Did you find that the first-time inclusion of Social Security benefits created an income tax shortfall that rendered you susceptible to an underpayment penalty? The IRS recently announced that for 1984, it will waive any penalty due for underestimating tax liability caused solely as a result of the tax on Social Security or Railroad Retirement Act Tier 1 benefits.

But the IRS cautions that this waiver will not extend to 1985 returns. If you expect that your 1985 tax shortfall -- the difference between your final tax liability for the year and the total of tax withheld on wages, pension payments or other income -- will come to $500 or more, you should file Form 1040-ES and pay estimated tax during the year to avoid a possible penalty next year.

Q: For the past five years I have used a part of my personal residence as rental property, using the number of rooms occupied as a basis for calculating the allowable expenses and depreciation. If I sell the property and wish to apply the once-in-a-lifetime over-55 exclusion on the gain, will I be required to reduce the gain by rental factor? Or would it simply be a matter of adding the depreciation to the cost basis?

A: You have to do both; and the correct first step is to subtract the depreciation from -- not add it to -- the cost basis. By subtracting, you reduce the cost basis, thus effectively increasing the gain by the amount of depreciation that had been taken.

In addition, you must allocate the total gain between the personal residence and that part that had been converted to rental property. All of the gain allocable to the personal residence may be excluded under the over-55 rule (up to the $125,000 ceiling). But that part of the profit allocated to the business property may not be excluded and must be reported on Schedule D as a long-term gain.

Q: Last October, in answer to a question about a lump-sum distribution of an insurance company Keogh annuity, you explained how to reduce the tax bite by 10-year averaging. My Keogh and IRA are with a bank. The IRS told me I cannot remove the total amount in a lump sum, but must stick to life expectancy removal. Is a Keogh (and IRA) with a bank different from an insurance company annuity?

A: No; the rules are the same regardless of where the funds have been placed. Of course, if your funds are in a CD, you may face a bank penalty for early withdrawal if you remove the money before maturity.

If you are age 59 1/2 or older, you may remove the entire amount from your IRA and Keogh accounts without penalty (other than the possible bank penalty mentioned above). Only the Keogh money is eligible for the special 10-year averaging, however, and only if you have had the Keogh for at least five years.

IRA proceeds are always taxable in full as ordinary income in the year withdrawn (unless rolled over into another IRA within 60 days after withdrawal). Withdrawals from both the Keogh and IRA must begin by April 15 of the year after the year in which you reach 70 1/2; but even then you have the option of either lump sum or annual withdrawals based on life expectancy.

Q: I will reach age 70 1/2 on April 2. May I make payments to my IRA in 1985 -- or at least prior to April 2? My wife is about a year younger than I; may I make payments into her IRA for 1985? For 1986?

A: You do not qualify for an IRA deposit for 1985. You cannot take a deduction for a payment to your IRA during or after the year you reach age 70 1/2.

In addition, you must start at least annual withdrawals from your IRA -- in accordance with an IRS life expectancy table -- not later than April 15, 1986, (the year following the year in which you reach age 70 1/2).

Even though you have reached that age, however, you may make a contribution to your wife's spousal IRA for 1985 -- up to $2,000, assuming your earnings for the year are at least that much. But you can't make a 1986 deposit for her; just as you were, she is ineligible for an IRA deposit for the year in which she reaches age 70 1/2.