ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, January 27, 1997 TAG: 9701280027
SECTION: MONEY PAGE: 6 EDITION: METRO
SERIES: Part 1 of 6
SOURCE: DAVE SKIDMORE THE ASSOCIATED PRESS
Congress passed and President Clinton signed a potpourri of new tax breaks in 1996. Some don't apply to 1996, but many changes could affect returns filed this spring. Here's what's new for 1996. Publication 553 has the details:
* TAX RATES:The tax rates are the same as last year: 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent.
With the inflation adjustment, the 15 percent rate applies to the first $24,000 of a single person's taxable income - what is left after subtracting exemptions and deductions. The 28 percent rate then applies up to $58,150, 31 percent up to $121,300, 36 percent up to $263,750 and 39.6 percent to everything over that amount.
For married couples filing a joint return, the 15 percent rate applies to the first $40,100 in taxable income, the 28 percent rate up to $96,900, 31 percent up to $147,700, 36 percent up to $263,750 and 39.6 percent to everything over that. Capital gains are taxed at 15 percent or 28 percent - no higher.
* EXEMPTIONS:The amount for each exemption - generally yourself, your spouse and your dependents - is $2,550, an increase of $50.
* STANDARD DEDUCTION: The deduction has been increased from $3,900 to $4,000 for single people and $6,550 to $6,700 for couples filing joint returns. Deductions can be smaller for people who may be claimed as dependents on others' returns and larger for those 65 or older or blind.
* HIGHER-INCOME PEOPLE: Couples and individuals with adjusted gross income over $117,950 may have to give up part of some deductions. They lose all or part of their exemptions when their adjusted gross income is over $117,950 for single people and $176,950 for couples.
* EARNED INCOME CREDIT: The earned income credit for the working poor has been increased. Depending on its income, a family with more than one child can receive a maximum of $3,556, families with one child, $2,152, and childless people, $323. The income limits, when eligibility for a partial credit ends, have risen to $28,495 for families with more than one child, $25,078 for families with one child, and $9,500 for the childless. Taxpayers with investment income, such as interest or capital gains, of more than $2,200 no longer can claim the credit.
* SOCIAL SECURITY AND MEDICARE TAXES: Only the first $62,700 of wages in 1996 was subject to the 6.2 percent Social Security tax. If you had more than one employer and paid more than $3,887.40, any overpayment can be claimed as a credit against your income tax or refunded. Note it on line 56 of Form 1040 or line 29d of Form 1040A. If any one employer withheld too much, see that employer.
* MILEAGE: The standard mileage rate for business use of a car is 31 cents a mile, up from 30 cents. For medical and moving expenses, it's 10 cents, up from 9 cents. The mileage deduction for charitable purposes remains 12 cents.
* 401(k) PLANS: The limit on contributions to these employer-sponsored retirement accounts in 1996 was $9,500, up from $9,240 in 1995.
* SOCIAL SECURITY NUMBERS: Correct Social Security numbers are more important than ever. Congress last year authorized the IRS to deny personal exemptions, the dependent care credit and the earned income credit for taxpayers who file returns without a correct Social Security number for themselves, their spouse or their dependents. You must obtain a number for all children born before December 1996. For children born in December, you may write ``12/96'' where the Social Security number should go if you don't have the number by the time you file. Aliens who aren't eligible for Social Security numbers must obtain an Individual Taxpayer Identification Number (ITIN) by filing Form W-7 with the IRS.
* DIRECT DEPOSIT: Now there's space on your return to ask the IRS to directly deposit your refund into your checking or savings account. You don't need to fill out a separate form, as you did last year. Also, taxpayers filing by telephone can get direct deposit. Last year they couldn't.
* TELEPHONE FILING: This year, many married couples without dependents, as well as some recipients of unemployment benefits, are eligible to file their tax returns with a 10-minute telephone call. Last year, only single taxpayers whose income was limited to wages and interest could use TeleFile. Recorded-voice instructions in Spanish aren't available this year.
* FAX MACHINES: The IRS has doubled, to 115, the number of forms and publications that can be obtained by fax machine. Use your machine to call (703) 487-4160. For the first time, information on about 150 tax topics is available by fax at the same number.
* EMPLOYER-PAID TUITION: Congress reinstated the exclusion for employer-paid tuition, which had lapsed at the end of 1994. W-2s for 1996 should reflect the exclusion of employer-paid undergraduate tuition, as well as tuition for graduate-level courses begun before July 1, 1996. Publication 508 has more information.
* PREPAID TUITION PROGRAMS: Congress last year clarified the tax rules for state prepaid tuition plans. The plans guarantee parents protection against future tuition increases if they prepay, either in a lump sum or in monthly contributions. Educational benefits received from the plans, or withdrawals, are taxable only to the extent they exceed what parents contributed. And they aren't taxable until the benefits are used or the money withdrawn. The new law resolves legal uncertainty over an IRS attempt to tax the investment income earned each year on the prepayments.
* SAVINGS BONDS: More taxpayers are eligible to exclude interest on Series EE U.S. Savings Bonds, issued after 1989 and redeemed to pay higher education expenses. For 1996, the exclusion is phased out for single taxpayers earning between $49,450 and $64,450 and for married couples earning between $74,200 to $104,200. The ranges were increased retroactively for 1993, 1994 and 1995. You may be able to get a refund by filing an amended return, Form 1040X, for those years. See Form 8815 and instructions for more information.
* LEGAL DAMAGES: Only compensatory damages received for physical injury or sickness can be excluded from income. A new law required that all punitive damages, starting Aug. 21, 1996, be declared as income and a Supreme Court decision late in the year made punitive damages taxable before that date.
* DEATH BENEFIT EXCLUSION: The exclusion for the first $5,000 of employer-provided death benefits was repealed for beneficiaries of people dying after Aug. 20, 1996.
* PENSIONS: There's a new, less favorable formula for figuring out what part of your pension or annuity is taxable and what isn't. It applies to pensions and annuities that started Nov. 19, 1996 and after.
* CHILDREN'S INCOME: Parents can include on their return investment income of less than $6,500 earned by children younger than 14, up from $5,000 the previous year.
* STOCK CONTRIBUTIONS: The rule allowing you to deduct the full market value of stock contributions to private foundations, rather than the price you paid for the stock originally, was reinstated for contributions made from July 1, 1996, through May 31, 1997.
* HOME OFFICE DEDUCTION: The deduction was expanded slightly to cover the expense of regularly storing product samples in a taxpayer's home so long as the home is the sole fixed location of the taxpayer's business.
* DIESEL CREDIT: The credit for purchasing diesel-powered vehicles ($102 for cars; $198 for light vans and trucks) was repealed starting Aug. 21, 1996. Publication 378 has details.
* ARMED FORCES: Armed forces members serving in the Persian Gulf combat zone and the hazardous-duty area of the former Yugoslavia have extra time to file returns, pay taxes and claim refunds. See Publication3.
Filing facts
* MUST YOU FILE?: Before figuring out your taxes, you will want to tackle an almost-as-daunting task: figuring out whether you must file.
The rules are complex and depend on the interaction of such factors as income, age, marital status, whether you have children and whether you're someone else's dependent.
Even if you're not required to file, you may want to anyway, if you can claim the earned income credit or are owed a refund.
Publication 501 and your tax package have details, but these are the basic filing thresholds:
* SINGLE: $6,550 in gross income if younger than 65 on Jan. 1, 1997, and $7,550 if 65 or older. This includes divorced, legally separated and many widowed people.
* HEAD OF HOUSEHOLD: $8,450 if younger than 65 and $9,450 if 65 or older. This status, which carries a lower tax rate than single status, is for unmarried people who provide a home for an unmarried child or grandchild or a dependent married child or grandchild, parent, grandparent, aunt, uncle, niece, nephew and most in-laws. Their parent need not live with them but any other relative must. Some married people who lived apart from their spouse during the last six months of 1996 also are eligible.
* MARRIED, FILING JOINTLY: $11,800 if both spouses are younger than 65, $12,600 if one spouse is 65 or older, and $13,400 if both spouses are 65 or older. If you file jointly but lived apart at the end of the year, the threshold is $2,550.
* MARRIED, FILING SEPARATELY: $2,550, any age.
* QUALIFYING WIDOW or widower with dependent child: $9,250 if younger than 65, $10,050 if 65 or older. To qualify, your spouse must have died in 1994 or 1995, you must not have remarried in 1996 and you must have paid over half the cost of keeping up a home for yourself and a dependent child who lived with you all year.
* DEPENDENTS: The thresholds are lower for dependents and vary depending on marital status, whether or not the dependent is blind or 65 or older and on the type of income involved, earned or unearned.
Children younger than 14 on Jan. 1, 1997, don't have to file separately if their parents include their income in their own by using Form 8814.
The child's income must have come entirely from interest and dividends, the income must be less than $6,500, and the child must have had no tax withheld from income and made no estimated tax payments.
This could be an expensive option, though, because with a few exceptions the child's earnings will be taxed at the parents' top rate. That could be as high as 39.6 percent; the child's rate could be as low as 15 percent.
Form facts
* WHAT FORM SHOULD YOU USE?: If you've determined you must file, then you must choose a form. Everyone can use Form 1040. But there are two simpler forms, 1040A and 1040EZ, for people who don't itemize deductions and whose income was less than $50,000 after subtracting their exemption and standard deduction.
To use 1040EZ, you must have no dependents and your filing status must be single or married filing jointly. Also, you must be younger than 65 and not blind, you must have had no more than $400 of interest income, and the rest of your income must come entirely from wages, salaries, tips, scholarships and unemployment compensation.
You can use the 1040EZ to claim the earned income credit if you did not have a qualifying child. You can't use it if you received advance earned income credit payments through your employer.
The 1040A allows more income sources than the 1040EZ, adding to the list: pensions, annuities, Social Security benefits, Individual Retirement Account withdrawals, interest in excess of $400 and dividends.
Unlike the 1040EZ, the 1040A allows you to deduct IRA contributions, claim the credit for child care expenses and the credit for the elderly and disabled. You can also use it to claim the earned income credit.
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