Tax averaging to offset an income bulge
Not all tax-saving tricks are limited to the wealthy. One that can be used by anyone who is eligible is income averaging. For this, all that's needed is an income that took a dramatic shift in the past five years. On the theory that people should not be penalized for having an unusually high income in one year, the Internal Revenue Service permits taxpayers to spread, or ''average,'' that year's income back over the previous four years. This can result in a significant cut in tax liability.Skip to next paragraph
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There is one possible cloud in the income-averaging picture, however. Even though Congress and the Reagan administration are almost certain not to raise taxes in this election year, they are looking at ways to increase the government's revenue without an actual tax increase. Thus, one idea being considered by both the House and the Senate would make it more difficult to qualify for income averaging. So while it is not certain, it is just possible this could be the last year many people will be eligible to use this technique.
To qualify for income averaging on the 1983 tax return, taxable income for the year must exceed the average income for the previous four years by 20 percent, plus $3,000. So if your income for the previous four years was $30,000, you must have earned at least $39,000 in 1983 to qualify for averaging.
The whole procedure is done on Schedule G, and if you are not eligible, you find out about halfway down the form and stop computing. In the past, tax experts have advised keeping the paper work even if you are not eligible and try again next year, but Congress could make this the last chance for many taxpayers.
An occasional tax note as the April 16 filing deadline approaches.