February 19, 1979, Monday, Final Edition In yesterday's Business and Finance section, a paragraph in The Washington Post Income Tax Guide contained graphical error. The paragraph should read: Under the old law, you could exclude 50 percent of net long-term capital gains from income. Effective Nov. 1, 1978, you exclude 60 percent, and only include (and pay tax on) 40 percent. February 21, 1979, Wednesday, Final Edition The telephone number for taxpayer assistance from the Internal Revenue Service for northern Virginia residents was reported incorrectly in Sunday's editions. The correct number is 557-9230.
During the 1976 presidential campaign, candidate Jimmy Carter characterized the nation's complex tax laws as "a disgrace to the human race." And when the subject of tax reform in 1978 reached the public forum many moons ago, there was brave talk about tax reduction and simplification, and about redistribution of the inequitable tax burden.
Tax revision occupied Congress for much of the year, but finally the Revenue Act of 1978 and the companion Energy Tax Act were passed and signed into law. In case you didn't already know, most of the news is bad. Taken by itself, the federal income tax burden went down for practically everyone on Jan. 1, 1979. And a couple of pretty substantial tax breaks were included for part of 1978 -- but only for select groups of taxpayers.
In terms of overall tax burden -- considering Social Security taxes along with the income tax -- many taxpayers will see little or no improvement. In fact, the total tax load will be increased for some. There have been some adjustments in tax distribution. Whether the new distribution is more equitable than the old depends for economists and social scientists on their particular views of how the tax system should contribute to our society. For most of us, our reactions will be colored as usual by how the new rules affect our own personal tax liability.
And there has been little simplification, little reduction in complexity. A few of the changes in the rules will ease the chore of tax return preparation, but other changes will add to overall complexity. The net result is that most people will have just as much trouble this spring as they did last year. And probably, just as last year, almost half of the nation's taxpayers will pay to have someone else prepare their tax returns. But others have given you, in these pages and elsewhere, their analyses of the economic and political considerations that led to the final legislation. Our goal in this column and the six that follow, is to examine the mechanics of the 1978 federal tax forms and to provide guidance for their completion -- useful both to those who prepare their own returns and to those who turn to a professional tax preparer.
In the eighth and final column of the series -- to appear next Sunday -- we will look at 1978 tax returns for the District of Columbia and the states of Maryland and Virginia.
Many of the changes in format introduced in 1977 have been continued for the 1978 tax year.
Here's a quick recap of the most important ones:
The income limit on use of the short form (1040A) is $40,000 for a married couple filing
jointly and $20,000 for all others.
Form 1040 is a continuous form and requires signature on Page 2 instead of on the face.
Schedule TC must be completed by any taxpayer who does not use the tax tables.
The tax tables already include allowance for the zero-bracket amount, personal exemptions
and the general tax credit.
The tax rate schedules again have the zero-bracket amount built in.
Because both the tables and the schedules account for the zero-bracket amount, a taxpayer
who itemizes must subtract the appropriate ZBA from total deductions on Schedule A,
carrying only "excess deductions" to Form 1040.
The zero bracket amount is a single fixed figure for each filing status, regardless of income.
New for 1978
A few of the changes mandated by the Revenue Act of 1978 affect 1978 individual income tax returns:
Under the old law, you could exclude 50 percent of net long-term capital gains from income.
Effective No. 1, 1978, you exclude 60 percent, and only include (and pay tax on) 40 percent. This
60-40 split applies to only to gains; you continue to use half of net long-term capital losses
to reduce other income.
TAX TIP: If you sold an asset on the "installment plan," payments received after Oct. 31 qualify
for the new 60 percent exclusion even though the sale itself took place before Nov. 1, 1978
(or in an earlier year).
For 1978 only, you may have some extra arithmetic to do. If you had gains or losses both before
and after the changeover date, you must make some special computations to account for the two
different exclusion rates.
TAX TIP: Remember that for 1978 (and following years), you must have held an asset for more than
12 months for it to qualify for longterm treatment; and starting in 1978, you may deduct up to
$3,000 of net capital loss from other income.
A taxpayer aged 55 or older can make a one-time election to exclude up to $100,000 of gain realized
on sale of his or her residence. There is a midyear starting date on this provision also; to be
eligible for the exclusion, the sale must have been consummated after July 26, 1978.
TAX TIP: This is a one-time exclusion. You should consider your decision carefully if you have only
a small gain and may sell another home later, or if you have bought a replacement residence (at
the same or a higher price) and are eligible to defer the tax on the gain anyway.
A recognized (but untaxed) capital gain from the sale of a principal residence after July 26, 1978,
no longer is considered a tax preference item and is not subject to the minimum tax. The new tax
law includes several liberalizing changes to the rules governing Individual Retirement Arrangements
(IRAs). You now have until the due date of your tax return to establish an IRA and make
contributions for the preceding year. Thus if you qualified for an IRA in 1978 but didn't do
anything about it, you can set up the account and make contributions any time up to April 16, 1979,
and still claim the deduction on your 1978 tax return.
Partial rollover of lump-sum distributions is now authorized. If you receive such a distribution,
you need not roll over the entire sum to qualify for preferential tax treatment. Current tax
liability will be incurred on that part of the distribution you retain, but you can continue to
enjoy deferral of taxes on the part that is reinvested in a qualified IRA within 60 days of receipt.
The annual report on IRA and Keogh programs no longer is required if the only activity in the plan
was making qualified deposits and the accruingtax-deferred earnings.
A tax credit is authorized for energy conservation expenditures made at any time after April 19, 1977.
The 1978 Act restores the earlier (larger) exclusion of foreign-earned income for 1977, and adds
an optional "excess foreign living expenses" deduction for 1978.
New for 1979
Most of the changes made by the Revenue Act of 1978 took effect Jan. 1, 1979. Here is a brief
listing of the most significat changes. These should be useful in planning 1979 tax strategy
-- but keep in mind that none of these changes affects your 1978 tax return.
The personal exemption for each taxpayer and dependent (including the additional exemption for
age or blindness) goes up from $750 to $1,000.
Tax rate brackets have been widened slightly, and small reductions have been made in the tax rates.
The zero-bracket amounts go up for all taxpayers: to $2,300 for single taxpayers, $3,400 on joint
returns and $1,700 for married taxpayers filing separately.
The general tax credit is repealed for 1979 and succeeding years.
Because of the increased personal exemption and zero-bracket amounts, the gross income minimums
at which returns must be filed go up for all classes of taxpayers.
Earned income credit calculations have been simplified and the maximum credit increased. In addition,
an individual eligible for the earned income credit may elect to receive periodic advance payments
(on the anticipated credit) from his or her employer along with regular wage payments.
The itemized deduction for political contributions is eliminated, but the tax credit for such
contributions continues and is doubled to $50 ( $100 on a joint return).
An IRA established in an annuity plan must permit flexible annual premium amounts. This provision
eliminates the problem faced by the purchaser of an individual retirement annuity whose eligibility
The exclusion of a part of foreign earned income is replaced by a complicated formula for deducting
"excess foreign living expenses" from foreign earned income.
The Schedule A deduction for state and local gasoline and diesel fuel taxes is eliminated, along with
the credit for nonbusiness off-highway fuel and motor oils.
And There's More
There were a number of technical changes, and changes which affect a relatively small number of taxpayers.
Neither these changes nor others to the estate and gift tax rules will be covered in these columns.
If you prepare your own returns, be sure to read carefully the IRS instructions and whatever guidance
publications you use.
If your returns will be completed by a commercial preparer, he or she should be familiar with all the
rules. But you might save tax money by doing some reading and asking your preparer about any provision
you think might affect your return.
Filing Your Return
Your federal income tax return must be postmarked no later than midnight of April 16, 1979.
(The extra day is a "calendar" extension -- the 15th falls on Sunday this year.)
Any payment due should be attached to the retur, unless you have asked the IRS to figure your tax.
Make your check or money order payable to "Internal Revenue Service." Put your Social Security number
right on the payment to identify it in case it gets separated from the return.
TAX TIP: If you can't make the deadline, don't ignore it.You can get an automatic extension to June 15
by filing IRS Form 4868 by April 16. (But you must estimate your tax on this form and pay any estimated
deficiency when you file the request for extension.)
Residents of the District of Columbia and of Maryland should send their federal returns to the Internal
Revenue Service Center, Philadelphia, Pa. 19255.Federal returns of Virginia residents should be mailed
to the Internal Revenue Service Center in Memphis, Tenn. 37501.
If you received an instruction booklet and forms by mail from the IRS, use the peel-off label from the
booklet on your return. Make any necessary corrections to your name, address, or Social Security number.
If you use a professional preparer, bring him or her the booklet or at least the page with the label.
If the order of the Social Security numbers on the label (on a joint return) doesn't match the order of
the first names, correct it.
If you don't have a Social Security number, apply for one on Form SS-5, available at any IRS or Social
Security Administration office and at many post offices. But file on time even if you don't have the
number by the normal due date -- and write "applied for" in the SSN block.
A member of the armed forces on duty in this area should use his or her permanent home or mailing
address rather than the address of a temporary residence here.
The increasing complexity of the tax laws makes it more and more difficult to handle your own tax
return with reasonable confidence that you are doing it properly and taking advantage of all the tax
breaks authorized by law. You still can do your own tax work -- but the annual changes add to the
confusion, so be prepared to spend hours in reading and research if your return will include anything
but the normal income and deductions. If you need more detailed information than is given in the
instruction booklet that accompanies the tax forms, pick up a copy of IRS Publication 17, "Your
Federal Income Tax."
TAX TIP: The IRS publishes a Spanish-language tax guide (IRS Publication 579-S) for taxpayers who
are more fluent in Spanish than in English.
[El gobierno publica un guia de informacion referente a los impuestos sobre la renata por los
contribuyentes de hapla espanola: Publicacion IRS 579-S.]
If you need personalized help, you can get assistance at any local IRS office. IRS tax assistance
people will not complete your return for you (unless you are handicapped), but they will answer
your questions and provide specific advice on how to handle individual tax problems.
The IRS also will respond to telephone requests for information over special lines set up for
this purpose, but you may encounter delays in getting through, particularly as the filing
If you live in the District or in Montgomery or Prince Georges counties, the IRS number to call
for help is 488-3100. Residents of northern Virginia are served by the Baileys Crossroads office;
the number there for taxpayer assistance is 357-9230.
You usually will get good information from the people at the local IRS offices. However, the
government is not bound by the advice you receive. If your return is audited, citing advice
from an IRS employe will not get you off the hook if it turns out that the information was wrong.
If you decide that tax preparation has gotten too complicated and you decide to use a professional
tax preparer, you have a pretty wide choice. Local tax preparation offices spring up every
January in homes, stores and offices.
These preparers may range from a housewife or retiree who has read a tax book or taken a short
course in tax preparation to a highly skilled accountant who works for the government or private
industry and "moonlights" for a few months to supplement his or her regular income.
The large chain operations -- working either in their own stores or offices or in space provided
by a department store -- generally can give satisfactory service at reasonable cost if you have
a fairly routine tax situation.
Their preparers usually have completed a basic course on income tax, and they may have a
knowledgeable manager who can assist on a more complicated return. Generally, however, the chain
offices are not geared to handle a complex return or one which includes unusual circumstances.
In that case, you may need the services of a public accounting firm or a tax attorney. As you
might expect, their fees are usually higher than the those of either the chains or the local
Tax preparers who are neither attorneys nor certified public accountants may take a comprehensive
examination given by the Internal Revenue Service. Those who pass the exam are known as
Whatever level of professional assistance you select, be sure the preparer (or the parent firm)
will be around all year to assist in answering any queries from the IRS. Many of the local
store-front operations that pop up in January silently fold their tents and steal away in April.
There are no federal or state licensing procedures which might eliminate the incompetent or
unscrupulous tax preparer. So you're really on your own when selecting a professional to prepare
your return. Here are a couple of things to look for:
If the person who prepares your return cannot or will not answer your questions or explain his
entries, go elsewhere. Do not be put off by statements like "Don't worry about it," or "It's
very technical -- you wouldn't understand," or "It's too complicated to explain."
You have full and final responsibility for the accuracy and legality of the return regardless of
the qualifications of the preparer, and you should understand every word on it.
Anyone who prepares the tax return of another for pay must sign the return and enter his or her
identification or Social Security number. In addition, the preparer must furnish you with a copy
of your tax return at the same time he or she presents the original for your signature.
Be wary of a tax preparer whose fee is based on a percentage of your refund or of the "tax savings"
he finds for you. Fees for preparation should be based on the complexity of the return and the
time needed to prepare it. (Incidentally, the better shape your records are in, the lower the
fee should be.)
Do not be taken in by tax preparation offices that advertise an "instant refund." This is nothing
more than a personal loan for the amount of the anticipated refund, usually at a high rate of
interest. If the refund doesn't come through, you'll have to repay the loan.
TAX TIP: Like the cost of tax assistance books, a fee paid in 1978 for preparation of your tax
return (or in connection with a tax audit) is deductible in Schedule A if you itemize.
Whether you prepare your own return or have it done by a professional, the key to a good return
with the lowest possible tax liability is adequate records. This needn't mean a complicated
accounting system. Most taxpayers require only a file folder or manila envelope in which to
keep bills and receipts, cancelled checks and memos of cash transactions.
If you put every piece of paper with a possible tax implication in that folder all year, it's a
relatively easy chore to sort them all out when you start work on your return. And don't wait
until April to start. If you get to it now, you'll have more time to look for missing papers,
sort out half-forgotten transactions and review the completed return. If you run into a problem,
it's easier now -- before the last-minute rush by all the other people -- to get help, either
from the IRS or a commercial preparer.
The IRS finds particular errors that seem to occur with surprising frequency, year after year.
Use this checklist to avoid the most common errors.
Check your work carefully for arithmetic errors or, better yet, have someone else check your computations.
TAX TIP: You can simplify your work and reduce the probability of error by rounding all figures
to the nearest dollar. Rounding does not raise any suspicions of inaccuracy at the IRS. Drop
all amounts under 50 cents, and raise amounts between 50 and 99 cents to the next dollar.
Be sure you have signed the return (including both signatures on a joint return) and any check enclosed.
Include your Social Security number (both numbers on a joint return).It isn't necessary to repeat
the number if it's on the IRS label -- but in that case check to be sure it's correct.
Attach Copy B of each W-2 form; but do not send the IRS any Form 1099 showing interest, dividends, etc.
Check the correct block for your marital and filing status.
Use the correct tax table and column or the correct tax rate schedule.
TAX TIP: Remember that the tax tables already allow for personal and dependent exemptions, the
zerobracket amount, and the general tax credit. But the tables do not provide for other tax credits,
which you must subtract after you have determined your initial tax liability.