In a chart on claiming tax credits, earned income should be reported on line 28c of Form 1040A. (Published 2/18/91)
If taxable income is $50,000 or less, trace your taxable income to the appropriate column in the Tax Table to determine your tax. If taxable income is more than $50,000, use the tax rate schedules.
If this return is for a child under age 14 whose investment income is taxed at the parent's top marginal rate use Form 8615 and enter the amount on line 38 of Form 1040.
Additional Income Taxes
Line 39, Form 1040 is used to include taxes calculated on separate Form 4970 "Tax on Accumulation Distribution of Trusts" or Form 4972 Tax on Lump Sum Distribution. See the "Reporting Income" discussion above regarding lump sum distributions from retirement plans. Trust accumulation distributions are beyond the scope of this article -- seek the help of a professional if you have such an item.
Once you determine your income tax -- entered above on line 40 -- determine whether you can reduce the tax by any of the credits listed on lines 41 to 45 of Form 1040.
Child and Dependent Care
A non-refundable credit is allowed for dependent care expenses paid to a care provider so you can work or look for work. The credit, calculated on Form 2441, is based on up to $2,400 of such expenses for one qualifying dependent, $4,800 for two or more qualifying dependents. The amount of the credit is a percentage of such dependent care expenses, ranging between 30 percent for taxpayers with AGI of $10,000 or less and 20 percent for taxpayers with AGI over $28,000.
To qualify, the care must have been provided so you and your spouse, if married, could work or look for work; your spouse need not have been working or looking for work if he or she was incapable of self-care or was a full-time student. You and the "qualifying dependent" must have lived in the same home; you and your spouse, if married, must have paid more than half of the cost of maintaining your home; the person who provided the care must not be your spouse or your dependent; and you must provide identifying information regarding the care provider.
If you were married during 1990, you must generally file a joint return to claim the credit. However, if you file a separate return and were either legally separated or living apart from your spouse during the last six months of the year, you will be eligible for the credit if the qualifying dependent lived with you for more than six months in your home for which you paid more than half the upkeep costs.
If you are divorced or legally separated and have custody of your disabled or under age 13 child, you may claim the credit even though you may have released the dependency exemption Form 8332 or were not entitled to the dependency exemption because of a pre-1985 divorce decree or settlement agreement.
Credit for Elderly, Disabled
Taxpayers over age 65 on Dec. 31 or under age 65 retired on total disability, receiving taxable disability income in 1990, may qualify for this credit. Income eligibility levels are found in the instruction booklet, and Schedule R must be attached to claim the credit.
Foreign Tax Credit In general, you can choose to claim income taxes you paid or accrued during the year to a foreign country or U.S. possession as a credit against your U.S. income taxes on line 43, Form 1040 or as an itemized deduction (line 7, Schedule A). To take the credit, use Form 1116.
General Business Credit Form 1040 provides one line for entering the total of all business credits you may claim. If you are eligible for one or more of these credits, complete and attach a summary Form 3800, enter the total amount claimed on line 44, check the applicable boxes and attach the appropriate supporting forms.
Credit Against Regular Tax For Prior Year Minimum TaxIf you were subject to the Alternative Minimum Tax (ATM) in 1987, 1988 or 1989, you may be eligible to claim a credit against your 1990 regular tax.
Other Taxes The "Other Taxes" section lists several possible additions that you may have to consider.
Self-Employment Tax Self-employment (SE) tax has changed this year as a result of the 1990 tax revision act. Beginning in 1990, income from self-employment is first reduced by 7.65 percent -- one-half of the SE tax rate -- to determine the amount subject to self-employment tax. This adjusted figure (SE income multiplies by .9235) is multiplied by the SE tax rate of 15.3 percent to determine self-employment tax.
As in prior years, the full amount of the tax is carried to line 48 of Form 1040. Starting in 1990, however, one-half of the tax is also carried to line 25 as an adjustment to income.
If you were self-employed and had net earnings of more than $400 in 1990 and your wages subject to Social Security or Railroad Retirement tax were less than $51,300, complete Schedule SE to determine self-employment tax you owe on those earnings.
Alternative Minimum Tax The Alternative Minimum Tax (AMT) is an alternative system of income tax that is designed to require individuals who benefit from having certain tax preferred types of income, or credits, to pay nevertheless a minimum level of tax. If your tentative AMT, as calculated on Form 6251, exceeds your regular tax, the excess must be carried to line 49 of the Form 1040 and be paid as an additional 1990 tax liability.
The AMT is figured using your taxable income with certain adjustments and increased by so-called tax preference items. These include eliminating the standard deduction, personal exemptions, itemized deductions for taxes, personal interest and most miscellaneous deductions; restricting deductions for medical expenses and other interest; using somewhat slower depreciation methods; eliminating any use of the installment method by dealers; including in income the bargain element of an incentive stock option; disallowing passive-activity losses; taxing some types of otherwise tax-exempt interest and dividends; and including in income the untaxed appreciation in value of donated property.
These items are "added back" to taxable income from line 37 of the return to arrive at "alternative minimum taxable income" (AMTI) against which the law provides an initial exemption, unchanged from previous years, which is phased out at the rate of 25 cents for every dollar that your AMTI exceeds specified amounts.
If you have tax preference income, you must complete Form 6251 and attach it to your return even if no liability for the alternative minimum tax results. The alternative minimum tax rate is 21 percent in 1990, increasing to 24 percent in 1991.
Recapture Taxes The investment tax credit was eliminated, beginning in 1986. However, if you took an investment tax credit in a prior year but disposed of the property or changed the use of the property so that it no longer qualifies as investment credit property before the expiration of its normal life, you may have to repay a part of the credit taken earlier.
Use Form 4255 for the calculations and carry any required recapture amount to line 50 of Form 1040. Similarly, if you dispose of property on which you took the low-income housing credit you may owe tax. The calculations are performed on Form 8611 and carried to line 50.
Tip Income Use Form 4137 to compute any Social Security tax liability on tips you received but didn't report to your employer, or on tips you had reported but on which your employer had not withheld the tax. Carry any tax due to line 51 of Form 1040.
Tax on IRA, Qualified Plan The rules governing IRA's and other qualified plans proliferate, and there are now a myriad of penalties and special taxes to enforce these rules.
Some of the special taxes that can apply: With certain exceptions, distributions by a qualified plan or IRA before the participant reaches age 59 or over, are subject to a 10 percent excise tax.
Distributions during a year, other than lump sum distributions, amounting to more than $128,228 from all of a participant's qualified plans or IRAs are subject to a 15 percent excise tax. Lump-sum distributions in excess of $641,140 are subject to this tax.
Distributions must be paid out within certain time periods; any shortfall in the amount paid out within the prescribed time frames are subject to a 50 percent excise tax.
Advance EIC Payments If you received advance payments from your employer in 1990 against an anticipated earned income credit, do not offset those advance payments against any credit you now calculate you are due.
You will claim the full amount of Earned Income Credit (EIC) due in the "Payments" section, as explained below.
Instead, enter the total of those advance income payments as shown on Form W-2 from your employer in the "Other Taxes" section by writing "AEIC" and the amount received on the dotted line on line 53 of Form 1040.
Tax Payments You have determined your total federal income tax liability for 1990. Next apply, against that tax liability, all payments of tax already made, plus any further credits you may claim.
Federal Income Tax Withheld The most significant, and often the only, payment for most taxpayers is the amount of federal income tax withheld from wages by their employer.
If you worked for more than one employer be sure you have a W-2 from each and add the amounts from all forms.
Estimated Tax If you paid estimated tax for 1990 enter the total of all estimated tax payments made, including any fourth-quarter payment sent in January 1991 and overpayments applied from you 1989 return.
Earned Income Credit A refundable tax credit of up to $953 is available to certain lower-income workers, not including single or married-filing-separately taxpayers, who provide a home for a dependent child, where a few tests regarding the marital and filing status of both the worker and the child are met. Your earned income and your adjusted gross income must each be less than $20,264 to qualify.
The basic credit is equal to 14 percent of the first $6,810 of the lesser of earned income or AGI. The credit phases out as earned income or AGI rises above that amount $10,750, and disappears when you reach $20,264. The credit must be reduced by your alternative minimum tax.
Advance earned income credit payments from your employer do not reduce the credit. Report the advance payment under "Other Taxes," as explained above, and claim the full amount of the credit here.
Since the EIC is a refundable credit, the IRS will send you a refund check if the credit exceeds your tax liability. If you are eligible for the EIC, you should file a tax return for the refund even if you are not otherwise required to do so.
Amounts Paid With Form 4868 You may file your tax return after April 15, 1991, if on or before that date you file Form 4868 requesting an automatic extension. When you file the extension you must pay 100 percent of your 1990 tax liability. The extension is for filing the return, not the payment of tax.
Excess Social Security Tax If you worked for more than one employer during 1990 and a total of more than $3,924.45 was withheld for Social Security (FICA) or Railroad Retirement (RRTA) tax, report the excess on line 59 of Form 1040. Any amount claimed here must be supported by the W-2s attached.
If excess FICA or RRTA is withheld by a single employer, you must be refunded by that employer rather than the IRS.
Special Fuel Credit A special credit -- available if you bought a new diesel-powered car or light truck between Jan. 1, 1985, and Dec. 31, 1987 -- may still be claimed if not previously used. A special credit for payment of diesel fuel excise tax may also be claimed by certain users. See Publication 378. Use Form 4136 if you qualify for this credit.
Investment Company Credit Occasionally, a regulated investment company (sometimes called a mutual fund) may allocate capital gains dividends to you that you did not actually receive. If the company paid tax on any of such dividends, it will advise you on Form 2439 and you may then claim a credit for those taxes.
The Bottom Line Compare your total payments with the total tax entered on line 54 above. If your payments are larger than your total tax, you may choose to have the overpayment refunded, applied to your 1991 tax or a combination of both.
If the total tax is larger than total payments, the difference is the amount you owe. Attach a check or money order, payable to Internal Revenue Service, for the amount due. Do not send cash.
Some 199 million returns were filed for 1989; as many are likely for 1990. Ensure proper credit to your account by writing your Social Security number, both if filing jointly; the tax year, 1990; and the tax form you are submitting -- 1040, 1040A or 1040EZ -- on the check, then staple it to the tax return as instructed.
Underpayment Penalty If the balance due the IRS is $500 or more and the underpayment is more than 10 percent of your 1990 total tax on line 54, you may have to complete Form 2210 to determine if an underpayment penalty is due. Farmers and fishermen should use Form 2210F.
A penalty may be due because insufficient tax was withheld from your pay or because you had income from self-employment, investments, pensions or other sources on which tax was not withheld and you either failed to file required estimated tax payments or filed but underpaid.
You don't have to complete Form 2210 if you were a U.S. citizen or resident for all of 1989 and had no 1989 tax liability, based on a full 12-month tax year, or if the tax shortfall is less than $500.
If you fail to file Form 2210 and are subject to the penalty, the IRS will compute the penalty for you -- and will add interest to the bill. If you qualify for a waiver of penalty because tax withheld or paid by estimate is equal to or greater than your 1989 tax liability, you should claim the waiver of penalty on Form 2210. The IRS will not check your 1989 return for you.
If you are required to complete Form 2210, attach the form to your tax return and check the box under line 65 of Form 1040. If Form 2210 shows that you owe a penalty, write the amount in the space indicated, and include it in the payment you send the IRS.
And Finally If your return shows a balance due the IRS, you should consider waiting until April 15 to mail the return and the payment. Unless the amount is small or if penalties and interest are accruing, it makes sense to hold on to your dollars, earning interest as long as possible.
But if you are due a refund, send the return as soon as it's completed. You will get your claim registered sooner and the waiting time between filing and refund is shorter during the early part of the filing season, before the IRS is swamped with returns.
When you are assembling your return, check the "Attachment Sequence No." on each form and schedule, directly under the year "1990" in the upper right corner of the forms. That number indicates the order in which the forms and schedules are to be placed behind the basic tax form. Any supporting documents or explanatory notes go at the back of the package after the last official form.
Both spouses must sign a joint return. A parent can sign for a minor child. A surviving spouse filing a joint return should write "Filing as surviving spouse" in the signature area of the return. Do not alter the language above the signature line or you may be subject to a $500 fine.
Use the peel-off label from the front of your IRS tax package, if available; this label is computer scannable and using it furthers the accurate processing of your return. Make a copy of your return.
Use the self-addressed envelope included in the IRS forms and booklet to mail your return or address an envelope to Internal Revenue Service Center, Philadelphia, Pa. 19255, for residents of the District, Maryland and Virginia. Send it by registered mail if you are close to the deadline, so you have proof of timely filing.
Most important, don't make yourself sick over taxes. If you owe a large amount on April 15, you are not being penalized or paying more than "your fair share."
In fact, if you meet the requirements of Form 2210 and owe no penalty, you have received the benefit of an interest-free loan. Conversely, if you are receiving a large refund you should consider revising your withholding or estimated payments in 1991.
The truth is that tax shelters are gone. Chances are if your getting a big refund you are doing nothing more than lending money to the government interest-free. We will all be paying taxes for the rest of our lives, so develop a strategy now to make the future easier.
1991 Estimated Tax The 1990 tax revision act made a number of changes to the tax structure for individuals beginning in 1991, all of which must be considered in calculating your 1991 estimated tax.
While the changes in the law impact a broad number of the elements of your return, in most instances, another year with the same employer means increased withholding sufficient to satisfy the higher tax they must now pay.
However, not all income is subject to withholding. Income from self-employment, investments, pensions, even the sale of your home in certain situations may require you to file an estimated tax return and to make quarterly estimated payments in order to avoid penalties for underpayment of tax.
Items to Consider The first step in trying to determine the amount of tax to pay during the year, either through withholding or by estimated payments, is to estimate your 1991 tax liability.
Try to anticipate your sources of income for the coming year. Start with wages. The work sheet attached to the W-4 for reporting withholding exemptions to your employer should allow you to estimate the correct withholding amounts for the year.
In addition to wages, you may be subject to alternative minimum tax and have to consider this addition to tax in making your estimated payments.
Self-employed individuals must consider the increases in self-employment tax. For 1991, the tax schedule is equal to 15.3 percent on the first $53,400 of earned income and 2.9 percent on earned income of $53,401 to $125,000. This could mean and an additional $2,398 in self-employment tax for some individuals when compared with 1990.
How Much to Pay Once you have estimated the amount you will owe, be brutally honest with yourself. If you are a poor saver, pay the tax in advance.
Avoid putting yourself in a situation where you have underpaid your taxes and can't pay the balance by April 15.
At the very least you may be subject to penalties.
If you expect to have higher income in 1991 and you have strong saving habits, plan to withhold or pay in 1991 only an amount equal to your 1990 tax liability.
How to Pay If after estimating your liability for 1991 taxes, you find that withholding at present levels will not be sufficient, you may increase withholding by filing a new W-4 with your employer or file an estimated return and make quarterly estimated payments.
Either step can be taken at any time during the year as often as required.
You file estimated tax on Form 1040-ES. If you filed an estimated return for 1990 and are still living at the same address, you should have received a 1040-ES package for 1991 from the IRS in late January.
If you didn't receive your 1040-ES package or if you're making estimated payments for the first time, the forms are available at any IRS office.
Estimated taxes are due 25 percent by April 15, 50 percent by June 15 and 75 percent by Sept. 15, 1991.
One hundred percent of estimated taxes for 1991 are due by Jan. 15, 1992. The estimated tax package has an easy work sheet for determining the amount of each payment.
CREDIT...........................WHERE TO REPORT......IRS PUBLICATION
Child or dependent care....1040 line 41 and Form.........503
...........................2441 1040A line 21 and
...........................Schedule 1 Part 1
Elderly or disabled........1040 line 42 and.............524
Foreign tax paid...........1040 line 43 and..............514
Credit for prior years.....1040 line 45..................909
Earned income..............1040 line 57..................596
...........................1040A line 25b
Special fuels..............1040 line 60 and .............378