Taxes: 1040 Blues
All right, this is the last chance I'll have to talk with you about doing your 1982 income taxes before the April 15 deadline hits. What follows is a general round-up of hints and suggestions as we all turn to that symbol of government taxation run amok in America, the Form 1040.
First of all, everyone should be aware that with the passage of the misnamed Tax Equity and Fiscal Responsibility Act of 1982, Congress has decided to "get tough" with taxpayers. Scared by an explosively growing underground economy and urged ever onward by those who benefit from an ever-growing state, the lawmakers passed a bill that is ending the "self-assessment" system of taxation in America.
I'll explore the vicious new attitude of Congress in a future column, but for now you should know one thing: If you employ a professional—accountant, lawyer, tax advisor, or whatever—you need to ask him or her how the new law has changed the way your taxes will be done. The problem is a new standard regarding when the extensive new penalties can be assessed by the IRS for understating your taxes. The new standard says there must be "substantial authority" for your position instead of the previously required "reasonable basis."
In addition, the penalties can be slapped on the taxpayer and the tax preparer. The latter can escape a $1,000 penalty by disclosing "all of the facts relevant to the tax treatment of the item," either on the face of the return or on a sheet attached to it. Ask your tax advisor or preparer: How are you dealing with the new penalties and the new "substantial authority" standard? If the answer is not to your satisfaction, you might want to shop around for a new helper or learn more about the tax laws yourself.
You should also know that many of the forms have been extensively changed. This is not too unusual: the authorities like to keep the forms churning so that nonprofessionals remain somewhat confused and inexpert. But the changes this year are more extensive than usual, due to the great changes in the tax laws themselves. Get a set of the new forms as soon as possible if you do your own return, and look them over. If there are things you don't understand, seek help in a tax book or from a professional.
There are several entirely new tax forms you'll want to know about. One, the 1040-EZ, is aptly named…for simpletons. If you want to be "EZ" and give a maximum amount of your money to the government, use it. I recommend that no one ever use either the 1040-A or this new form. They are designed for people who think they have no tax breaks. Even when I have a client making peanuts, I go through the whole gamut of tax-saving devices that might possibly apply. Almost always a hidden tax break appears. Stay away from the "EZ" forms.
For the first time, the federal government has actually done something with the tax code that encourages rather than discourages saving and investment by the broad middle class. I'm referring to the "universal" Individual Retirement Account (IRA). Now anyone, whether covered by another pension plan or not, can start up an IRA and put $2,000 per year into it (given that you've earned at least that much during the year). The $2,000 maximum contribution can then be deducted from your income on the Form 1040. A single person making $25,000 per year, with no other tax breaks, would gain an extra $681 refund. Which ain't hay. You have until April 15, 1983, to put $2,000 into your IRA established in 1982. Go to it.
Another new form many of us will use is the Schedule W: Deduction for a Married Couple When Both Work. Starting with the 1982 tax year, a couple filing jointly can deduct 5 percent of an adjusted amount ("qualified income"), which is the smaller amount earned by either spouse. The Schedule W shows you how to do it, and the extra deduction comes off on line 29 of the Form 1040. In 1983 this break will go up to 10 percent. Neither amount is sufficient to offset the built-in bias against families where both husband and wife work. But it's better than nothing for those of us who choose not to get divorced each December and remarried in January (which still appears to be a viable maneuver, by the way).
If you received unemployment benefits during 1982, look out. Although the Reagan administration's suggestion that such payments be taxed offered Congress and the media a chance to weep and beat their breasts, the fact is that these benefits have been subject to taxation for several years now, given certain circumstances. In the past, if you made more than $20,000 ($25,000 if married and filing jointly), (subject to all kinds of adjustments, of course), then some or all of the unemployment money would be taxed. For 1982 that "base amount" of income is reduced to $12,000 for singles and $18,000 for married couples filing jointly.
Finally, keep in mind that you don't really have to file your entire tax return on April 15. If you haven't had time to wade through the forms and other garbage that is our national tax system, you may file a Form 4868: Application for Automatic Extension of Time to File US Individual Income Tax Return. In the past, the extension was for two months; now that's been lengthened to four months, so you won't have to mail in the return till August 15.
This form does not allow you to put off paying any tax due. You must estimate what you will ultimately owe and send it in with the Form 4868. If you estimate wrong, you pay interest and penalties—or you delay your refund check. So make sure you or your preparer know what's going on with your tax situation. Or face the ugly consequence: you might let the government have more money—for four months, at least—than you absolutely have to.
Tim Condon is an attorney and a tax specialist practicing in Florida.