 1984 return.
The tax tables and tax rate schedules already incorporate the appropriate ZBA deduction, so you have no calculations to make if you use the ZBA. If you itemize deductions, a special computation is required on Schedule A after you have entered your various deductions.
After entering on line 24 of Schedule A the total of all your deductions, you must subtract from that total the amount of the ZBA for your filing status. The remaining amount on line 26 is the figure to be carried to line 34a of Form 1040, rather than total deductions.
(Caution: If your state tax return uses the federal Schedule A deduction in some form, be sure to carry over the appropriate figure.)
Schedule A shows five major catagories of deductions -- medical and dental expenses, taxes, interest, contributions and casualty and theft losses -- plus a sixth "catch-all" section titled "Miscellaneous Deductions." Since overlooked deductions are one of the major culprits for overpaid taxes and because the Tax Reform Act of 1984 made some important changes, let's take a detailed look at each category. Medical and Dental Expenses
Qualifying medical expenses may be claimed on Schedule A to the extent that the total exceeds 5 percent of your adjusted gross income (line 32 on Form 1040).
"Qualifying medical expenses" includes all payments you made to medical practitioners such as physicians, dentists, osteopaths, nurses and acupuncturists; to pharmacies for prescription drugs and insulin (the only pharmaceuticals that qualify this year); and for services from organizations such as hospitals, clinics, free-standing emergency centers, laboratories and ambulance services.
The cost of a legal abortion or a procedure for sterilization is a qualifying medical expense, but illegal drugs or any treatment that is against the law in your state or under federal regulations may not be included. Organ donors may deduct all related surgical, hospital and transportation expenses.
Count the cost of prosthetics, such as false teeth, hearing aids and batteries, glasses and contact lenses, orthopedic shoes, crutches and similar aids; purchase or rental of special equipment for the handicapped; the cost of acquiring and maintaining a guide dog for the sightless or hearing-impaired; and total medical insurance premiums, including such things as replacement insurance for contact lenses and supplementary (Part B) medicare.
Medical expenses include the cost of transportation to obtain medical care -- bus, taxi, train or plane fare, or nine cents a mile plus tolls and parking fees if you use your car. Expenses of a parent traveling with a child or of a nurse accompanying a patient also may be claimed.
New for 1984: You may deduct up to $50 per individual for lodging (but not food) away from home for the purpose of obtaining medical treatment, such as outpatient treatment at a licensed hospital or clinic. You may count your own medical expenses plus those paid by you on behalf of all dependents claimed on your return, including a dependent you claim under a multiple-support agreement (and other "eligible persons").
(Beginning in 1985, both divorced parents may claim medical expenses paid for a child regardless of which parent has custody or gets the dependent exemption.)
You may also include medical expenses you paid for a person you would have been permitted to claim as a dependent except that he or she had taxable income of $1,000 or more or is filing a joint return.
If you charge medical expenses on a bank credit card, the deduction should be claimed in the year the charge was made rather than in the year the amount was paid. But if the health practitioner simply delays the due date of your payment, then the deduction belongs to the year of the payment. Taxes
Various types of state and local taxes may be deducted on Schedule A. First, let's clear out those taxes you may not deduct: excise taxes on liquor, cigarettes, gasoline, utility bills or transportation; hunting or fishing licenses; car tags or driver licenses; and traffic fines or penalties for underpayment of federal or state income tax.
With those out of the way, we can take a look at the major tax payments you may legally deduct.
* State and local income taxes actually paid or withheld from wages during 1984, whether more or less than your final tax bill. If you itemize deductions for 1984 and then in 1985 you receive a refund of a part of your 1984 state or local income tax, you will generally report the entire amount of the refund as income on your 1985 return.
* Personal property taxes paid in 1984, regardless of the year to which the tax applied.
* Real estate taxes paid in 1984 on your home or other nonbusiness property you own. (Taxes paid on property held for rental to others go on Schedule E as an expense deduction against rental income, rather than on Schedule A.)
If the financial institution that holds your mortgage pays the real estate tax, deduct only the amount paid on your behalf during 1984 as shown on the annual statement -- not the monthly tax payments you made into the escrow account.
* General sales tax -- either the amount allowed in the table in the IRS instruction booklet or the total 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 such as a car, boat or trailer.
If you use the sales tax table in the booklet, don't just automatically look up the figure for your adjusted gross income. Instead, add to your AGI all nontaxable income such as municipal bond interest, the excluded portion of long-term capital gains, the deduction for a two-earner couple and the untaxed part of Social Security benefits.
Use this true "spendable income" in looking up the tax allowance in the table. And in the "Taxes" box on Schedule A write "includes $--- nontaxed income" (entering the dollar amount) to explain the seeming discrepancy. Interest Expense
You may deduct on Schedule A the interest paid on a mortgage on your home or other nonbusiness property, on a personal loan, on charge accounts and on late federal or state tax deficiencies (but not any penalty charges).
Interest on a life insurance loan is deductible if paid in cash, but not if the interest charge is added to the principal amount of the loan.
If you bought a home with "creative financing" that provided you with a mortgage on which the stated interest rate was less than 9 percent (including zero interest), you are entitled instead to a Schedule A deduction at an annual rate of 10 percent for what the IRS calls "imputed" interest.
(The Tax Reduction Act of 1984 changed the rules governing imputed interest on loans at less than market interest. However, the new rules are effective for 1985 and do not affect your 1984 return.)
The amount of any "points" paid by you in connection with the purchase of a home normally is considered interest. But if you didn't pay the points in cash, and the amount was instead subtracted from the loan proceeds, the deduction may not be allowed because you didn't actually "pay" the charge.
If you sold your home, points you paid to induce a lender to provide financing to the buyer (mortgage "buy-down") is not interest. The amount you paid, however, is a selling expense that may be used to reduce any profit on the sale.
Prepaid or discounted interest may not be deducted when paid if the loan extends beyond the 1984 tax year. Instead, the interest cost must be prorated over the life of the loan, with only the amount applicable to each year allowed as a deduction on that year's tax return.
If the loan document doesn't specify and you don't know how much of each payment is interest, divide the total amount of interest charged evenly over the scheduled number of payments. Multiply the resulting interest per payment by the number of payments due and made during the tax year.
Interest paid on money borrowed to buy tax-exempt bonds or a single-premium life insurance policy is not an authorized deduction. And there is a ceiling on the deduction for interest paid in connection with investments. See IRS Publication 550 for details. Contributions
The IRS instruction book that accompanied your tax forms provides a comprehensive list of the types of religious, charitable and educational organizations that qualify for Schedule A deductions -- along with the major kinds of contributions that may not be claimed.
In addition to cash contributions, you may deduct the fair market value of property given to qualifying organizations (if the property is issued by the organization in connection with its tax-exempt functions).
If you donate property you have owned for more than a year that has appreciated in value, you may claim the present (higher) value without having to report the capital gain over your cost. The holding period changes to six months for property acquired after June 22, 1984 -- the effective date for the change in holding period to determine short-term vs. long-term capital gain or loss.
But there are restrictions on donations of property -- particularly property that is now valued at more than your cost basis. And for high-value items such as works of art a professional appraisal may be required; the Tax Reform Act set $5,000 (on other than publicly held securities) as the minimum starting value for a mandatory appraisal, beginning in 1985. See IRS Publication 526 for details.
Unreimbursed expenses incurred while donating personal services to a qualifying organization are deductible -- things such as 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 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.
If you use your own car, you may claim either the actual cost of operating the vehicle (fuel and maintenance, but not depreciation or insurance) or the 1984 optional standard rate of 9 cents a mile. (For 1985, the mileage rate goes up to 12 cents.) You may add tolls and parking to the total using either method.
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 by a qualifying organization is not deductible even if the property 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 Schedule A tax deduction.
Gradual deterioration such as a termite infestation doesn't qualify, nor does preventive action such as removing a dead tree before it falls. The event must occur suddenly -- a hurricane or tornado, earthquake or flood, fire, theft, vandalism or accident.
Only an unreimbursed loss is deductible. Any amount recovered from an insurance company or from another individual must be subtracted from the total loss.
The first $100 of net loss from each separate event must be subtracted. Nonbusiness casualty losses are deductible only to the extent that the total of all losses (after deducting the $100 exclusion for each loss) exceeds 10 percent of your adjusted gross income.
If you have a qualifying casualty loss, report the detailed calculations on Form 4684 -- using a different Form 4684 for each separate event, but summarizing on lines 13 through 18 of a single 4684 -- then carry the net deductible loss to line 19 of Schedule A.
If you had expenses associated with establishing the amount of the loss -- photographs or professional appraisals, for example -- those expenses should be claimed as a miscellaneous deduction on line 22 of Schedule A rather than as a part of the loss itself. Employe Deductions
Certain business expenses may be taken in the "miscellaneous deductions" section of Schedule A if they were incurred in the course of your employment and you were not reimbursed by your employer.
These include entertainment expenses, professional societies and publications, union dues, small tools and supplies, original cost and upkeep of specialized uniforms not suitable for wear away from work and protective clothing such as hard hats and safety shoes.
If your employer requires that you have a medical examination and doesn't reimburse you for the cost, it may be claimed either as an employe expense or a medical deduction. Unless other medical expenses have already put you over the required minimum, a miscellaneous deduction is the smart way to go.
Military people on active duty may not deduct the cost of regular uniforms, but may claim items such as insignia and ribbons and both the purchase cost and maintenance of work clothing that may not be worn off duty.
But reservists and guardsmen not on extended active duty may deduct the unreimbursed cost of all uniforms.
Unreimbursed expenses (other than transportation) for education related to your work are deductible on Schedule A. (Transportation costs for qualifying education may be claimed as an adjustment to income even if you don't itemize deductions.)
To qualify, 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.
Expenses related to a search for a job in the same trade or business may be deducted even if the search was unsuccessful. But such expenses may not be claimed if they were incurred in a search for employment in a new trade or business.
If the job-hunting qualifies under this rule, you may deduct such things as preparation and mailing of a re'sume', fees paid to an employment agency, long-distance phone calls, travel and transportation.
You may not claim the cost of a certifying examination or of a license to practice -- but these may be included as Schedule C expenses if you are self-employed and were already in business when the costs were incurred. Office at Home
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 tests:
* The area must be used exclusively for business. It may be a separate room or just a part of a room, as long as that part is used only for business purposes.
* It must be the principal place for operating the business for which you claim the deduction, or be regularly used by clients or customers of that business.
The business for which you claim the office deduction need not be your principal occupation. The deduction qualifies even if the space is used for a secondary or part-time business, as long as the tests are met.
If you are an employe rather than self-employed, there is an additional requirement: Use of the space in your home must be for the convenience of your employer, not for your own convenience.
If the space qualifies, you may claim two kinds of expenses:
* Expenses directly attributable to the business use, such as a desk, filing cabinet, telephone, stationery, etc.
* A proportionate share of the general expenses of the home, such as utilities, rent or depreciation (if you own the home). The fraction to be used may be derived either from the number of rooms or by a square-footage calculation.
The Tax Reform Act imposed new, stricter rules on deductions claimed for certain specified types of property -- notably cars and computers. The property must be predominantly used for business; that is, business use must exceed 50 percent of total use. If it does not, the investment tax credit is not allowed, and depreciation must be taken using the straight line method over the useful life of the property.
The deduction for an office in the home may not be used to shelter other income from tax. The total amount of the deduction for expenses (after subtracting the allocable portion of property taxes and mortgage interest, which could be claimed on Schedule A in any case) may not exceed your net income from the business for which the deduction is claimed. Adoption Expenses
A miscellaneous deduction is allowed for up to $1,500 of expense in connection with adoption of a "child with special needs" -- 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 any reimbursement received under a 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 offset. Investment Expenses
In general, you may claim as a Schedule A deduction any personal expense related to the production of taxable income. Under this rule, you may include the cost of a safe deposit box if it held stocks or corporate bonds or the deed to investment property, but not if it contained only the deed to your residence, other personal papers and tax-free bonds.
Fees for investment advisory services and subscriptions to investment periodicals may be deducted even if you lost money on your investments. Costs of transporation to your broker's office may be properly included; but travel expenses to attend a stockholder meeting are not deductible even if you own or contemplate buying shares in the company.
You may not claim a deduction for office space at home that is used to manage your investments, no matter how extensive those investments are. Although there is an obvious profit motive, an investment portfolio does not constitute a trade or business, and you may not claim home office expenses.
However, you may deduct reasonable costs directly associated with portfolio management, such as a calculator, accounting pads, etc. You may also deduct the cost of computer software dedicated to portfolio management -- but a computer doesn't qualify for the investment tax credit or accelerated depreciation unless it is used more than 50 percent for business purposes rather than solely for investment management.
You may deduct fees paid to your bank or broker for the collection of taxable interest on notes or bonds; and a custodian fee on your IRA or Keogh account is deductible if you paid the fee in cash, but not if it was simply deducted from your account. Other Deductions
Legal fees associated with the production of taxable income, such as attempts to collect alimony or back wages, qualify as miscellaneous deductions. Legal costs for a divorce proceeding are not deductible; but a separately identified fee for investment or tax counseling in connection with a divorce is a valid deduction.
This is the place to deduct your losses from all kinds of gambling -- but only to the extent that you have reported gambling winnings as income. Winnings and losses must be reported separately; you may not offset one against the other to come up with a net figure.
Finally, don't forget to include a fee paid for having your personal income tax return prepared, as well as the cost of any tax books and of trips to an IRS office for tax assistance. Even if you completed your own return, you may deduct the cost of legal or accounting assistance needed in the event of an audit of your return. TAX CALCULATIONS IRS Tax Computing
The IRS will figure your tax liability for you if you wish. All 1040A and 1040EZ filers may request this service; 1040 filers qualify only if you meet specified conditions.
If you file on 1040EZ, you need only attach the IRS mailing label or print your name and address and Social Security number at the top of the form, then enter the proper amounts for lines 1 through 8. (Line 4 permits the deduction of up to $75 in charitable contributions -- the only special allowance authorized on the 1040EZ.)
Sign and date the return, attach the required W-2s and mail the package to the IRS. The IRS will compute your tax, send you any refund or bill you for any balance due.
Calculating your own tax liability is no big deal if you're filing 1040EZ. After you have done all of the above, all that's left is to look up your tax in the tax table and compare that figure with the tax withheld to come up with either a refund or an additional payment.
If you're using Form 1040A, you get a little more help from the IRS; in addition to finding your tax liability from the tax table, they will also figure the earned income credit for you, if you qualify.
But you must still come up with all the basic data. After completing the identification information at the top of the form, you must indicate your filing status and the number of personal and dependent exemptions claimed.
Then enter the appropriate figures for lines 6 through 19, including such things as unemployment compensation, IRA deductions, the adjustment for a two-earner family and the allowable part of your charitable contributions.
Skip line 20, which is the amount of your tax from the tax table. But if you are eligible for either a credit for part of your political contributions or a credit for child or dependent care, you must enter the proper amounts on lines 21a and 21b.
And finally you must enter, on line 24a, the total amount of income tax withheld from your pay, normally found in Box 9 of your W-2 forms. Sign and date the 1040A at the bottom, attach your W-2 and also Schedule 1 (for interest or dividend income above $400, the two-earner credit or the credit for child and dependent care expenses) and mail the whole thing off for the IRS to complete the job for you.
The IRS also will compute your tax for you on Form 1040 if you meet all of the conditions described on pages 12 and 13 of the instruction booklet.
But if you have more than $50,000 adjusted gross income, itemize deductions, want to income average on Schedule G or otherwise don't fit the requirements specified, you'll have to determine your own tax liability.
If you request IRS computations on a joint return on either the 1040A or 1040 (you may not use 1040EZ for a joint return) show the income of each spouse separately, identifying the figures by "H" for husband and "W" for wife.
On the 1040A, put this information in the space on the left of line 19 under the heading "Step 6 Figure Your Taxable Income." On the 1040, enter the two figures in the left-hand space under "Adjustments to income" on the front of the form. Figuring Your Own Tax
You may compute your own tax liability on any of the three filing forms. Use the tax table if your net taxable income is under $50,000, unless you figure your tax by income-averaging on Schedule G.
If your income exceeds the table ceiling of $49,999 or you use Schedule G, you must calculate your tax liability from the appropriate tax rate schedule for your filing category.
Whether you use the tax table or the rate schedule, on all three forms you must subtract the total dollar value of all personal exemptions and exemptions for dependents from your adjusted gross income. Each exemption is worth $1,000; since Form 1040EZ may only be used by a single taxpayer without dependents, that form comes with the allowable $1,000 exemption already entered.
The zero bracket amount is already taken into account on all the tables and tax rate schedules, so don't subtract the ZBA on any of the tax forms. INCOME AVERAGING
The rules for income averaging were made more difficult last year, and those who qualify will get a smaller tax break. However, if your income in 1984 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 four-year period from 1981 through 1984.
* You must have furnished at least half your own support during each of the preceding three years. (There are some exceptions to this test, explained in the instructions on the back of Schedule G, the income-averaging form.)
Schedule G may look rather complicated at first glance; but the explanations are quite clear, and the line item descriptions will lead you by the hand through all the necessary steps.
If you run into a problem, get a free copy of IRS Publications 506. If your marital situation changed during the last four years, you will probably have to do some off-form calculating to separately identify and track your income and your former or present spouse's income through the period. But if your income for 1984 shows a substantial increase, the potential tax savings may make it all worth while.
To complete Schedule G, you must have copies of your federal income tax returns for each of the years 1981, 1982 and 1983. If you can't find them, photocopies of returns for prior years may be obtained from the IRS for a fee.
Complete Form 4506, "Request for Copy of Tax Form," and mail it to the address shown on the form. Along with the request you must send $5 for each return you want. You can get a transcript of selected tax information -- enough to complete Schedule G -- for $2.50 per year, but you really should get a copy of the complete return to keep in your personal files. Tax Credits
After you have determined your initial tax liability -- from the tax table, the tax rate schedule or Schedule G -- you get another shot at reducing your tax bill with various tax credits.
Unlike adjustments and deductions, which only reduce the amount of income on which tax is levied, a tax credit gives you a dollar-for-dollar reduction in the tax itself.
The accompanying chart "Claiming Tax Credits" tells you where to enter each of the credits; the applicable IRS publication also is listed, should you want to do further research. Credit for the Elderly and Disabled
The old Schedule R/RP tax credit has a different look this year. The old special credit on Schedule RP for people receiving public retirement pensions has been eliminated; a modified Schedule R is now called "Credit for the Elderly and Permanently and Totally Disabled."
You may qualify for the tax credit on Schedule R under either of two circumstances:
* You were age 65 or over on Dec. 31, 1984, and had taxable income of any kind during the year.
* You were under age 65 on Dec. 31, you retired for permanent total disability or were permanently and totally disabled on Jan. 1 of either 1976 or 1977 and you received taxable disability income during 1984.
In either case, you must be a citizen or resident of the United States; and if you're married, you must file a joint return to claim the credit (unless you are filing a married-filing-separately return and didn't live with your spouse at any time during the year).
You start with an initial maximum allowance for your Schedule R filing status (which may be different from your filing category on the basic tax form). The maximum allowance is either $3,750, $5,000 or $7,500, depending on which of the nine status boxes you checked on the form -- so review the descriptions carefully to be sure you have selected the correct status.
From the starting amount you must subtract certain kinds of pension and annuity payments not included in taxable income, like the nontaxable portion of Social Security or Tier I Railroad Retirement benefits.
Then there is a further offset of 50 percent of adjusted gross income above specified amounts shown on Schedule R. The tax credit is 15 percent of any amount remaining after these deductions. Foreign Tax Credit
You may be allowed a credit against your U.S. tax liability for income (or equivalent type) taxes paid to a foreign country, if you were a U.S. citizen or were an alien resident of this country for all of 1984.
In lieu of the credit you may elect to take a deduction on Schedule A. In most cases, however, the credit will be preferable because it provides a dollar-for-dollar offset against U.S. taxes rather than a deduction from income. Of course, if you take the ZBA and do not itemize deductions on Schedule A, the credit is the only option available to you.
The amount of the foreign tax credit is computed on Form 1116. The formula used is set up to assure that the foreign tax credit is not applied to reduce your tax liability on income from U.S. sources. Detailed instructions are found on Form 1116, and further information about the credit is available in IRS Publication 514. Investment Credit
If you are employed -- either for yourself or by another -- you may claim a tax credit for your investment in certain depreciable personal property bought for use in your business or profession.
The normal credit is 10 percent of the qualifying value of ACRS (accelerated cost recovery system) properly placed in service during the year. The "qualifying value" is 60 percent of the amount invested in the purchase of property with a useful life of three years, and 100 percent of the amount of investment credit taken. But there is an alternative: If you elect to decrease the investment credit by two percentage points (that is, from 10 to 8 percent), you may then use the full cost basis for depreciation purposes.
This year the rules have been changed for specific types of business property, primarily automobiles and computers. The property must be used more than 50 percent for business to qualify for either the investment credit or accelerated depreciation.
If a car doesn't meet this 51 percent test, you lose the tax credit and must depreciate the car using the straight-line method over at least five years. Even if the car qualifies, there is a dollar limit on both the tax credit ($1,000) and annual depreciation ($4,000 for the first year, $6,000 a year thereafter).
There is a similar "business use" test for computers. In addition to forfeiting the investment credit if the test is not met, depreciation (for the actual percentage of business use) must be straight line for a period of 12 years.
Use of a personal computer for investment management does not qualify as business use. However, if you can substantiate more than 50 percent use for business, then you may count use for portfolio management (or other income-producing work) to determine the percent of total use to be counted for both the tax credit and depreciation.
On Form 1040, the investment credit has been combined with the job credit and the alcohol fuels credit into a single line item called the "general business credit." If you claim just one of these three credits, use one of the forms specified in the next paragraph; but if you claim more than one, you must also attach summary Form 3800.
Confused? Well, if you are in business and getting involved with the investment credit and depreciation or the other business credits, you probably should have professional help. If you want to go it alone, see the pertinent sections of IRS Publication 334 and the instructions for Form 3468 (investment credit), Form 5884 (jobs credit) or Form 6478 (alcohol fuels credit). Political Contributions
You may claim a tax credit for half of your total qualifying political contributions up to a ceiling of $100 on a joint return, $50 on all others.
To qualify, your contribution must have been made to a candidate for elective public office or to a newsletter fund or political action committee of a candidate or an elected public official.
The dollar checkoff on the tax return for financing presidential election campaigns is not a qualifying political contribution. Child and Dependent Care
For 1984, the rules for calculating the tax credit for expenses incurred in caring for a child or other dependent are unchanged from the rules that applied in earlier years. (The Tax Reform Act included minor changes to the rules for separated or divorced couples, but they apply starting in 1985.)
Specifically, if your adjusted gross income (AGI) was $10,000 or less, you may claim a tax credit equal to 30 percent of qualifying expenses up to the ceiling shown in the table above.
The rate is reduced one percentage point for each $2,000 (or fraction) of your AGI above $10,000. When your AGI reaches $28,000, the credit levels out at 20 percent for all remaining taxpayers, with no income cutoff.
There are two qualifying requirements:
* The expenses must have been incurred for care of a child under age 15 or for a spouse or dependent who was unable to care for himself or herself.
* The care must have been provided to permit the taxpayer (both spouses in the case of a married couple) to be employed for pay or to look for work. (In special circumstances, as explained below, the credit is available to a couple even if only one spouse was employed.)
The ceiling on eligible expenses is $2,400 for care of one individual, $4,800 for two or more. Because the percentage changes with rising income, the actual credit ceiling varies. The table should help you figure out how much of a credit you may claim.
Regardless of your marital status, you must have maintained a home of your own during 1984, and the qualifying individual for whose care you claim the credit must have been a member of your household.
The credit is normally allowed only for care in the home paid during 1984. But care outside the home -- nursery school, even a summer camp -- may also qualify in the case of a dependent child under age 15.
If you are married, you must file a joint return to claim the credit. However, you may be eligible even if you file a separate return if you meet these tests:
* You were legally separated or living apart from your husband or wife.
* You paid more than half the cost of maintaining a home in 1984 that was also the principal home of the qualifying individual for more than half the year.
* Your spouse was not a member of the household during at least the last six months of the year.
If you are single, the amount of expenses you may take into account for the credit may not exceed the amount of your earned income for the year.
For married taxpayers filing jointly, the amount of expenses claimed may not be greater than the earned income of the spouse who 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 $200 a month if you are claiming care of one dependent or $400 a month if you have two or more.
You may apply this exemption to either spouse each month, but to only one spouse in any single month. Therefore, at least one spouse must have been employed each month with earned income equal to or greater than whichever of the two amounts applies.
In addition, this assumption of earned income may be used only for those months in which the nonworking spouse was either incapable of self-care or a full-time student.
In some circumstances you may have an option. The cost of nursing care for a disabled dependent may qualify either for this tax credit or as a medical deduction. You cannot claim both for the same expense, but you may use whichever method gives you the larger tax benefit.
If you are using the zero bracket amount and not itemizing deductions, then you should take the tax credit. But if you itemize and already have enough medical expense to exceed the 5 percent exclusion, then the choice depends on your tax bracket.
You should figure it out both ways to see which technique results in the better tax break. Remember that if you decide to go the tax credit route, any qualifying expense in excess of the $2,400/$4,800 limit may still be added to medical expenses on Schedule A. Energy Credit
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 residence (including a condominium or cooperative, a mobile home or houseboat 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 itself must have been substantially completed 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 during the entire period. OTHER TAXES
After you have entered all of the various credits to which you may be entitled, it's time to move on to the next section of Form 1040, which deals with the components other than the basic income tax that make up your total tax liability. Self-Employment Tax
If you had $400 or more in net earnings from self-employment, you must complete and attach Schedule SE to determine if you owe any Social Security tax on those earnings.
In the event that you earned $37,800 or more in salary or wages subject to Social Security withholding, then you have already contributed the maximum and will not be liable for Social Security tax on additional earnings from self-employment. But you must still complete Schedule SE and attach it to your return to show the computations.
If you are subject to Social Security tax on Schedule SE, you do not send payment to the Social Security Administration (SSA). Instead, it goes on line 51 of Form 1040, where it gets added to your income tax liability. The IRS is responsible for transferring both the payment and the supporting data (from Schedule SE) to the SSA. Alternative Minimum Tax
If you're a high-income taxpayer with considerable income sheltered from tax, you may be liable for a "minimum" tax. The alternative minimum tax was established for the specific purpose of preventing taxpayers from sheltering so much of their ordinary income with sophisticated tax avoidance methods that they ended up paying little or no tax on large amounts of income.
The minimum tax is imposed on selected forms of income known as "tax preference" items. The list includes such things as incentive stock options; certain types of accelerated depreciation and depletion; otherwise excluded interest and dividends; the untaxed portion of net long-term capital gains (but not on sale of a personal residence); and selected Schedule A deductions.
A minimum tax of 20 percent is imposed on the excess of "alternative minimum taxable income" over normal taxable income, after excluding an exemption based on your filing status. The exemption for single taxpayers is $30,000; on joint returns, $40,000; and $20,000 for married taxpayers filing separately (as well as for estates and trusts).
Determination of minimum tax is made on Form 6251, and any tax due is carried to line 52 of Form 1040. Change for 1984: You must file Form 6251 if you have tax preference income (other than the dividend exclusion or the 60 percent long-term capital gain deduction) even if no minimum tax liability results. Additional explanatory information and instructions are found in Publication 909. ITC Recapture
If you took an investment tax credit in an earlier year, but disposed of the property on which the credit was taken before the expiration of its normal life, you may have to repay a part of the credit taken earlier. Use Form 4255 for the calculations. Tip Income
Use Form 4137 to compute any Social Security tax liability for tips received but not reported to your employer. In this same section, but on another line, you also report the amount of Social Security tax due on tips you had reported, but on which your employer had not withheld the tax. Tax on an IRA
Early withdrawal of funds from an IRA (before age 59 1/2, except in case of death or disability) requires payment of a penalty in addition to the normal tax due. This additional tax is reported on Form 5329, then carried to the "Other taxes" section of the 1040. Advance EIC Payments
If you received advance payments from your employer against anticipated earned-income-credit money, you do not offset those advance payments against what you now calculate you are due.
Instead, you enter the total of those advance payments (as shown on the Form W-2 from your employer) in this section, then enter further on (as explained below) the total amount of earned income credit you are entitled to.
There is no designated line on the tax forms for entering advance earned income credit payments. On Form 1040, write in "AEIC" and the amount received on the dotted line on line 56, then include that amount in the "Total tax" on that line. Follow the same procedure on the 1040A, using line 23. TAX COMPUTATIONS
Now you're ready to determine your total tax liability by subtracting total credits from the initial tax figure on line 40, then adding any other taxes to the resulting amount. The next step is to apply against that total tax all payments or other types of allowable credits. Tax Withheld
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, usually in Box 9. 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 57 of Form 1040, line 24a of the 1040A or line 8 of the 1040EZ. Estimated Tax
Then, on line 51 of the 1040, enter the total of all estimated tax payments made, plus any part of your 1983 tax refund you asked to be applied against your 1984 tax. (If you paid estimated tax, you may not use either of the two short forms.)
If you're filing a delayed tax return, enter on line 60 of Form 1040 the amount of any payment you had enclosed with Form 4868 when you requested the filing extension. Earned Income Credit
Enter on line 59 of Form 1040 or line 24b of the 1040A the amount of any earned income credit to which you are entitled. A worksheet is provided in the instruction booklet for computing this credit.
The earned income credit is generally limited to family taxpayers. To qualify, you must be either married filing a joint return or the head of a household.
As the name of the credit implies, you must have had some earned income during 1984 on which to base the credit. This may include earnings from self-employment in addition to wages or salary, tips and commissions -- but does not include a pension, retirement pay or income from investments.
Both your net earned income and your adjusted gross income must be less than $10,000. (If you are married, these ceilings apply to the combined totals for both spouses.) For 1985 this ceiling goes to $11,000, and the rate up as well.
Unlike the other tax credits discussed earlier, 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 advance payments from your employer because of the expectation of qualifying for an earned income credit, do not subtract the advance payments from the credit itself to come up with a net amount. Instead, report total advance payments received under "Other taxes," as explained above.
You may claim the earned income credit and report advance EIC payments received from your employer on either Form 1040 or 1040A, but not on the 1040EZ. Excess FICA Payments
If you worked for more than one employer during 1984 and a total of more than $2,532.60 was withheld for Social Security (FICA) or Railroad Retirement (RRTA) tax, claim the overpayment on line 61 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 $2,532.60 from any one employer. If a single employer withheld, by mistake, more than this ceiling, you must claim a refund from that employer rather than from the IRS on your tax return. Other Credits
Other credits against your tax liability that are allowed in this section affect relatively few taxpayers in the Washington area. If you are eligible for the special fuels credit (Form 4136),, the regulated investment company credit (Form 2439), or the credit for overpaid windfall-profit tax (Forms 6248 and 6249), you probably should have professional assistance.
A purchaser of a new diesel-powered car, van or light truck between Jan. 1, 1985, and Jan. 1, 1988, will get a "diesel fuel differential" refund to compensate for the increase in the tax on diesel fuel from 6 cents to 15 cents.
If you are the original purchaser of a 1979- or later model diesel vehicle that you still owned on Jan. 1, 1985, you may be eligible for a similar one-time tax credit, on a sliding scale based on the model year. Detailed instructions are found on Form 4136; if you qualify, the credit goes on line 62 of Form 1040. PLUS OR MINUS?
Finally, add up all of the payments and credit allowances and subtract the total from your total tax on line 56. If the tax is larger than the payments, you owe Uncle Sam the difference; send a check or money order along with the tax return, payable to Internal Revenue Service. Be sure to write your Social Security number on the payment.
If you end up with a balance due IRS of $400 or more and the underpayment is more than 20 percent of your total tax liability, you should complete Form 2210 to determine if there is an interest penalty due on the shortfall. (Farmers and fishermen use Form 2210F.)
A penalty might be due because insufficient tax was withheld from your pay or because you had substantial investment income, retirement pay or other nonwithholding income and either failed to file an estimated tax return or filed and underpaid.
You will not have to complete Form 2210 if you were a U.S. citizen or resident for all of 1983 and had no 1983 tax liability (based on a full 12-month tax year); or if your total tax liability for 1984 is less than $400 (this amount increases to $500 for 1985).
There are several exceptions to the imposition of the penalty, explained in some detail on Form 2210. Additional information may be found in Publication 505, "Tax Withholding and Estimated Tax."
For the first time, the IRS has the authority to waive the imposition of the penalty if the underpayment is due to a casualty or disaster or other unusual circumstance, so that the penalty would be patently unfair. Further, the IRS may waive the penalty for a taxpayer who retired (at 62 or older) or became disabled in either 1983 or 1984; the penalty also will be waived if the underpayment is attributable to the inclusion in income of taxable Social Security benefits.
If you are filing Form 2210, check the box just under line 68 of Form 1040. (You may not use either 1040A or 1040EZ with Form 2210.) If the form shows that you owe a penalty, write the amount in the "$" space under line 68, and include it in the payment you send to the IRS.
If your total tax liability turns out to be less than your total payments, smile! You have a refund due, and the IRS will send you a check after a while. Or you may have all or part of the refund applied against your estimated tax for 1985 by entering an amount (not greater than the amount of the refund) on line 67.
If you owe additional tax, it is perfectly legal to wait until April 15 to mail the payment with the return. Unless the amount due is small, it makes sense to hang on to the money, earning interest, as long as you can.
But if you're due a refund, send the return in as soon as it's completed. Not only will you get your check sooner by virtue of filing sooner, but the delay between filing and refund is shorter during the early part of the filing season, before the IRS is swamped with returns. ESTIMATED TAX
A taxpayer who is self-employed or who expects to have considerable income in 1985 that is not subject to withholding must make special arrangements to comply with federal pay-as-you-go income tax rules.
If you are employed, federal income tax is normally withheld from your pay, unless you had indicated on the Form W-4 you filed with your employer that you were entitled to a large enough number of withholding exemptions to avoid withholding.
Withholding is optional on taxable distributions from pension, profit-sharing and stock ownership programs, IRAs and most commercial annuities. Generally, tax will be withheld unless the recipient specifically directs the payer not to withhold.
There are a number of exceptions to the requirement for paying estimated tax. The requirement is waived if you fit any of these categories:
* You expect that your gross income for 1985 will not include more than $500 of taxable income not subject to withholding.
* You expect that either your total tax liability or your net tax deficiency -- that is, the difference between your total tax liability and the amount of tax withheld during the year -- will be less than $500.
* 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 and 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 of the other filing categories.
Although the rules specify a $500 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 are not required to pay the full amount of the estimated shortfall. You are only required to pay enough tax -- by withholding or estimating payments or both -- to equal 80 percent of the eventual tax liability. So if withholding for the year will equal 80 percent or more of your estimated total tax, you can forget the whole thing.
But if your income is uncertain, you may want to make a payment of estimated tax sufficient to provide a small cushion above the 80 percent minimum to avoid the imposition of a penalty in the event your estimate was a little low. New this year: You must include the alternative minimum tax (if you expect it to apply) when determining if estimated tax is due.
There are other exceptions that also will relieve you of liability for a penalty. For example, if the total of tax withholding and estimated tax payments during 1985 equals or exceeds your total liability for 1984, there will be no penalty. See Publication 505 for more information.
You file estimated tax on Form 1040-ES. If you filed an estimated tax return for 1984 and are still living at the same address, you should have received a 1985 1040-ES packet in late January.
If you didn't get a packet in the mail and you think you are liable for filing an estimated tax return for 1985, pick up a packet at any IRS office or request it by mail from the address given in your tax information booklet.
The 1040-ES packet includes a worksheet for estimating your tax liability and possible tax deficiency, plus four payment vouchers and mailing envelopes. Vouchers received from the IRS have your name, address and Social Security number preprinted.
You may pay the entire estimated deficiency with the first voucher on April 15. You will probably prefer, however, to send one-fourth of the total with that first voucher, then additional payments of one-fourth each by June 17 and Sept. 16 of this year and Jan. 15, 1986.
If you end up with an overpayment on your 1984 tax, you may elect to have all or part of that overpayment credited against your 1985 tax instead of being refunded to you. Each of the estimated tax vouchers provides a space for claiming credit for the 1984 overpayment; you may take the entire credit on the first voucher(s) or spread the total overpayment evenly over all four vouchers.
If your estimate of eventual tax liability changes during the year, simply adjust the remaining payments to correspond to the new balance due -- either 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 and divide the total amount of the estimated deficiency evenly over the remaining number of payments. Filing a New W-4
There is a legal alternative to filing an estimated tax return. 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 withholding allowances.
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. You can thus ensure having enough money withheld to cover your entire tax liability (or at least 80 percent of it), eliminating the need to file an estimate.
You may also file a new W-4 to reduce the amount withheld 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 proper level simply to generate more take-home pay. You may find yourself with a large tax bill next April plus an interest penalty for underpayment.