So tax reform didn't pass last year. That does not mean taxpayers don't have to worry about any new tax laws when they fill out their 1985 returns. The Internal Revenue Service has picked up several new laws and regulations in the last couple of years to help it get more information, bring in more income, and enforce the tax laws more closely. On the other hand, some of the changes allow for greater deductions and credits, though the reporting requirements may be stiffer.
An example of this change can be found in the reporting requirements for charitable contributions. Before, if you donated a noncash item to charity, a certified appraisal of its value was not needed. No more. Now, people who claim a deduction of more than $5,000 for the contribution of a single item of property must first get an independent appraisal of the item and attach a copy of that appraisal to their return. While the amount is raised to $10,000 for donations of nonpublic stock, the rules don't apply at all to publicly traded stock.
``This is one of the biggest changes,'' says Ira Shapiro, director of national tax policy at Coopers & Lybrand, the accounting firm.
``Also, non-itemizers can deduct a bigger share of their donations,'' he adds. Under prior law, Mr. Shapiro said, non-itemizing taxpayers could only deduct 25 percent of their charitable contributions, up to a limit of $300.
Now, he explains, they can deduct as much as 50 percent of their donations, and there is no ceiling. ``So if someone gave $14,000 in '85, they could claim a $7,500 deduction.'' He does acknowledge that most people who could afford to give $14,000 to charity are probably going to be itemizing, but the formula works for smaller amounts, too.
Another improvement on the charity front is the mileage deduction for use of your own car: It's been raised from 9 cents to 12 cents a mile.
Some changes take place without any effort on your part. Two of them are the increase in the personal exemption from $1,000 to $1,040 and the change in individual tax brackets. Since both of these are either incorporated in the Form 1040 or in the tax tables, you don't have to worry about them; just enjoy them.
``As a practical matter, you don't need to be prepared for these changes,'' says James Swenson, a tax partner in the Boston office of Price, Waterhouse, another accounting firm.
People who invest in municipal bonds are going to see a change, too. ``In the past, there was no place to report tax-exempt interest,'' says Paul Anglin, a tax partner the Chicago office of Deloitte, Haskins & Sells, the accounting firm. ``Now you are required to report it.''
The main reason for the change, he explains, is social security. For the first time, interest from municipal bonds will be included in the overall income tabulation to decide if social security payments will be taxed. This change has caused howls in the municipal bond business and in cities and towns where the bonds' tax-free privilege is considered sacrosanct.
``It is a back-door way of taxing social security,'' Mr. Anglin agrees.
Another change is an improvement for the taxpayer, says Mr. Swenson. People who have a fairly large amount of self-employment income are required to make estimated income tax payments every quarter. If your estimate is too low, you not only have to pay the extra tax, but a penalty to boot.
``It used to be you could get blind-sided if you based your estimated payment on the previous year,'' he says. If a self-employed taxpayer had an especially good year, he or she would have more income to report, so the earlier estimated payment would be off, resulting in the penalty.
``Now there's no penalty if the estimated payment is based on 100 percent of the previous year's tax,'' Swenson notes. ``So they aren't getting penalized for a minor mistake.''
An important change affects divorced couples and child-support payments. First, whoever is paying alimony must not only provide his own social security number, but he must also list his ex-wife's name and social security number, assuming he is the one paying alimony. This helps the IRS make sure the recipient is reporting this taxable income.
For alimony agreements made after 1984, however, or modified after that, the parties can agree to switch this and make alimony payments nondeductible to the payer and nontaxable to the recipient. For example, an ex-wife may have enough income so that alimony would simply add to her tax burden, while her ex-husband does not have enough deductions to itemize. Of course, this assumes a divorcing couple will be in a mood to look for the most favorable tax considerations. If they can work it out, it may help both of them.
If there are children involved in a divorce, now they no longer have to spend almost the whole time with their mother, for instance, for her to claim ``head of household'' status, where the tax rates are lower. ``They can spend the summers with their father,'' Anglin says, as long as they live with their mother at least half the year.
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