Like most states in the nation, the District of Columbia found it necessary -- or certainly desirable -- to make changes in its tax regulations to accommodate the impact on District tax returns of the federal Tax Reform Act of 1986.
Among other changes, the nine different tax brackets of prior years were reduced to three: 6 percent on taxable income up to $10,000; 8 percent for income over $10,000 to $20,000, and a 10 percent bracket for taxable income over $20,000. The old "zero bracket amount" label was scrapped and, like the federal return, the "standard deduction" is back again. And both the standard deduction and the personal exemption have been increased. Federal Employees Because of the special nature of the relationship between the District and the federal government, there are special provisions in the D.C. tax laws not found in any of the 50 states. People in these four categories are exempt from District income tax: An elective officer of the federal government, unless actually domiciled in the District. An officer of the executive branch of the federal government appointed by the president, subject to confirmation by the Senate and serving at the pleasure of the president, unless domiciled in the District at any time during 1987. A justice of the U.S. Supreme Court, unless domiciled in the District in 1987. An employee on the personal staff of an elected member of the federal legislative branch (but not a committee staff) who is a bona fide resident of the same state as the elected officer. Nonresidents If you were not a resident of the District during 1987 but D.C. tax was withheld from your pay, file Form D-40B to request a refund of the amount withheld. Other Taxpayers You may use the short Form D-40EZ if you meet the tests described on the back of the form. If you fail to meet any of the nine specifications, you must use the long Form D-40. The headings of both forms look different this year; they are designed to be read by optical scanners. Follow the letter and number examples on the first page of the instruction booklets; careless entries that can't be read by the scanner will slow processing and may mean a delay in getting any refund due.
The label on your instruction booklet is machine-readable, so use it if you received a booklet. Apply the label carefully right over the printed boxes, and don't enter any information in the name, address and Social Security boxes in the heading; all the necessary data is on the label.
The relatively simple D-40ES also provides boxes for entering all the numbers on the form, much like the federal Form 1040EZ. Since the short form may only be used if you're single, the standard deduction and personal exemption are preprinted on the form.
The explanations that follow are for users of the long Form D-40; if you elect to use the D-40ES, the instructions on the form itself should be adequate. If you have any questions not answered on the form or in the instruction booklet, you may find what you're looking for here. Filing Status
You have a choice of five filing categories, unchanged from last year. The first four are essentially the same as their counterparts on the federal return: single, head of a household, married filing jointly and married filing separately.
The fifth filing status permits a married couple to file separate returns on the same form. This category is useful only if both spouses had taxable income in 1987. You may want to work out the numbers both ways -- joint and combined separate -- then pick the method that comes up with the smaller total tax. If you use the combined separate method, enter the husband's data in column A and the wife's in column B. All other filers should use column B only. Exemptions
The District did not follow the federal example in eliminating the extra exemptions for age and blindness, so if you were 65 or older or blind (or both) on Dec. 31, 1987, add a "1" in the appropriate box or boxes to claim these.
In addition, you get one exemption for each dependent claimed on your federal return. (On a combined separate return, you may allocate each dependent to husband or wife, as you wish.) And if you file as head of a household, you automatically get an extra exemption, for a total of two.
The value of each personal exemption and exemption for dependents has gone up 18 percent, from last year's $750 to $885. If you're filing a part-year return, each exemption has a value of $73.75 per month. Income
In Part I on page 2 of Form D-40, transfer the amounts, line by line, for the various types of income as they appear on your federal return. Do not make changes here to the federal figures; any modifications required will be taken care of in Part II.
If you filed a joint federal return and are filing combined separate returns on a single D-40, enter income items in columns A and B as if you had filed separate federal returns. Although the total for each line doesn't appear on your District return, the line-item sum of columns A and B must equal the amount for the corresponding line on the federal return. Adjustments
Enter the total of all adjustments to income from line 29 of your federal Form 1040 on line 42 of the D.C. return. Attach to your return a list of the individual adjustments claimed. Additions
With the elimination of the two-earner deduction on the federal return, there are now very few additions to federal income for District tax purposes. They are listed on page 6 of the instruction booklet, and should be entered on line 44 ("Other Additions") if there is room; if not, attach a separate list to your return and enter the total on line 44. Subtractions
Interest and dividend income received on obligations of the United States or its agencies is not taxable by the District. The total of such income included on your federal return should be entered on line 46 for later subtraction.
If you reported a state tax refund as a part of federal income, enter the same amount on line 47 as a subtraction. And on line 52 show the amount of money you won in a D.C. lottery, to the extent it was included as federal income. (Other gambling winnings, such as prize money on a lottery in another state, are taxable in the District.)
In line with new federal rules, if you don't itemize deductions you may not subtract charitable contributions this year on the District return.
If you were a resident of the District for only part of the year, on line 48 subtract income received during the period of nonresidence (to the extent it appears in Part I). At the same time, a compensating "addition" is required on line 44 to add back any adjustment (an IRA contribution, for example) carried over from the federal return but attributable to the nonresident earnings being subtracted.
If disability payments were included in your federal taxable income in Part I, complete D.C. Form D-2440 to determine if you qualify for an adjustment to your District income. Instructions for completing D-2440 are found on the form itself.
You may qualify to exclude a portion of retirement pay from District taxable income. If you were 62 or older on Dec. 31 and you received taxable military retirement pay, pension or annuity income or survivor benefits from the D.C. or federal government in 1987, you may exclude those payments, up to a maximum of $3,000. On a joint or combined separate return, the exclusion is figured separately for each spouse.
Calculate the exclusion on the worksheet on page 6 of the instruction booklet and carry the allowed amount to line 53. Do not attach the worksheet to your return. Deductions
You have a choice between itemizing and taking the standard deduction, regardless of which way you went on your federal return. The D.C. standard deduction for 1987 is $1,000 each for couples filing either separate or combined separate returns, and $2,000 for all other taxpayers.
These allowances are double the 1986 amounts. However, they still are substantially lower than the federal standard deductions, so you may want to itemize for D.C. even if you stayed with the standard deduction on your federal return.
If you go this route, a D.C. Schedule A is provided in the tax booklet. If you itemize on both the federal and D.C. returns, you need not complete the District's Schedule A. Simply transfer the total for each category of deduction from your federal Schedule A to the appropriate line of Part III of your District return. All the deductions should be transferred to the D.C. return as they appear on your federal Schedule A except for any interest expense incurred to carry U.S. securities (since they produce income that is exempt from D.C. tax).
After totaling the deductions copied from federal Schedule A, you must subtract some deductions not allowed for D.C. The two most important of these are the federal deduction taken for state income tax paid and deductions allocable to periods when you were not a D.C. resident.
If you're filing combined separate returns, you may split your deductions between husband and wife any way you wish, using columns A and B. But on separate returns, if either spouse itemizes, the other must itemize and may not claim the standard deduction. 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 D.C. return.
Instead, multiply the federal credit (from Form 2441) by 30 percent (.30), then enter the answer on line 14 of Form D-40. If you are not filing a federal return or are filing a part-year D.C. return, use D.C. Form D-2441 to calculate the amount of credit allowed.
If you are married, you must file a joint federal return to qualify for the federal child or dependent care credit. However, you may claim the D.C. credit if you are married and file combined separate returns on a single form.
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 against your D.C. tax liability for all or part of the "foreign" tax paid. The formula for computing the amount of any credit is provided on page 4 of the D.C. instruction booklet. Attach a copy of the other state return to your D.C. return.
Although the credit for political contributions was eliminated on the federal return, a D.C. credit is still allowed. You may claim a tax credit for 50 percent of campaign contributions to any of the D.C. political candidates specified on page 4 of the instruction booklet, up to a maximum of $100 on a joint return, $50 on all others.
New this year: The District has instituted a low-income credit, available to a taxpayer who filed a federal return but ended up with zero federal income tax liability because adjusted gross income was less than the total of federal personal exemptions and standard deduction.
This is not a "refundable" credit; that is, you must have D.C. tax liability against which to claim the low income credit, and the final answer cannot be less than zero. Tables showing the amount of the low-income credit for each filing status and for various numbers of exemptions appear on page 8 of the instruction booklet. Enter the amount of your credit on line 15 of Form D-40. Property Tax Credit
Residents of the District who owned or rented their homes for the full 12 months of 1987, and who had household gross income of $20,000 or less for the year, may qualify for a property tax credit. The requirements for eligibility are found on page 6 of the instruction booklet.
Use D-40 Schedule H to calculate the credit, then carry the amount of the credit to line 21 of Form D-40. If you have no D.C. income tax liability and do not file either Form D-40 or D-40EZ, you may still claim the property tax credit by filing Schedule H by itself. If you qualify, you will receive a cash payment from the District for the amount of the credit.
Reminder: You must 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).