Several old-time favorites in the section labeled "Adjustments to Income" are missing this year, courtesy of the Tax Reform Act of 1986. The remaining adjustments, plus one new one, may be claimed whether you itemize or take the standard deduction.
The accompanying table, "Reporting Adjustments," tells you where to enter each adjustment and identifies the IRS publication that contains more detailed information than is provided in the following explanations.
The costs of moving in connection with your job may now be claimed only as a miscellaneous expense on Schedule A; the deduction is lost if you don't itemize.
Employee Business Expenses
No adjustment is allowed for the travel portion of employee business expenses, which are now deductible only on Schedule A. However, if your employer reimbursed you for such expenses, you may claim an adjustment up to the extent to which such reimbursement was included on your W-2 and reportable as income.
Use Form 2106 to explain the adjustment, as well as to support a Schedule A itemized deduction.
The tax-saving technique for reducing the tax bite on families in which both spouses worked for pay has been eliminated, along with Schedule W, the form on which the reduction was calculated.
The IRA Deduction
The law authorizing tax-deductible IRAs for virtually everyone has been modified by tax reform. But there is no change in the rules for anyone who is not covered by some kind of employer-sponsored retirement plan, including -- but not limited to -- 401(a), 401(k), 403(a), 403(b), SEP or Keogh. (On a joint return, neither spouse may be covered by such a plan.)
Receipt of retirement pay from a former job is not considered "participation" and doesn't disqualify an IRA contribution based on earnings from other (current) employment.
If you do participate in any kind of employer plan, you may still contribute to an IRA and claim an adjustment to income if your AGI doesn't exceed specified limits. A single taxpayer is eligible for the full IRA deduction if his adjusted gross income (AGI) is no greater than $25,000; the deduction starts to phase out at that level at the rate of $200 for each $1,000 of AGI, and is completely gone at $35,000. The comparable numbers for a joint return are $40,000 and $50,000.
Even if you are not eligible for a tax-favored IRA deduction, you may still contribute to an IRA up to the $2,000 ceiling. The amount of the contribution will not be deductible as an adjustment on your tax return, but all later earnings may accumulate without tax liability until withdrawn.
Be sure to keep track of all taxable IRA contributions; when later withdrawn, they will not be taxed a second time.
If you are subject to the restrictions, use new IRS Form 8606 to show your calculations. The same form is to be used to account for a withdrawal that includes any part of a previously taxed contribution.
Another IRA change: If you're married (and qualify under the new rules), you may contribute to a spousal IRA even if your spouse had a small amount of earned income in 1987, such as payment for jury duty or a director's fee. Of course, if earned income exceeded $250, your spouse may be eligible for a larger IRA based on his or her own individual earnings.
If you're self-employed, you may write off 25 percent of the cost of health insurance for yourself and your family -- provided neither you nor your spouse is eligible for a health plan offered and subsidized by your employer. (The premium cost of Medicare Part B qualifies as health insurance for this deduction.)
This adjustment is available even if you use the standard deduction. But it is only on the books for three years, and is scheduled to expire after 1989.
Early CD Withdrawal
If you redeemed a certificate of deposit before maturity, you were probably assessed an interest penalty. Do not subtract the penalty from the earned interest. Instead, report the full amount of the interest income (as shown on the Form 1099INT) on Schedule B, then enter the amount of the penalty on line 27 of Form 1040, where it is included in total adjustments and subtracted from income.
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 as an adjustment to income. Payments for support of a minor child are not deductible as alimony even if paid to your former spouse rather than directly to the child.
If you claim this adjustment, you must enter on line 28 of Form 1040 the name and Social Security number of the person to whom it was paid.
---Adjustment:-----------------Where to report:---IRS Publication:
Employee business expense (reimbursed)...1040 line 23 and......463
IRA deduction (in some cases Form........1040 line 24..........590
.............8606 may be required).......1040A line 11............
Keogh/SEP deduction (self-employed)......1040 line 26..........560
Health insurance (self-employed).........1040 line 25..........334
CD withdrawal penalty....................1040 line 27..........550
Alimony payments.........................1040 line 28..........504