While many people are thinking about the impact of possible tax law changes next year (as this column did last week), they are also concerned about what they have to do to comply with changes brought on by this year's legislation.
One of the more sweeping sections of the 1984 law deals with deductions, particularly for personal property that is sometimes used in business, and for travel and entertainment. The key thing to remember is to keep records, meticulous, up-to-date records.
Before June 18, 1984, for instance, if you used a car 30 percent of the time for business and 70 percent for personal use, you were allowed to claim the 6 percent investment tax credit against 30 percent of the cost and deduct the rest of the 30 percent over three years, using the accelerated cost recovery system (ACRS).
The same benefit was available to home computers, but there was a 10 percent tax credit and the ACRS was spread over five years.
But after June 18 ('84), any personal property used part-time for business, including cars and personal computers, must be used at least half the time for business, or you won't be able to take any investment tax credit and you can't use ACRS. A car's business expense must be depreciated over five years and a computer's over 12 years.
In addition to depreciation, taxpayers like to claim deductions for business use of such personal items as cars and computers. But starting Jan. 1, you will have to keep very good records to get these deductions. If you claim decuctions that are not backed up with adequate proof, you are subject to an automatic 5 percent penalty for negligence. The record-keeping rules also apply to business travel, meals, lodging, entertainment, and gifts. Your records should show dates , places, guests, recipients, purpose of the trip or gift, and amounts spent. The records should also include any receipts you are given.
For a home computer, you should keep a log of when the machine is turned on. The log should show when the computer was used for business use, as well as non-business use, such as the kids' homework, or time spent on Donkey Kong.
If an accountant or other professional prepares your return, you will be asked to give that person a statement saying that you have these records.
There is some good news in new rules for individual retirement accounts. Before the 1984 law, a retirement plan distribution could not be rolled over tax-free into an IRA while you were still working. Now, you can move most or all of the funds in a retirement plan into an IRA before retirement. This is helpful to people who change jobs or retire early and want to manage their own retirement assets until they leave the work force.
It also means people who are not satisfied with the performance of their retirement plans can try to do better themselves, as long as they put the money in an IRA within 60 days of taking it out.
There are, however, some hitches in this deal: You cannot roll the distribution into another retirement plan or annuity; the distribution must be at least half your account balance; it cannot be part of a series of periodic payments; and - most important - the amount left in the original retirement-plan account is no longer eligible for special 10-year forward averaging or long-term capital-gain treatment usually given to lump-sum distributions at retirement. These rules are effective for distributions made after July 18 ('84).
Under the new law, you also have to be more careful about when you make an IRA contribution. Before, you could apply for a fairly easy-to-get extension (say, to July 15) and not have to make the IRA contribution until then. Now, you can still get extensions, but the previous year's IRA payment must be made by April 15, the normal filing deadline.
In another IRA change, as of Jan. 1 it will be much easier for divorced people to put part of the alimony they receive into an IRA. As long as you are receiving taxable alimony but no earned income, you can put up to $2,000 into an IRA and claim the IRA deduction.
This is also the year social security benefits become subject to tax for the first time, a practice that might be used more if the social security system ran into new financial difficulties. For now, one-half of social security benefits will be subject to tax if the total of the adjusted gross income, plus tax-free interest income, plus half of social security benefits, exceeds $25,000 for individuals or $32,000 for a joint return.
If tax shelters strike your fancy, the Internal Revenue Service is watching you and the shelters more closely. Starting with those offered after Aug. 31, ' 84, all shelter organizers must register their programs, providing you and the IRS with a registration number for each investment. You, in turn, must include this registration number with your 1984 return (on Form 8271) if you want to claim, through the shelter, a deduction, loss, or credit.
Finally, one of the biggest changes in the 1984 law was the reduction of the holding period for long-term capital gains from one year to six months for property acquired after June 22, 1984. While this will revert to a one-year period in the 1988 tax year, it does present an opportunity for more flexibility now. If you have bought stock or other property since June 22, try to hold it at least six months, to be eligible for the long-term capital-gain tax of 20 percent, instead of the 50 percent maximum tax placed on short-term gains by individuals.
That stock, however, may have dropped in value since you bought it a few months ago. In that case, you may want to sell it for a loss now, since short-term losses receive more favorable treatment than long-term losses. These short-term losses can also be used to offset any short-term gains you may have had this year, gains that would otherwise be subject to a higher tax.
If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.