After you have added all your taxable income, check to see if you qualify for any "adjustments to income." 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 authorized adjustments, tells you where to enter each item and identifies the IRS publication to see for more information than is provided in the following explanations. Moving Expenses
If you changed your principal residence during 1985 to work at a new location -- for either the same or a different employer -- you may deduct all or part of the expenses of the move. Two requirements must be met.
First, the distance between your new place of employment and your old residence must be at least 35 miles greater than the distance between your former job location and your old residence. (The location of your new residence is not a factor.)
And second, you must work in the new area (though not necessarily for the same employer) for at least 39 weeks during 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 termination of employment is due to death or disability, transfer for the employer's benefit or discharge other than for willful misconduct.)
If you meet both tests, you may deduct as an adjustment to 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 for side trips to visit friends or family en route.
If you go by car, you may use either out-of-pocket expenses for gas, oil and repairs (but not depreciation or other "overhead" costs) or a flat 9 cents a mile. In either case, you may add tolls and parking fees.
The cost of moving your household goods 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 house-hunting trips before the move but after being hired for the new job (or making definitive arrangements for self-employment). You also may include the cost of meals, lodging and miscellaneous personal expenses for up to 30 days (90 days for an overseas move) if you had to stay in temporary quarters after arriving in the new area.
Finally, you may count the costs associated with selling your old residence and buying a new home, such as broker commissions and legal fees; but a loss on the sale may not be claimed. If you rent instead of own, include any expenses in connection with terminating an old lease or negotiating a new one.
In the case of the house sale, you may have a choice. Some of the selling costs on the old home may be deducted as either a moving expense on Form 3903 or a selling expense on Form 2119. 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 (assuming you owned the house for longer than six months). 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 allowable ceiling on this type of moving expense still may 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 expenses. But claim the total amount 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. Employee 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 as an adjustment to 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 apply 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 was for 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 increments. 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 you may not apply different methods to different trips; you must use whichever method you elect for all travel during the year.
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 duration and business purpose of each trip.
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 another.
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 reduce the record-keeping chore simply by keeping track of business mileage. You may then take a deduction of 21 cents a mile (up from 20.5 cents in 1984) for the first 15,000 miles of business use, plus 11 cents a mile 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 continuously 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, but don't count more than 15,000 miles in any single year. That's because you were only allowed to claim the reduced rate of 11 cents for each mile above 15,000, rather than the higher standard rate.
Whether you use the actual expense method or the optional standard mileage rate, tolls and parking fees should be added; but you may not claim purely personal expenses such as the cost of a driver's license or fines for traffic violations.
The Tax Reform Act of 1984 tightened the rules on record-keeping for business expenses, particularly travel and entertainment. However, in 1985 Congress in effect returned to the less restrictive rules in place before TRA, specifically repealing the requirement for contemporaneous record-keeping that had brought considerable public protest. As a result, claims for transportation expenses need only be substantiated by "adequate" records, sufficient to corroborate the taxpayer's statements. IRA and Keogh
If you had earned income in 1985, you may claim an adjustment on your tax return for contributions to an Individual Retirement Account for up to 100 percent of that income up to the annual ceiling of $2,000.
On a joint return with one spouse having no earnings, the ceiling increases to $2,250, divided between two separate accounts -- one for the worker, one for the nonearning spouse -- in any desired proportion, but with no more than $2,000 in either account.
You may open an IRA and make payments (based on 1985 earnings) as late as April 15, 1986, and still claim the deduction on your 1985 return. That April 15 date is firm and will not be extended even if you file for an automatic four-month extension for your return.
If you have earnings from self-employment, you may make payments into a Keogh account and claim an adjustment for a corresponding amount on your tax return. The annual ceiling for Keogh deposits is $30,000, based on a nominal maximum contribution of 25 percent of net earnings from self-employment.
The word "nominal" is used because that 25 percent figure is to be applied to net earnings after taking the Keogh deduction itself. This sounds convoluted; but as a simple rule of thumb you may figure the true ceiling as equal to 20 percent of net earnings before the Keogh deduction.
The April 15 cutoff date for payments and a tax adjustment applies to Keogh contributions as well as to IRAs. However, the Keogh account must have been opened with at least a token payment by Dec. 31, 1985, for the deduction to be allowed for 1985. And unlike the IRA, an extension for filing your return provides a corresponding extension for payments into your Keogh account.
Annual reports are now required for Keogh plans, including those plans in which the only participant is the owner. Form 5500-C must be filed at least once every three years, including the initial and final years of a plan. For the intervening years a shorter form 5500-R may be filed. The Keogh report does not go with your tax return; it must be filed separately, not later than July 31, 1986, for calendar-year plans. Early CD Withdrawal
If you redeemed a certificate of deposit before its maturity date, you probably were assessed an interest penalty that the savings institution withheld from the proceeds.
Do not subtract the penalty from the earned interest. Instead, report the full amount of interest income as stated on the form 1099-INT 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 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. (This is the "flip" side of the report of alimony as taxable income by the recipient.)
Payments specifically designated as support for a minor child are not deductible, even if they are paid to your former spouse rather than directly to the child. Under the 1985 rules, child support may be inferred from the terms of the financial agreement; for example, if the dollar amount of what is called "alimony" is reduced to coincide with the date when a child reaches majority age, that part of the total payment may be considered child support despite the wording of the agreement.
New for 1985: If you claim an adjustment for alimony, you must enter on line 29 the last name and Social Security number of the person to whom it was paid. Two-Earner Families
To qualify for the deduction for a two-earner family, 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 allowable adjustment is 10 percent of the net earned income of whichever spouse earned less, up to a maximum adjustment 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 Form 1040A, the calculations are made in Part I of Schedule 1 and the credit entered on line 12 of the 1040A.