You have a choice of five different filing categories. The first four essentially are the same as their counterparts on the federal return: single, head of household, married filing jointly and married filing separately.
The fifth filing category permits a married couple to file separate returns on the same form. This category should be used if each spouse had gross taxable income of more than $1,250 in 1985.
If you use this status, enter data pertaining to the husband in column A and the wife's information in column B. All other filers should use only column B. Tax Forms
For 1985, the District of Columbia has introduced a new tax form, D-40EZ. Like its federal counterpart, the D-40EZ is a simple one-page form available only to a single taxpayer without dependents with taxable income of less than $50,000, coming only from wages, salary and tips plus interest income of not more than $400.
To use the D-40EZ you must have been a D.C. resident for all 12 months of 1985; make no payments of estimated tax; take the zero bracket deduction instead of itemizing; claim no adjustments to income, and not file a Schedule H, Property Tax Credit Claim.
If you do not fall within these limitations, you must use the standard Form D-40, which is little changed from last year's tax form. Exemptions
Personal exemptions are the same as on your federal return -- one per taxpayer (and spouse, on a joint return) plus one for being age 65 or older and one for legal blindness. The only difference: If you file as head of a household you get an extra personal exemption not available on the federal return.
One exemption is allowed for each dependent claimed on your federal return. On a combined separate return you may allocate the dependents to husband or wife, as you wish.
The dollar amount for each personal and dependent exemption remains at $750, unchanged from last year. On a part-year return, exemption allowances must be prorated at $62.50 for each month of residence. Income
In Part I on page 2 of the District D-40, transfer the amounts, line by line, for the various types of income as they appear on your federal return. Do not make any changes here to federal figures; if modifications are required, they will be taken care of in Part II of the return.
For example, even though Social Security and Railroad Retirement Act benefits are not taxed by the District of Columbia, any amount on line 21b of Form 1040 should be entered on line 39 of the D-40. The same amount will be subtracted later by entering it on line 52 of Part II.
For line 34 (capital gain or loss) of the D.C. return, use the figure from either line 13 or line 14 of your federal return. (You should have an entry on only one of those lines of your 1040, not on both.)
If you filed a joint federal return and are filing combined separate for the District, enter income items and adjustments in columns A and B as if you had filed separate federal returns. The line-item total for the two columns must equal the amount for the corresponding line on the federal return. Ajustments
On line 42 of the District return, claim the total of all adjustments to income from line 31 of the federal return. (Do not eliminate from the total the Schedule W deduction for a two-earner couple; that will be taken care of in the next step.) Attach to your return a list of individual adjustments to support the total. Additions
Line 44 is where you add back to income the Schedule W deduction -- the "marriage tax penalty" allowance -- taken on the federal return. Enter the amount in the column of the lower-earning spouse.
Other "additions" include any adjustments taken on line 42 that apply to a period when you were not a District resident, and any income from Form 4972 not already included in Part I. (This is the form for computing 10-year averaging on a lump-sum distribution from a retirement plan, a federal tax break not allowed on the District return.)
Do not add to your District income interest received on municipal bonds. Unlike most states, the District does not tax interest income from municipal bonds issued by "foreign" states; tax-free income from such bonds remains tax-free in the District regardless of the state of issue.
See page 3 of the District instruction booklet for other additions that apply only to a limited number of taxpayers. Subtractions
Interest and dividend income received on obligations of the United States or its agencies is not taxable by the District (or any state). The total of such income included on your federal return should be subtracted by entering the amount on line 48.
If you reported a state tax refund as a part of federal income, enter the same amount on line 50 as a subtraction. And on line 55, do the same for any money you won in the D.C. lottery, which is taxable on the federal return but not in the District.
If you do not itemize deductions, you may claim on line 49 one-half of your contributions made during 1985. The amount claimed should correspond to line 16d of the federal Form 1040A or line 34e of federal Form 1040 if you were a D.C. resident for the entire taxable year.
If you were a resident of the District for only a part of the year, subtract from gross income (by entry on line 51) all income received during the period you were not a resident, to the extent it appears above in the "Income" section.
In this situation, a compensating "addition" (on line 46) is required to add back any adjustment such as an IRA contribution or employe expense carried over from the federal return but attributable to the nonresident earnings being excluded.
The District has retained an adjustment for disability (similar to the old federal adjustment that was eliminated a couple of years ago). If you included disability payments in your federal income (in Part I), complete D.C. Form D-2440 to determine if you qualify for an adjustment of your District taxable income. You won't find the details in the D.C. instruction booklet; look at Form D-2440 itself for specific instructions. A qualifying exclusion should be entered on line 53.
The last major subtraction, "Income Previously Taxed by D.C.," may require some calculations on a separate worksheet. For example, if you received distributions in 1985 from an IRA, the entire amount is taxable on your federal return because tax had been deferred on the earlier IRA contribution.
But prior to 1982 you were not permitted to exclude IRA contributions from liability for D.C. income tax. Paying tax on the full amount of IRA distributions would then result in double taxation on the same dollars.
So you now subtract from total 1985 distributions IRA contributions made while you were a D.C. resident and on which you already had paid D.C. tax -- but reduced by any amounts you already have excluded on D.C. returns since 1982.
If previously taxed contributions (after subtracting the 1982-1984 adjustments) are larger than 1985 distributions, carry the balance forward to be applied against 1986 and later distributions until used up.
If you received pension or annuity payments prior to 1982, the old method of reporting those payments on the District return was substantially different from the federal method. It isn't practical to examine all the possible situations here. The basic rule to remember is that the District government does not expect you to pay tax a second time on money that had been taxed previously.
If your entire pension payment already was fully taxable under the old rule, then it continues to be fully taxable now. But if before 1982 you had not recovered tax-free an amount equal to your cost, then for 1985 (and future years, if necessary) exclude from taxable income all pension payments until you have recovered tax-free an amount equal to your total contributions to the plan.
If you went through these off-return calculations when preparing earlier returns, you need only continue the figures for 1985 and future years until your payments become fully taxable. Deductions
Just as on the federal return, District taxpayers have a choice between itemizing deductions or taking the zero bracket amount (ZBA). You have this option regardless of which way you went on the federal return.
The District ZBA is $500 each for couples filing either separate or combined separate returns, and $1,000 for all other taxpayers. Because this is a much lower amount than the federal allowance, you may want to itemize on your District return even if you took the ZBA on the federal return.
If you go this route, a D.C. Schedule A is provided in the tax package. But if you are itemizing on both federal and District returns, District Schedule A is not required. You need only copy the total for each category of deduction from your federal Schedule A to the appropriate line in Part III of your District return.
After you have added all the deductions carried over to Part III, you must subtract some deductions authorized on the federal return but not allowed for D.C. The two most important of these: any deduction taken for state income tax paid, and any deductions for periods when you were not a resident of the District.
In the case of a married couple filing either separate or combined separate returns, both spouses must file the same way. That is, if one itemizes, the other must itemize and may not take the ZBA. If they itemize, deductions may be split between them any way they wish; but the $500 ZBA is an individual deduction and may not be shifted. Tax Credits
The qualifying rules for the child and dependent-care credit are the same as for the federal return, but the amount of the credit is considerably less. So don't simply copy the federal credit to your District return.
Instead, multiply the authorized federal credit by 30 percent (.30) to get the amount of the D.C. credit. If you are filing a part-year return, or have not filed a federal return, use D.C. Form D-2441 to substantiate the credit claimed.
One difference between IRS rules and District rules: To qualify for the federal child and dependent-care credit, a married couple must file a joint return; the D.C. credit may be claimed on a combined separate return.
If you were required to pay tax to another state on income earned in that state during a period when you were a D.C. resident, you may be able to claim a credit for all or part of the tax paid against your District tax liability. The formula for computing the amount of the credit is on page 3 of the instruction booklet. Attach a copy of the other state return to your D.C. return.
There is also a tax credit for 50 percent of campaign contributions to specified District of Columbia political candidates. The list of offices for which the credit is authorized is on page 4 of the tax booklet. Maximum credit is $100 on a joint return, $50 per taxpayer on all others. Federal Employes
Because of the special nature of the relationship between the District of Columbia and the federal government, D.C. tax laws contain special provisions not found in any of the 50 states. People in these four categories are exempt from District income tax:
An elected officer of the U.S. government, unless actually domiciled in the District.
An officer of the executive branch appointed to office by the president subject to confirmation by the Senate and whose appointment may be terminated at the pleasure of the president, unless domiciled in the District at any time during 1985.
A person on the personal staff of an elected member of the legislative branch (but not on a committee staff) if a bona fide resident of the same state as the elected member.
A justice of the U.S. Supreme Court not domiciled in the District at any time in 1985. Nonresident Refunds
If you were not a resident of the District during 1985 but D.C. tax was withheld from your pay, file Form D-40B to claim a refund of the amount withheld. Property Tax Credit
Residents of the District with household gross income of $20,000 or less during 1985 may be eligible for a property tax credit. The requirements to qualify are on page 5 of the instruction booklet.
Use Schedule H to calculate the credit. Carry the amount of the credit to line 20 of Form D-40, and attach Schedule H to the return.
If you have no income tax liability and are not filing a District tax return, you still may claim the property tax credit by filing Schedule H by itself. If you qualify, you will receive a cash payment from the D.C. government for the amount of the credit.
Reminder: You are required to list, on page 2 of Schedule H, the names and Social Security numbers of all members of the household (other than the claiming taxpayer and spouse, whose names go at the top of the form). Budget-Stretcher
If you customarily have your D.C. tax returns prepared by a professional who doesn't use your instruction booklet or forms, check the box just above the signature block.
Then next year, instead of getting a booklet and set of forms in the mail, D.C. tax dollars will be saved by sending you only a postcard with the mailing label to be used on the return.