Income Tax Law: U.S. Armed Forces Training: Course Book

DOCUMENT RESUME

ED 116 025 CE005939

TITLE Income Tax Law: U.S. Armed Forces Training: Course Book.

INSTITUTION Internal Revenue Service (Dept. of Treasury), Washington, D.C. REPORT NO IRS-757-11-75 PUB DATE Nov 75 NOTE 111p.; For the Instructor Guide, see CE 005 938

EDRS PRICE MF-$0.78 HC -$5.70 Plus Postage DESCRIPTORS *Course Content; Course Objectives; Income; *Instructional Materials; Laws; *Military Personnel; Records (Forms); *Study Guides; *Taxes; Tests

ABSTRACT The course book contains eight lessons designed for military Personnel learning how to properly prepare their U.S. Income Tax returns. The lessons cover the following subjects: requirments for filing returns of income and declaration of estimated tax; exemptions; gross income; exclusions and deductions to arrive at adjusted gross income; percentage standard deduction, low income allowance, and itemized deductions; rental income and depreciation; aliens; and .exclusion of earned income from sources outside the U.S., Section 911. For each lesson the course book provides an introduction, lesson objectives, explanations of the various content areas within the lesson, a summary, and a quiz. Appendixes provide quiz solutions, a 1975 Form 1040 road map, dependency exemption charts, and major applicable tax forms. (JR)

*********************************************************************** Documents acquired by ERIC include many informal unpublished * Materials not available from other sources. ERIC makes every effort * * to btain the best copy available. Nevertheless, items of marginal * * rep clucibility are often encountered and this affects the quality * * of he microfiche and hardcopy reproductions ERIC makes available * * via the ERIC Document Reproduction Service (EDRS). EDRS is not * responsible for the quality of the original document. Reproductions * * supplied by EDRS are the best that can be made from the original. *******************************************************4R************** ..!

Li C,...:::, 1;;;; i 5 Course Book A

U.S. Armed Forces Training ra@CM® tax law

Depart'mentc(fh®Tfr@n,@yauv Internal Revenue Service

U S DEPARTMENT OF HEALTH. EDUCATION A WELFARE NATIONAL INSTITUTE OF EDUCATION 'HISDOCUMENT HAS BEEN REPRO- (5) DUCED EXACTLY AS RECEIVED FROM t THE PERSON OR ORGANIZATION ORIGIN. ATINO IT POINTS OF VIEW OR OPINIONS . cr, STATED DO NOT NECESSARILY REPRE- SENT OFFICIAL NATIONAL INSTITUTE OF c. EDUCATION POSITION OR POLICY la C 0 Publication 757 (11-75) 0PI Preface The program for the United StatesArmed Forces is intended to furnish a brief summary of the United States incometax law. This course offers a concisecompilation of information and reference material.

This publication should not be relied upon asencompassing all facets of the subject presented. Researchin other authoritative tax publications may therefore be advisable onthe more difficult or unusual problems encountered. In noinstance should this publication be cited as authority for a positiontaken.

Please Note:

The Internal Revenue Code wasamended by the Tax Reduction Act of 1975. The changes made bythe Act generally apply only to 1975. The following is a list of the newprovisions which apply to individual taxpayers:

1. $30 exemption credit. 2.Earned income credit. 3.Purchase of new residence credit. 4.Low income allowance increase. 5.Standard deduction increase. 6.Income level increase for thechild care deduction (applies in 1976 and later years).

Also the Code was amended byPublic Law 93-625 which changed the interest rate charged orpaid in connection withdeficiencies, etc. from 6% to 9% effectiveJuly 1, 1975.

3 Contents

Chapter 1 Percentage Standard Deduction, 39 Requirements for Filing Returns of Income and Low Income Allowance, 39 Declaration of Estimated Tax Itemized Deductions, 40 Introduction, 1 Medical and Dental Expenses, 40 General Rules, 1 Contributions, 41 Filing Status, 2 Taxes, 42 When and Where to File, 5 Interest, 42 Statute of Limitations, 6 Losses, 44 Estimated Income Tax Payment, 8 Miscellaneous Deductions, 45 Summary, 9. Credits, 49 Quiz , 10 Summary, 50 Quizzes, 52

Chapter 2 Exemptions Chapter 6 Introduction, 13 Rental Income and Depreciation Personal Exemption, 13 Rental IncomeWhen Reported, 54 Exemption for Nonresident Alien Spouse, 13 Rental Expenses, 54 Exemptions for Dependents, 13 Part BusinessPart Personal, 54 Summary, 15 Depreciation: Quizzes, 16 When Allowed, 55 Property Subject to Depreciation, 55 Basis, 55 Chapter 3 Gross Income AllocationLand and Building, 55 I ntoduction,.19 Salvage, 56 Methods of Computing, 56 Income Defined, 19 Additional first year, 57 Military Taxable Wages, 19 Quiz, 57 Forms 1040 and 1040A for 1975, 20 Dividends, 21 Interest, 22 Capital Gains and Losses, 22 Chapter 7 Sale of a Residence, 24 Aliens Miscellaneous Income, 25 Introduction, 58 Summary, 26 Returns Filed by Aliens, 58 Quizzes, 28 Alien Members on Active Duty, 58 Military Personnel Married to Aliens, 58 Servicemen Domiciled in Community Property Chapter 4 States, 59 Exclusions and Deductions to Arrive at Information To Be Filed With Returns, 60 Adjusted Gross Income Summary, 60 Introduction, 31 Quiz, 61 Excludable or Deductible Items Received From the Armed Forces, 31 Excludable Items From Other Sources, 35 Chapter 8 Summary, 37 Section 911Exclusion of Earned Income Form Quizzes, 37 Sources Without the United States, 62

Chapter 5 Appendix AQuiz Solutions 1-7, 64 Percentage Standard Deduction, Low Income Appendix B-1915 Form 1040 Road Map, 79 Allowance, Itemized Deductions, and Credits Appendix CDependency Exemption Charts, 91 Introduction, 39 Appendix DMajor Applicable Tax Forms, 98 9

Suggested Daily Classroom Schedule

First Day Hours Orientation and Distribution of Kits 1 Chapter 1 (Filing Requirements) 4 Chapter 2 (Exemptions & Tax Tables) 3

Total `8

Second Day Chapter 3 (Gross Income) 2 Chapter 4 (Exclusions) 2 Cha'pter 5 (Deductions) 4

r Total . 8

Third Day Chapter 6 (Rental Income, & Depreciation) 1

Chapter 7 (Aliens) - - 3 Chapter 8 (Section 911) .. 1 Review 3

Total . 8

The course materials are:

.Course Book, Your Federal Income TaxPublication 17 Federal IncomeI-6c Information for Armed Forces Personnel NAVSO P-1983 - Tax Guide for Small BusinessPublication 334 U.S. Tax Guide for AliensPublication 519 Tax Guide for U.S. Citizens AbroadPublication 54 Federal Income Tax Forms for 1975

-sz Chapter 1. Requirements for Filing Returns of Incomeand Decliration of Estimated Tax Introduction MarriedFiling Jointly (both spouses 65 or over) 4,900 MarriedFiling Separately 750 Short Form 1040A is filed without any accompanying Dependent taxpayer with unearned income 750 Persons with Income from U.S. Possessions 750 schedules. Form 1040 may be filed with one or more of Surviving Spouse' the following schedules if needed: 2,650 Schedules A and B, for itemized deductions and forThe income level atwhich a return must be filed dividends or interest over $400; (S2,350 for individuals who are not married and S3,400 Schedule D, for gains or losses on sales or exchanges for married persons filing jointly) is increased by $750 of property; for each additional personal exemption for age 65 or Schedules E and R, for income from pensions, rents, older to which they are entitled. Exemptions for blind- partnerships, estates, small business corporations, and ness and dependents do not apply to the filing require- retirement income credit; ments. Schedule F, for farm income and expenses, . For married couples, these higher filing requirements Schedule G, for income averaging. apply only if they have the same household as their This chapter discusses the requirements for filing in- home at the close of the taxable year. They do not come tax 'returns and the declaration of estimated tax. apply if either spouse files a separate return or if any Chapters 1-6 and 8 deal only with U.S. citizens. Chapter other taxpayer is entitled to an exemption for either 7 deals with the tax problems of aliens. Special emphasis spouse. is given to military situations. For a broader picture of The taxpayer must file a tax return if the gross in- the filing requirements that pertain to minors, decedents, come level as mentioned above is met or exceeded. This etc., refer to "Your Federal Income Tax," otherwise applies in all cases regardless of whether: known as Publication 17. An explanation of the applica- (a) the taxpayer's entire tax for the taxable year tion of penalties to those areas of noncompliance is also under consideration has been paid in full or overpaid incorporated in this chapter. through amounts withheld by the individual's employer or through direct payments to the Government on a declaration of estimated tax; ObjectivesChapter 1 (b) the taxpayer's deductioris exceed this gross in- Participants shoulcj be able to explain the followingcome, and thus no tax liability; concepts: (c) the taxpayer's credits render the return nontaxa- (1) Requirements for filing ble; or (2) Joint vs. separate returns (d) the taxpayer is residing at home or abroad. (3) Surviving spouse and head-of-household status If the taxpayer receives gross income of less than the (4) Introduction to Forms 1040, 1040A and 1040X amount in the "required to file income level category" (5) Statute of limitations he is not required to file a return. However, suppose a (6) Penalties new recruit, almost straight out of high school, earns less (7) Declaration of estimated tax than his "required tb file income level." Since his gross Applicable forms foi, this chapter include. income is less than his "required to file income" he does not have to file a return, but he should file a return in Form No. order to recover the taxes withheld from his wages. In 1310 Statement of Claimant to Refund Due Deceased this -case, a properly executed return Form 1040 or Taxpayer Form 1040A serves as a claim for refund. 4868 Application for Automatic Extension of Time to A self-employed individual is required to file a tax File U.S. Individual Income Tax Return return if net earnings (synonymous with net profit) 2688 Application for Extension of TiMe to File (Resi- from self-employment are $aog or more, even though dent) gross income is less than his "required to file income 843 Claim level." 1040 Individual Income Tax Retail 1040A Individual Income Tax ReturnShort Form Dependent Taxpayers With Unearned Income 1040X Amended U.S. Individual Income Tax Return 1040-ES Declaration of Estimated Tax for Individuals The filing requirement for children under age 19 or 2350 Application for Extension of Time for Filing U.S. full-time students is $750 if: (1) they can be claimed as Income Tax Returns (U.S. Citizen Abroad). dependents of another and (2) they haveunearned Income.The origin of the dependent's unearned income is immaterial. It may come from the yield on inheri- General Rules for U.S. Citizens tances, gifts, trust income, dividends (after the exclu- The income level at which an individual must file ansion) or even the savings from the dependent's own income tax return is as follows for taxable year 1975. earnings. See Chapter 5 for a discussion on "unearned income." Single--under 65 $2,350 Note:If the child or student furnishes more than one Single-65 or over 3,100 half of his own support, or is married and files a joint MarriedFiling Jointly . 3,400 MarriedFiling Jointlyone spouse 65 or over) 4,150 return, his parents would not be entitled to a personal exemption for him Therefore, since he does not qualitfy Presidential Election Campaign Fund as a "dependent," the unearned income rule would not apply. It is important to note that the child or student A taxpayer may designate -$l(if a joint return, SI need not be actually claimed asa dependent. Theeach for husband and wife) of his taxes to the presi- unearned income rule applies if the parent is entitled todential election campaign fund by checking the appro- the exemption regardless of whether he actually claims priate box(es) on Forms 1040 or 1040A. Checking it. the box(es) will not increase the' tax or reduce the refund. What Is "Gross Income" for the Purpose of Determining Who Must File Filing Status Although subsequent chapters deal specifically with Five filing status categories are listed on page 1 of "gross income," and inclusions and exclusions with re- Forms 1040 and 040A. These are: gard to "gross income," it is imperative at this point to define "gross income" as it applies to the "required to Single file income level" test. Married filing joint return (even if only one had "Gross income," for purposes of filing an income tax income) return, means all wealth which flows to the taxpayer Married filing separately (other than a more return of capital), except income Unmarried Head of Household excluded by statutory provisions. Gross income in- Qualifying wiclow.(er) with dependent child cludes income realized in any form, whether in money, You are to check the correct box of the taxpayer property or accommodations. Ingeneral,ifservices involved. By ascertaining his appropriate category at the are paid for in other than money, the fair market value start, you will findit easier to decide upon such tax of the property or services taken in payment must be featuresas tax tablestouse, exemptions allowable, Included in gross income. What constitutes "gross In- methods of computation, etc. Only one box should be come" may be classified as follows: checked on a tax return. (a) For servicemen, "gross income" for the purpose of filing an income tax return includes such items as basic pay, incentive pay, special pay, reenlistment bonus, Single dividend income, interest, annuities, etc. A single person is one who is unmarried as of the last (b) For rental property, "gross income" means grossday of the tax year. A "single" taxpayer may be a receipts from rents, that is, before deductions for rentalbachelor, a person chvorc:d under a final decree, or a operating expenses. person who is legally separated or a widow(er). How- (c) For sales or other disposition of property, "grossever, a person separated under an interlocutary decree income" means the gross selling price, less the cost or of divorce is not considered unmarried for this purpose adjusted basis of the property sold or otherwise disposedand may not file as a single person. of. A taxpayer's status at the close of the year ishis (d) For a citizen of the United States who claims thestatus for the year. For example, a person who receives exclusion of wages earned outside the United States a final decree of divorce on 31 December of a given because he is a bona fide resident of a foreign country year is a '`single" taxpayer for the entire year. for an entire year or physically present in a foreign Certain "single" taxpayers who support dependents country for 510 full days during a period of 18 consec-may also qualify as "unmarried head of household" or utive months, a tax return must be filed if the required "surviving widow(er)." See the explanations of these tofile income leveltestissatisfied.In determining categories which follow. whether the test is met, the taxpayer must count such excluded income. You may have certain civilians (contractors, etc.) Mthied Filing Joint Returns working at your base whose incomes are not taxable because of this exclusion. However, iftheir income, A husband and wife may file separate returns or one although excludable, exceeds their required tofileIn- joint return. However, as will be noted in a later discus- come level, they, nevertheless, are required tofile an sion on the advantages and disadvantages of filing joint income tax return and submit a Form 2555 withit. of separate returns, married taxpayers almost always (This will be covered in Chapter 8 dealing with exclu- will benefit by filing a joint return instead of filing sep- sions.) arate returns. A joint return must include all the income and deduc- General Information tions of both spouses. Thus, even though the income of Submitted on a Return one spouse may be less than $750 and that person would not be required tofilea return, this income Members of the Armed Forces should indicate their would have to be included if the couple decided to file a name, social security number, and permanent home ad- joint return. A joint return may be filed even if one of dress on their returns. Suppose the taxpayer is entitled the spouses has no income during the tax year. to a refund which he does not wish to be mailed to his Under no circumstances may one spouse file a sepa- permanent home address. In that event, itis suggested rate return to receive a refund of tax on wages withheld that the taxpayer delete his permanent address and if the income is less than $750 and, at the same time, enter his' current address. file a joint return with the other spouse.

2 , Effects of Deathor aJoint Return and dividends received exclusions, if both husband and If one spouse dies during the taxable year and the wife qualify for these exclusions, are to be separately surviving spouse does not remarry before the close of computed. the tax year, the surviving spouse can file a joint return The credits against their tax liability are alsb, as a with the deceased spouse. general rule, aggregated. However, separate computations mustbeemployed in those cases where each of the Note.As will be studied later, the survividg spouse spouses is entitled to the benefits of retirement income may also, under certain circumstances,use the joint credits against the tax liability. return tax tables for the two years following the year of These are but a few examples of specific items which death of his or her spouse; an exemption may not, require separate computations to arrive at the combined however, be claimed for the deceased spouse in other credits inuring to married taxpayers filing joint returns. than the year of death. (2)The liability for any tax and penalties due on If the surviving spouse remarries in the year of death such returnif a joint returnisfiled each spouse is of the other, then the return for the deceased former generallyliable: spouse would have tobea separate return. However, (a) for the full amount of tax due on such return, the surviving spouse and the present spouse may file a regardless of the amount of his or her separate taxable joint return for such taxable year. income included therein;and, Chapter 3 in Publication 17 discussesin detail the (b)for any increase in liability by reason of civil law applicable to the filing of returns involving dece- penalties imposed. dents. The following thoughts are highlighted since they are more important: Note:Chapter 2 in Publication 17 discusses the "in- (1) When a return is being prepared on behalf of a nocent spouse" exception to the general rule. decedent, after the surname write"deceased." Whether a joint return or separate returns will result (2) The gross income requirement for filing a return in a tax advantage depends upon various factors. In for a decedent is the same as that for any other tax- some of the special situations given below, itis to the payer. advantage of the spouses to file a joint return, in others (3) The executor, administrator or legal representa- itis to their disadvantage. tive, if one has been appointed, must filethe final return and sign the return on behalf of the deceased. If no Advantages of Filing a Joint Return person has been appointed, the surviving spouse may file the joint return and sign the return adding "Taxpayer A joint return containing large amounts of gross in- and surviving spouse." come generally results in a tax advantage, since the tax (4) If a refund is due, a Form 1310, Statement of based on taxable income is computed at rates which Claimant to Refund Due Deceased Taxpayer, must be apply to each one-half of the income. executed by the person claiming therefund. A copy of A joint return is advantageous when one spouse had ,the death certificate must accompany the Form 1310. deductions in excess of gross income. The excess deductions of the spouse may be applied against the income of the other spouse. Citizenship or Residency A joint return may permit a greater deduction for Itis most important to know that In order for mar- contributionsifone spouse has made contributions in ried taxpayers to be eligible for the tax benefits of joint excess of the allowable limitation and the other spouse return filing they must either be citizens or alien resi- did not use up his or her maximum allowable deduc- dents of the United States during theentire taxable tion. year. A joint return would be advantageous when the gross The taxation of aliens is discussed later in the text. income of one spouse is less than $750, since the other spouse would benefit by the excess of the deduction for Problems of Husband and Wife Electing To File a the $750 exemption over the income'of such spouse. Joint Return Certain problems are frequently encountered by the Disadvantages of Filing a Joint Return average taxpayers electing to file a joint return These If one spouse has a heavy medical expense deduction problems shouldbethoroughly understood in order to and a moderate income and the other spouse has a determine whethera joint returnor separate returns are moderate income and no medical expenses,. it would more advantageours. Some of the most common prob- ordinarily be to their disadvantage to file a joint return. lems are listed below. A smaller adjusted gross income allows a greater medi- (1) The determination of theaggregateadjusted cal deduction. gross income, taxable income and creditsWhena husband and wife exercise their statutory rights to file a Conclusion joint return, they are in effect, regarddd asa single taxpayer. The incomes of both are combined in comput- A military manand his U.S. citizen or resident alien ing the combined "adjusted gross income" (line15, wife will find it more advantageous to file a joint return Form 1040 or line 12, Form 1040A) and the combined because the tax rateapplicable to a joint return is much "taxable income" (line 47, Form 1040 or line 5, Form more beneficial than that applicable to separate returns 1040A Worksheet). In certain cases, however, separate and because, as a rule, the medical needs of military computations may be necessary to arrive at the correct personnel and their families are administered at low cost adjusted gross income. For example, sick-pay exclusions to such personnel.

3 Married Filing Separately daughter for whom she is entitled a dependenCyexempt- tion for the year, (2) she furnishes more than one-half Married persons may file separate tax returns if they the cost of maintaining the household and, (3) during choose to do so. Each spouse reports his own income, the entire taxable year her spouse is not a member of claims his own deductions and exemptions, and com- the household. putes his tax under rates applicable to married persons who file separate tax returns. Each spouse is liable for any tax due on his return and is entitled to the refund if Unmarried Head of Household Status the tax paid in advance exceeds the tax liability shown on the tax return. This tax computation results in a lower tax lability If either spouse had at least $750 income and the than the separate status, but in a higher one than the other did not, the spouse who had at least $750 may file joint return status. In factit falls about half-way behis own separate return while the other need not file. tween these two computations. The spouse filing the return must report only his own . To obtain this benefit the taxpayer must meet two income. If the spouse not filing had no income and was requirements. not the dependent of someone else, then the one filing may claim his spouse's exemption. Requirement (1)Marital Status The taxpayer must be unmarried (or legally sepa- May Separate Returns Be Substituted for a Joint rated) -on the last day of the tax year. An interlocutory Return or Vice Versa? decree of divorce does not give the taxpayer an unmar- Separate returns may be substituted for an original ried status. joint return only if they are filed on or before the 15th Ifat the end of the tax year the U.S. taxpayer is day of the fourth month following the close of the married toa, spouse who was a nonresident alien at taxable year. In other words they must be filed before some time during the tax year, the U.S. taxpayer is not the expiration of the due date of the return (15 April considered married for purposes of this head of house- for calendar year taxpayers). hold test. However, the nonresident alien spouse does Married taxpayers who elected to file separate returnsnot qualify as a relative or dependent for purposes of are permitted to change their election. An amended Requirement (2) explained below. joint return may be filed within three years from the A widow or widower cannot be considered as head of regular due date of the return, exclusive of any exten-household as long as he or she is entitled to the benefits sion of time granted to either spouse. of a surviving spouse (Note, however, that the latter's If a taxpayer was married and entitled to file a jointtax rate is more beneficial than the head of household return at the time of filing a separate return, he and his rate) spouse may subsequen ly elect to file jointly even though at 'the" time of such eledlion they are legally separated or Requirement (2)7-Maintenance of Household divorced. If either spouse has died, the election to change from The taxpayer must furnish over half of the cost of a separate to a joint return with respect to the decedentmaintaining a household for the entire year for at least can be made only by the executor or administrator. one relative (not his spouse). Whether this relative must A joint return may not be substktuted for original also qualify asadependent and whether he or she niust separate returns if: actually live in the taxpayer's household depends upon , (a) either spouse has instituted an action against thethe relationship. Government in any court with respect to his taxes for Father or MotherA father or mother must qualify that year; as a dependent and must live with the taxpayer or in a (b) either spouse has entered into a closing agree-home maintained for them. In this situation, qualifica- ment with respect to that taxable year; or tion as a dependent cannot arise because of a multiple (c) either spouse has compromised any civil or crimi- support agreement. nal liabilities for taxes with respect to that year. Unmarried Child, Grandchild, Stepchild or Poster ChildAn unmarried child, grandchild, stepchild or Married Individuals Filing SeparateReturns foster child must live with the taxpayer, but does not have to qualify as a dependent. If a husband and wifeN\e separate Forms 1040 and Any Other RelativeAny other relative must live in one elects to itemize deduc ons the other must also the taxpayer's home and must qualify as a dependent. itemize. If one itemizes deductions on Form 1040, the Temporary AbsencesTemporary absences for vaca- other may not take the Standard Deduction, use thetions, schools, sickness, etc., are disregarded in deter- Optional Tax Tables, or file Fork 1040A. The spouses mining whether a related person actually lived in a must be consistent in their election. household. Military service may be considered a t mpo- rary absence. Married Persons Living Apart The following items are included in the cost of ma n- taining a household: rent, mortgage interest, taxes, in- An abandoned spouse is not considered married if she surance on the premises, repairs, utilities, domestic help, (or he) (1) files a separate return and maintains as her and food consumed in the home. The cost of clothing, home a household which constitutes, for more than education, medical and dental treatment, vacations, and one-half of thetaxable year,the principal place oftransportation is not considered as part of the expense abode of her dependent son, daughter, stepson, or step-of maintaining a household. 4 Example. Taxpayer's wife died several years ago and (2) had uncollected employee tax(socialsecurity he has not remarried. An unmarried son lives in the tax) on tips as shown on his Form NV-2, house, but he cannot he claimed as a dependent. The (3) had received $20 or more in tips inany one taxpayer furnished over half the cost of maintaining the month and did not fullyreport these tips tohis em- home. Head of household status may be claimed by the ployer, taxpayer. (4) files a separate return and the spouseitemizes deductions, Widow(er) With Dependent Child (5)is a nonresident alien (Form 1040NR should be used), This computation results in the same tax liability as a (6) could be claimed as a dependent on his parent's joint computation and is available to an eligible survivor return, and had $750 or more of dividend and interest for wily the two next succeeding taxable years follOwing income, or has total income of more than ,S10,000 if the death of the spouse. singleor unmarried head of household ($5,937rf The exemption deductionforthe deceased spou se married and filing separately), may not be claimed by the survivor when this filing (7) claims the retirement income credit, or certain status is used. (Remember that the exemption can beother credits, or claimed for the year of death because the surviving (8) makes adjustments to gross income for sick pay, spouse is permitted to file jointly with the decedent.) moving expenses, or employee business expenses. The requirements for this computation are as follows. See Instructions for Preparing Short Form 1040A (a) One spouse must have died within the two pre-for other circumstances in which a taxpayer may not ceding taxable years; use Form 1040A. (b) The husband and wife must have been entitled to filejointlyforthe year of death;itisimmaterial whether they actually did file jointly; (c) The survivor must not have remarried; Here Is a Tes t To Help Taxpayers Decide Whether (d) The survivor must have a child or stepchild whoThey Can Reduce Their Tax. Liability fey Itemizing qualifies as a dependent; and Deductions on Form 1040 (e) The survivor Must furnish over half the cost of maintaining a home whichis the principal place of A taxpayer filing jointly or as surviving widow(er) abode for a dependent child or stepchild, except forshould Itemize hisdeductions on Form 1040ifhis temporary absences (vacations, schools, sickness, etc.) income on line 12 of Form 1040A is: Example. Commander Palmer's wife died last year less than $11,875 and his allowable itemized de- and a joint return was filed forthatyear. He was ductions (see Chapter 5) total more than $1,900. unmarried at the end of the current year and he main- between $11,875 and $16,250 and his allowable, tained a residence for his child who qualified as hisitemized deductions total more than 16% of line 12. dependent. He may use the joint return tax computation over $16,250 and his allowable itemized deduc- for the current,year since he qualifies as a survivingtions total more than $2,600. spouse. Note that he cannot claim an exemption deduc- Note if the taxpayer married and filing separately tion for his deceased spouse. for the current year. the above dollar amounts must be divided in half. The privilege of filing as surviving spouseisnot A taxpayer filingas singV..,45r head of household granted if: should itemizehis deductions on Form 1040 ifhis (a) The taxpayer remarries before. the end of his income on line 12 of Form 1040A is: taxable year; or lessthan $10,000 and his itemized deductions (b) The taxpayer or his spouse was a nonresident total more than $1,600. alien. between $10,000 and $14,375 and his itemized deductions total more than 16% of line 12. over $14,375 and his itemized deductions total What Form to File more than $2,300. Eligibility for Filing Form 1040A Taxpayers may use Form 1040A for 1975 if: When and Where To File an Individual (1) their total income (regardless of amount) is fromIncome Tax Return ,wages, salarids, tips, and not more than $400 in dividends or interest, and 15 April is the final date for filling individual income (2) they do not itemize their deductions. taxreturnsiftaxpayersusea calendar year. The Note. Taxpayer may disregard the $400 limitations return should be sent to the appropriate Internal Reve- for interest and dividends if not required to file a re- nue Service Center for the state in which the taxpayer is turn but files to get the earned income credit. located as shown in the instructions on Forms 1040 and 1040A. If his principal place of abode for the tax year Who May Not File Form 1040A is outside the United States, and he has no legal residence or principal place of business in any Internal A taxpayer is not eligible to file Form 1040A if the Revenue District within the United States, he should file taxpayer: his return with the Internal Revenue Service Center, (1) had income other than wages, salaries, tips, or 11601 Roosevelt Boulevard, Philadelphia, Pennsylvania more than $400 in either interest orldividends, 19155.

5 Exceptions to 15 April Due Date for the United States or Puerto Rico on 15 April. It also Calendar Year Individual Taxpayers applies when only one spouse isoutside the United States or Puerto Rico on 15 April, provideda joint return isfiled. What are the filing requirements of a Written Application husband and wife who wish tofile separate returns if (1) A taxpayer may get an automatic two-monthonly one spouse is outside the United Statesor Puerto extension of time to file Form 1040 by properly com-Rico on 15 April? pleting Form 4868 (Application for Automatic_ Exten- Erample: Capt John Baker is stationed in Koreaon sion of Time toFile U.S. Individual Income Tax 15 April 1976 and his wife is living in Idahoon that Return). Taxpayers filing this application are assured ofdate They decided to file separate returns for 1975. an extension of time tofileunlessnotifiedtothe Capt. Baker has until 15 June 1976 to file his return but contrary.' his wife must file her return by 15 April 1976. Had they The application must befilePwiththe appropriate filed a joint return the automatic 15 June 1976 exten- Internal Revenue Service Center on or before the nor-sion would have applied in their case. mal due date of the tax return. In submitting Form 4868, it is necessary to make a tentative tax estimate for Combat Zone Service or Hospitalization the year. Any tax due after taking into account prepayments (such as withholding or estimated tax payments) Members of the Armed Forces of the United States, must be paid with the application. or any other individuals, such as Red Cross workers, Interest on any unpaid portion of the final tax is 1/2% Federal civilian employees, industrial technicians and a month (up to a maximum of 25%) from the original,accredited correspondents who support such Armed due date of Form 1040 to the date of payment. TheForces have until 180 days after they leave a combat late payment penalty of 4,2% a month will also applyzone or are discharged from continuous hospitalization unless there is reasonable cause for failure to pay on outside the 50 states and the District of Columbia as a time. However, the late payment penalty will not applyresult of injury incurred in the combat zone, for filing if the balance due on the return is less than 10% of the any Federal income, estate or gift tax return, or declara- total tax and payment of the balance due is remitted tion of estimated tax, paying these taxes, claiming re- with the return. fund, bringing suit upon any of these claims, being Except in severe or undue hardship cases, a taxpayerliable for assessments or deficiencies, or being subject to must take adavantage of the automatic extension provi-levy. sions before any longer extension will be granted. Fur- ther extensions of time to file 'beyond 2 months will not Missing Persons be automatic end must be specifically granted. A taxpayer may request a further extension by filing Form No Federal income tax return of, or payinent of any 2688 (Application for Extension of Time to File U.S. Federal income tax by, a member of a uniformed force Individual Income Tax Return). or civilian officer or employee of any department who, (2) U.S. citizens abroad who expect to receive ex-at the time any such`return or payment would otherwise empt earned income may request an extension by filing become due, is absent from his duty station in a status Form 2350. of missing,. missing in action, interned in a foreigncoun- Note: The duplicate Form 4868 should be attachedtry, captured, beleaguered, or besieged by 'a hostile to the face of the completed tax return when it is filedforce, or detained in a foreign country against his will, as evidence of the extension. Any payment you madeshall becoine due until the earlier of: (A) the 15th day with the application for extension should be entered of the 3rd month in which he ceased (except-byreason on line 21(d), Form 1040. You may not use Formof death or incompetency) to be absent unless within 1040A or elect to have the Internal Revenue Servicethat period he again becomes absent under the forego- compute your tax if you applied for an extension ofing conditions or (B) the 15th day of the 3rd month time to file. following the month in which an epcutor, administrator, or conservator Of the estate "of the taxpayer is appointed. The postponed returns should also beaccom- Extension While Abroad panied by explanatory statements when filed. Note that this postponement is not lirriited to the geographical Citizens of the United States, who, on 15 April, arelimits of any combaCzone. outside the United States and Puerto Rico, are allowed The spouse of an individual in missing statusmay an automatic extension of time until 15 June for filingfile a joint return during the period heisin missing the return for the preceding calendar year. In additionstatus even if it is subsequently determined that he had to the tax liability due, however, interest on the liabilitybeen killed in action in a prior year. Such spouse . may is incurred at the rate of 9% per annum from 15 April, also file as surviving spouse (if she has a,_dependenti. the normal due date, to the date paid. The interest ratechild) for two years following the yearin which her is 6% on amounts due before July 1, 1975. husband's missing status is changed. If a taxpayer takes advantage of this automatic extension, a statement must be attached to the return showing he was outside the United States or Puerto Rico on theStatute of Limitations tlue date. The law prescribes a specific period within which the The automatic 15 June extension applies to individu-Commissioner may assess and collect income taxes. als filing separate returns when both spouses are outsideListed below are various limitation periods applicable to

1A. the assessment and collection of iticome taxes. The fol-file the return within the prescribed time is shown tothe lowing is not all inclusive. satisfaction of the district director tO be due to reasonable cause. The amount to be added to the tax is 5% General Rule thereof if the failure is for not more than one month, - with an additional 5% for each additional month or Normally income taxes will be assessed within 3 years fraction thereof during, which the failure continues, but after the return was filed (whether or not such return not to exceed 25% in the aggregate. The addition is was filed on or after the date prescribed), and no pro-computed on the net amount of tax due. ceeding in court without assessment for the collection of the tax may be begun after the expiration of that period. An income tax return filed before the last dayNegligence Penalty prescribed by law or by regulations for the filing thereof If any part of any underpayment of tax is due to will be considered as filed on that last day. Whenever negligence or intentional disregard of rules and regula- the period of limitations begins to run from the date of tions, but without intent to defraud, 5% of the under- filing the return, it means the date of filing the original payment will be added to the tax. return. The limitations period does not generally begin on unsigned returns. Fraud Penalty Failure to File a Return If any part of any underpayment of tax is due to fraud, 50% of the underpayment will be added to the Ira taxpayer fails to file a return there is no limita- tax. tion on assessment and collection of income tax. The Occasionally a taxpayer will, for one reason or an- assessment may be made at any time. other, fail to file an income tax return for a particular year. Failure to file can bring upon a taxpayer both a Files False or Fraudulent Return With criminal and a civil fraud penalty, so that a" taxpayer Intent to Evade Taxes would be well counselled to file an income tai return no matter how late such filinis. Sometimes a taxpayer If a taxpayer files a false or fradulent return withwho owes tax does not have the funds to pay and, intent to evade taxes there is no limitation on assess- because .heis unfamiliar with the law, fails to file a ment and collection of income tax. return, thus leaving himself open to the suspicion of fraud or penalties for ,failure to,file. In the following Files and Omits More Than 25% of Gross years the taxpayer, once having failed to file, may not Income Properly Includible Therein file even when refunds are due. Eventually when he does file he may lose his refunds for prior years because If a taxpayer omits from his gross income an amount the statute of limitations has expired. Yet if he hod which is more than 25% of the gross income stated on filed a timely return for the first year that he owed some his return, the period of limitations for assessment andtax in which he could not pay, he would merely have collection of the tax expires 6 years from the date ofbeen subject to 9% (6% before July 1, 1975) per an- filing the return. num interest (and the one-half of 1% penalty dismissed below), and would not havelefthimself open to Statute of Limitations on Claims for fraud penalties or jeopardized his refunds. Therefore, Refund by Taxpayers itis always better to file a timely return even if a taxpayer does not have the money to pay histax The period for filing timely claims for refund or liability. credit on income tax is as follows: (a) If a return is filed, a claim for credit or refund of an overpayment must be filed by the taxpayer within 3Failure To Pay Tax Penalty years from the time the return was filed or 2 years from If the taxpayer fails to pay the income tax -when due the time the tax was paid, whichever expires later. there will be added to the tax an additional penalty (b)If no returnisfiled,the claim for credit orcharge of one-half of 1% a monthf not exceeding a refund of an overpayment must be filed by the taxpayer total of 25% of theverdue amount. For failing to pay within 2 years from the time the tax was paid. the income tax whenue, the penalty is imposed on the The running of the statute of limitations on filing amount shown on threturn as due, less amounts that claims for refund is suspended because of service in ahave been withheld, estimated tax payments, partial combat zone. payments, and other applicable credits. This penalty is not imposed if it is shown that the failure to pay the tax is due to reasonable cause and not to wilful neglect. The Penalties failure "to pay" penalties are in addition to-the regular Delinquency Penalty 9% interest charged on overdue taxes. The 9% per 'year interest charged for delayed pay- In the case of failure to file an income tax return onment of tax is fully deductible from income in comput- or before the date prescribed for filing (determined withing taxable income. The 1% penalty is not de- regard to any extension of time for such filing), thereductible in arriving at taxable because it is spe- will be added to the tax required to be shown on thecifically referred to as an addition to the tax and as a return, the amount specified below, unless the failure to penalty. Estimated Income Tax Payment year. For the taxpayer who is outside the United States on 15 April filing may be postponed until 15 June. If In General the estimated tax return is not filed until 15 June then one-half of the estimated tax is due and payable with In order to have all individual taxpayers on a pay-as- the return. The following example illustrates the normal you-earn basis, many U.S. citizens, and resident and due dates and amounts of estimated tax payments: nonresident aliens are required to estimate their tax liabilities and to pay at least 80% of the tax in advance Total estimated tax $3,000.00 through so-called quarterly payments and withholdingLess. Estimated withholding from pay $2,000.00 by the employer. Form 1040-ES, Declaration of Esti-Estimated tax $1,000.00 mated Tax for Individuals, is used to report the estimated tax to the Internal Revenue Service and is filed Payments of estimated taxwith the taxpayer's income tax return. A nonresident 15 April (paid with declaration) $250.00 alien must use Form 1040-ES (010). 15 Tune $250.00 Additional charge for failure to pay estimated income 15 September $250.00 and self-employment tax.An additional charge of 9% 15 January (after end of taxable year) $250.00 (6% before July 1, 1975) a year is imposed by law for Total $1,000.00 underpayment of installments of estimated tax receipts in certain situations. The charge does not apply if each Note The fourth payment (15 January after the end installment is paid on time and (a) Is at least 80 perof the taxable year) need not be made if the taxpayer cent (662, 3% for farmers and fisherman)of the files his return on or before 31 January of the succeed- amount due, or (b)is based on a tax computed by ing calendar year and pays in full the amount computed using your income for last year and this year's tax on his return as payable. rates and exemptions. For additionalexceptions in unusual cases see Form 2210. Amended Declarations Who Must Make a Declaration Generally, if an individual has filed a declaration and the facts and circumstances later indicate that his in- Every citizen or resident of the United States mustcome will be substantially greater or less than he pre- make a declaration of his estimated tax if he: viouslyestimatedonhisoriginaldeclaration,the (I) can reasonably expect gross income to exceedAmended Computation schedule on page 2 of Form (a) $20,000 in the case of 1040-ES should be used to determine the amended esti- 1. a single individual, mated tax: The amended estimated tax should then be 2. a head of household, shown in item 1 of the next declaration-voucher filed. A 3. a surviving spouse, or declaration or amended declaration which would other- 4. a married individual entitled to filea joint wise be due to be filed on 15 January need not be filed declaration if his spouse does not receive any wages; or if the income tax return for the taxable year is filed and 5. a married person living apart (as described the tax due paid by 31 January. On page 4). Note: Itis important to retain copies of cancelled (b) .SI0,000 in the case of a married individual checks to prove payment of taxes to the Internal Reve- entitled to file a joint declaration if both spouses receivenue Service if the return is examined. wages; (c) $5,000 in the case of a married individual who is not eligible to file a joint declaration; OR Alternative (2) can reasonably expect to receive more than $500 To circumvent the problem of filing a declaration of from sources other than wages subject to withholding. estimated tax (indeed to insure that no tax is due with No declaration is required, however, if the estimated the filing of a taxpayer's income tax return), an alterna- tax can reasonably be expected to be less than $100. tive method is presented. An employee having earnings subject to withholding (1) At the beginning of the taxable year estimate the may wish to have his employer withhold more than the taxable income for the coming year. minimum amount of income tax, thus reducing his esti- (2) Compute the tax. mated tax liability after deducting withholding and elim- (3) Divide the tax by the number of military pay inating the need for a declaration. For the serviceman checks in the year. whose only source of income is his military pay, the (4) Inform the personnel officer to withhold the possibility of an estimated tax penalty is remote because amount computed in 3 above (to the nearest $5 per pay the withholding from such pay is more than adequate to check) from each pay check. cover his situation. However, many personnel have in- This suggestion requires little more work than that come not subject to withholding (dividends, interest,necessary to compute an accurate declaration of esti- capital gains, annuities, rents, etc.). These people have mated tax. the problem of filing an estimated tax declaration and making the quarterly payments in accordance with such declaration. Additional Facts on Wage Withholding Due Dates An indiviAuwill not be subject to withholding of income tax if hOcertifies to his employer that he expects Ordinarily calendar year taxpayers first file their dec- to have no income tax liability for the current year and laration of estimated tax by 15 April of the taxable that he had no tax liability for the prior taxable year.

8 This provision relieves individuals who earn less than (3) Spouse diedsurvivor does not remarry before the amount required to file a tax return from filing ayear end, a joint return may be filed.f return solely to obtain a refund of the tax withheld. (4) Single person may have head of household or Aurviving widow(er) status. 1- Voluntary Withholding on Pensions and Annuities (5) Certain married individuals living apart. Pension and annuity payments are subject to income tax withholding when the payee requests withholding. Joint Returns If the taxpayer wants to take advantage of this provi- (1) Taxpayers may owe less if they file joint returns sion he should contact his personnel officer. (2) Marital statusIf on last day of taxable year taxpayers are: Summary (a) Married and living together (b) Living in common) law if in common law state Who Must FileCitizens and Residents (c) Married and living apart but not divorced or of the United States legally separated Tax Year (d) Separated under 'interlocutory decree of di- Filing Status 1975 vorce. Singleunder 65 $2,350 (3)Effect of death of one spouse Single-65 or over 3,100 (a) Joint return for year of death. Married Filing Jointly 3,400 (b) Surviving spouseratefor two succeeding Married Filing Jointly years if certain requirements are met. (one spouse 65 or over) 4,150 (c) Remarriage in year of deathdecedent's re- Married Filing Jointly turn must be separate. Newlyweds can file jointly. (both spouses 65 or over) 4,900 (d) Executor must file on behalf of decedent or Married Filing Separately (See Note 1) 750 spouse when none is appointed. Married Couples Living Apart (See Note2) 750 (e) Refund claim with Form 1310submit copy Dependent Taxpayer with of death certificate. Unearned Income (See Note 3) 750 (f) Both taxpayers must sign a jointireturn. Surviving Spouse Z650 (4) CitizenshiporResidenceENTIRE TAXABLE YEAR. Notes: (1) The higher filing requirements do not ap- plyif isentitledtoclaim an any other taxpayer Unmarried Head of Household Status exemption for either spouse, (2) For married couples, the higher filing require- Rateisless than separate status, more than joint ments apply only if they have the same household as return status. their home at the close of the taxable year. Requirements (3) Any unearned income of a taxpayer who could be (1) Marital Status claimed as a dependent of another reduces the filing re- (a) Unmarried or legally separated on last day of quirement to $750. tax year, or Special Notes: (1) Exemptions for blindness and de- (b) Married to a nonresident alien at some time pendents do not apply to the filing requiremnts. during year and who meets second requirements, or (2) Taxpayers with $400 or more of self-employment (c) Certain married individuals living apart. income must file. (2) Maintenance of household General Information on Return (a) Furnish over half of the cost of maintaining household (a) Social Security Number (b) For entire year (b) Permanent Home Address (note refund sitoa- (c) For at least one relative (not his spouse). tions requiring current mailing address) RelativeDefinition for purpose of (2) (c) above: (c) Presidential Election Campaign Fund. Father or Mothermust be dependent and must live with taxpayer or in a house maintained for them. Filing Status Note: Dependency qualification cannot arise from a Separate Returns multiple support agreement. Unmarried child, grandchild, stepchild or foster child 'General Rule must live with taxpayerdoes not have to qualify as (1) Filed by one taxpayer a dependent. (2) Includes only his income and deductions Any other relativemust live in taxpayer's home and (3) Filed in the name of and signed by that taxpayer be a dependent. (4) Nor'-ha lly filed by taxpayer who is not married at (d) Temporary AbsencesMilitary service, vaca- the end of his tax year. tion, school, sickness, etc., do not negate living with Exceptions taxpayer clause. (1) Married taxpayers ilia',file separate returns. (e) Cost of Maintaining HouseholdRent, mort- (2) Citizen or resident who is married to one who gage interest, taxes, insurance on premises, repairs, util- was a nonresident alien at some time during the taxities, domestic help and food consumed in home are year must file a separate return unless he qualifies as considered as costs of maintenance. head of household. Clothing, education, medical treatment, vacation's and

9 14; transportation are not considered as costs of mainte- penaltyMaximum 25%. However, failure to file dis- nance. N covery by IRS can result in criminal and civil fraud.

Surviving Spouse Status Declaration of Estimated Tax (1) Same tax rate as a joint return. Penalty-9% per annum broken down into quarterly (2) Available to an eligible survivor for only two installments next succeeding tax y ears following death of spouse. (3) Exemptionfordeceased- Due Date-15 April, (15 June if outside U.S. on 15 spousecannotbe April) claimed by survivor. Requirements Installment Dates-15 April, 15 June, 15 September, (1) One spouse must 'have died within the two pre- and 15 Jan. (note filing and payment by 31 Jan. negates ceding tax years. 15 Jan. installment) (2) Must have been entitled to file jointly for year of AlternativeCompute taxdue andhave pro-rata death. amount withheld each .pay day. (3) Survivor must not have remarried. (4) Survivor must have a child or stepchild who / qualifies as a dependent. Quizzes for Chapter 1 (5) Survivor must furnish 50% of the cost of maintaining a home which is principal abode of such de- YesNo Quiz pendent . Note. Surviv.ing spouse filing status cannot be used if Check applicable box to show if the taxpayer must taxpayer remarries before the end of his tax year or if filea tax return in each case study that follows. You the taxpayer or his spouse was a nonresident alien. mayuse the summary schedule to help you answer. A. Tax year 1975Single taxpayer, age 20, a college student, $2,000 earned wages, nd unearned-income. When and Where to File O Yes 0 No B. Tax year 1975Single taxpayer, age 28, $1,100 When to file self-employment income, wage income $550. 15 April filing datenormal calendar year taxpayer O Yes 0 No 15 June if taxpayer is outside U.S.A. or Puerto Rico C. Tax year 1975Married couple, husband over 65, on 15 April Social Security income of 5800, wage income of Interest at 9% per annum due from 15 April to filing $4,200. date. O Yes 0 No Extension by filing Form 4868 (Application for Au- D. Tax year 1975Marriedcouple both under 65, tomatic Extension) Combat zone service or hospitaliza- wages $5,900. tion-180 days after leaving combat zone or hospital O Yes 0 No outside U.S.A. E.Tax year 1975Marriedcouple both under 65, Missing persons postponementearlier of the 15th bank interest $250, wagesof $2,500. O Yes 0 No day of th third month in which he ceased to be.absent ±.( or on the 15th day of the third month following the F.Tax year 1975Single, age 17, high school stti- month in.which an executor, administrator, or conserva- dent, $380 income from delivering newspapers, tor of the taxpayer's estate is appointed. $600 in wages, $20 bank interest, dependent upon parents. O Yes 0 No Where to file G.Tax year 1975Married couple, husband over 65, Military personnelAppropriate InternalRevenue wife under 65, Social Security income $965, wage Service Center. income $2,900, jointly owned dividend income $550; interest income $125. Statute of Limitations O Yes C] No H.Tax year 1975Married taxpayer filing separately, (a) General rule-3 years after due date or filing age 21, $700 wages, $97 in dividends. date whichever is later EjYes 0 No . (b) 25% understatement of income-6 years I. Tax year 1975Single taxpayer age 67, dividend (c) Fraudno statute income $950, wages $1,400, interest income $220, and tip income of $250. Penalties O Yes 0 No Failure to pay tax-1/2 % per month up to a maxi-TrueFalse Quiz mum of 25% Delinquency-5% per month up to a maximum of Indicate whether each of the following statements is 25% true or false by inserting "X" in the appropriate box. Negligence-5% of any underpayment 1.Every citizen of the United States must file a re- Fraud-50% turn if his gross income is $750 or more. Note: Voluntary late filing may result in Delinquency O True 0 False

10 1 i 2.If a single taxpayer's deduction exceeds his gross 2.All of the following must file a return of income income of $2,700 he is not required to file a return. EXCEPT o True False A. a minor attending school who earned $3,000 3. A college student worked as a handy man during during vacations_ the summer vacation and earned S2,200. He had B. a single individual with tax liability of $1,200 no other income. His em over, however, waI un- whose employer withheld taxes of $1,250 on able to pay the student's ages. In lieu of 4ages, his salary. the student accepted an automobile offered by the C. a single individual with gross income of employer, which had a fair-market value of $1,350 $3,000 but who has deductions of $3,500. at that time. The student is required to file a re- D. a single individual 71 years of age with gross turn because he actually earned $2,200. income of $2,600. True False E.a United States citizen residing in France 4. A husband and wife who are not living together whose salary was $20,000. but are not legally separated under a decree of 3. H has gross income of $4,000 and deduction of , divorce or separate maintenance on the List day $500. His wife, W, has gross income of $500 from of the taxable year may file a joint return. which S50 has been withheld by her employer. True False They may file as follows: 5.Sue, Jim's wife, died during the early part of the'. A. A joint return not including W's income and year. Sue had income from wages in the amount of deductions. $300 for the taxable period from which $36 in tax B. A joint return not including W's income and had been withheld. She had no other income. Jim deduction with W also filing a separate return remarried before the close of the year and his to receive a refund on taxes withheld by her present spouse had no Income A returnisnot employer. required to be filed for Sue. C. A joint return including the income and de- D True False ductions of both. 6.Assume the facts in question 5Jim may filea D. A joint return including the income and de- joint return with Sue for the y ear to avail himself ductions of both with W also filing a separate of her exemption, $750, because itis in excess of return to receive a refund on the taxes with: her wages, $300. held by her employer. . O True False E. Any of the above. 7. A 17 year old student received $900 in dividends 4. H became a widower in January and remarried in and purchased a used car. Since he is under age 19 December of the same year. Neither his deceased and receives more than one half of his support wife nor his present wife had any groSs income. In from his parents, he is not required to file a return. filing his return for the same year H True 0 False A. may file a joint return with his deceased wife. 8. A husband and wife must be consistent in their B. may file a joint return with his present wife. choice of separate returns. If one spouse itemized C. must file a separate return. deductions the other spouse must also itemize de- D. may file a'joint return with his deceased wife ductions. for a one month period, a separate return for ,True E False .,* 10 months, and a joint return with his present 9.Citizens of the United States who are residing in a wife for one month, each of the short periods foreign country, or traveling in a foreign country subject to annualized computatiOn. on the due date of their returns are automatically E. may file as in D above not subject to annual- entitled to an extension of time,for ,filing their ized computation. returns, not to eXceed 6 months. 5.A joint return would be advantageous in all of the True False following EXCEPT . . 10. Bob filed a timely return for the calendar year A. when one spouse has a large amount of gross income and the other a nominal amount. 1972 on 1 April 103. The statute of limitation B. when both spouses have a modest income, would normally expire on 1 April 1976. True False but one spouse has a heavy medical expense and the other has none. , C. when one spouse has deductions in excess of Multiple Choice Quiz .. gross income. D. when one spouse has made contributions in DirectionsCirciethe appropriateletter to select excess of the allowable limitation and the the best answer to each of the following 'questions. ' other has not used up his maximum allow- 1. The test to be applied in determining whether a able deduction. return of income must be filed by a person residing E,when gross income of one spouse is less than in the United States Is based on $750. A. gross income. 6.All but one of the following statements concerning B. adjusted grosi income. the period of limitations with respect to assessment C. asingleindividual with gross income of and collection of income tax are correct. Select the $3,000. EXCEPTION. D. net profits. A. There is no limitation period, if no return is E. gross receipts. filed.

11 B. If an individual omits from his gross income $595 for the taxable year and his net income an amount greater than 25% of the gross was $410. income stated on his return, the period of 2.Bobby Barr, the 19-year-old son of Captain Barr, limitation expires 6 years from date of who is stationed at Rome, Italy, was a full-time filing. studentat Columbia University. He visited his C. If an individual files a, false or fraudulent father in Rome and, while there, earned $480 for return with intent to evade taxes, there is part time work on which U.S. income tax was no limitation period. withheld. D. If an individual who files his return on a a.Must Bobby file a United States income tax calendar year basis files his return on 30 return? January, the limitation periodis 3years b. May he obtain a refund of the U.S. income tax after that date. I withheld from his earnings? If so, how? 3.With what office should the following taxpayers file QuestionAnswer Quiz their United States income tax returns, if tax is due with the returns 1.State whether a United States income tax return is a. A taxpayer whose actual and legal residence is required to be filed by a United States citizen in St. Paul, Minn. under the following set of circumstances. b. An officer of the United States Armyon duty a. Chester Bradley accepted a`discharge from the inSpain and having his legal residencein Air Force in Japan, on 15 January. He was Georgia. unemployed for threemonths, then earned c. A civilian employee of the United States Air $2,400 as a clerk in the Air Force Exchange. Force in Japan, who has no legal residenceor On 1 Oct. he reenlisted as a Staff Sergeant in principal place of business in the United States. the Air Force. 4.Aunt Rebecca, the relative of Bill Edwards,a U.S. b. William Brown, a former Army sergeant over soldier, stationed in Heidelberg, Germany,spent 65 years of age on 31 Dec. of the taxable year, the entire year in Edwards' home because of the earned $1,900 from employment by the Euro- illness of his wife. She had dividend income of pean Exchange Systems in its PX in Florence, more than $750 from a stateside source. Italy. a.Is she required to file a U.S. incometax return? c. Oscar Mills, former Army machinist, 63 years b. Assuming in the above situation that heronly of age, conducted his own lathing business at income was fromSocialSecuritybenefits, Vienna, Virginia. His gross income derived would she be required to file a U.S. incometax from capital as well as personal services was -return?

12 Chapter 2. Exemptions introduction beyond the above standards, the taxpayer should attach to the return a certified opinion to this effect from a This chapter deals with personal exemptions and de- physician skilled in diseases of the eye. In future years, pendency exemptions. Although it is true that, in mili- onlya statement referringtothis opinion need be tary parlance, a wife is a dependent, itis most impor- attached. tant to recognize that, for income tax surposes, a wife may be an exemption but never a dependent. You will notice that five dependency tests must be met before Exemption for Wife or Husband exemptions for dependents may be claimed. There are, A married taxpayer filing a joint return may claim an however, special relief provisions applicable to claiming exemption for his or her spouse. The exemptions for dependent children which do not apply'to other relatives. age and blindness also apply for both spouses, but they are not allowed for a'dependent. (Note that when filing jointly all taxable income of both spouses must be in- Objectives cluded on the return). Participants should be able to explain the following Example. Assume husband and wife file a joint re- conceptv- turn and have no children or other dependents. ( I) All situations involving personal and dependency (1) If both were under 65 and neither was blind, they exemptions would be entitled to two exemptions. (2) The correct procedure for preparing-Form 1040 (2) If both were under 65 and one was blind, they and Form 1040A would be entitled to three - exemptions. Applicable forms for this chapter include. (3) If both were over 65 and blind they would be entitled to six exemptions. Form No. If a separate return is filed by a married taxpayer, an 2120 Multiple Support Declaration.* exemption for the spouse may be claimed only if such spouse has no income and isnot the dependent of Personal Exemption another taxpayer. If both husband and wife file separate returns, neither may claim an exemption for the other. Every taxpayerisentitled to a personal exemp- Example. Husband and wife each filed separate re- tion of $750 in filing a Federal Income Tax Return. In turns. The wife earned $300 from which $40 Income addition, the taxpayer may be entitled to extra exemp- tax was withheld. She received a refund of $40 on her tions for age, blindness, spouse, and dependents. return. The husband cannot claim her as an exemption on-his return even though her income was less than Credit $750. There is an important distinction between an exemp- In addition to the $750 personal exemption,' a $30 tion and a dependent. The rules for claiming depend- tax credit is allowed for each personal exemption that ency exemptions do not apply to personal exemption of a taxpayer can claim. However, there are no credits forspouses. For instance, even though the taxpayer did not the additional exemptions for taxpayers who_ are 65 or marry until December 31 (his wife being supported by over or blind. The credit is available only for taxableher father until then) he still is entitled to file a joint years ending in 1975. return and claim her as an exemption. As we shall see in the next section, the wife's father could not claim her as-a dependent under these circumstances. Exemption for Age If the taxpayer's wife died during the year,,he may An additional $750 exemption is allowed a taxpayer still claim her exemptions if he his not remarried by the who is 65 or older by the last day of the tax year.. A end of the year. If a taxpayer lk 4iyorced or legally person is considered to be 65 on the day before his 63th separated from his wife at the end Mhis tax ydar, he birthday. may neither claim an exemption fpr her nor file a joint return with her. Exemption for Blindness Exemption for Nonresident Alien Spouse An additional $750 exemption is allowed a tax er if he is blind on the last day of the tax year. A perti is A United States citizen may claution exemption for a considered to be blind if the central visual acuity doesnonresident alien spouse if the alien spouse has no not exceed 20,200 in the better eye with correctingincome from United States sources and is not the de- lenses, or the widest diameter of the visual field sub-,pendent of another taxpayer. Thli exemptions for age tends an angle no greater than 20 degrees. If a tax-(being 65 or more) and blindness are allowed in the payer is totally blind, a statement to this effect mustcase of the nonresident alien spouse exemption. . be attached to the return. If the taxpayer is partially- blind, a statement from a qualified physician orregis- Exemptions for Dependents tered optometrist must be attached to the return verify- ing that the taxpayer's vision is not greater than de- The taxpayer is allowed an exemption of $750 for each scribed above. If partial blindness will never improveperson who qualifies as a dependent of the taxpayer.

13 'However, no additional exemptions are allowed for thepensation and allowances received by the relative from age or blindness of a dependent. If the dependent wasthe Armed Forces and used for this relative's support born or died during the year, a full S750 exemption is must be taken into account. This is true of cadets and allowed if the dependency tests are met for the part of midshipmenalso,sincesuchappointments do not the year in which the dependent lived. constitute scholarship awards. To obtain this S750 dependency exemption each of (5) Tax-exempt income(socialsecurity,armed the following five separate tests must be met. forces family allotments, nontaxable pensions, etc.) and (I) Support Test savings which areusedfor the support of a dependent (2) Gross Income Test must be included in computing total support to deter- (3) Member of Household or Relationship Test mine whether the taxpayer furnished more than half of (4) Citizenship Test such total support. (5) Joint Return Test (6) The part of a dependency allotment contributed See Appendix C forstep-by-step proceduresfor by the Government, as well as the part withheld from applying these tests. the pay of service personnel,is considered furnished by that person in determining whether this person fur- Support Test nishes over half the support of a dependent. If the allotment is used to support dependents other than those The taxpayer must furnish over half of the total from whom the allotment is authorized, an exemption support of the dependent during the calendar year. Inmay be claimed for those other dependents if they determining whether an individual has received overotherwise qualify. half of the support from the taxpayer, compare the Example:Taxpayer isin the Armed Forces and amount of the support provided by the taxpayer withauthorized a dependency allotment for his widowed the entire amount of support which the individual re-mother, who used the amount received for the support ceived from other sourcesThis includes tax-exempt of herself and his younger sister. He providesno other income and savings which are used for the support offunds for their support. If more than half of their the dependent Items not to be considered when deter-support is provided by the allotment, the taxpayer may mining total support are scholarships, automobile pur-claim exemptions for both his mother and his sister, chases, life insurance premiums, And Federal, state and even though the allotment was authorized for only his local income tax payments. mother. Total support is generally the total expenditures in- Caution:A taxpayer should keep careful records of curred in furnishing food, shelter(atitsfair rentalthe amounts spent for the support of dependents, partic- value), clothing, education, medical and dentalcare, ularly if the taxpayer is divorced or legally separated recreation, transportation, and other similar necessities. because the amount of support furnished to any of the taxpayer's children not living with the taxpayer during Miscellaneous Support Information the year as well as the amount of support furnished (1) Amounts paid to others as child care or disabledother dependents must be entered on the tax return. dependent care to enable the taxpayer to be gainfully employed may be included as part of total support, even Multiple Support Agreement though such amounts are deductible 4s itemized deduc- In one exceptional situation the taxpayer may claima tions. dependency exemption even though the taxpayer did (2) Social Security benefit payments made toa child not provide over half of the dependent's support. When of a disabled parent must be considered as furnishedtwo or more persons together support another indivi- by the child in determining who furnished more thandual for the calendar year, one of the contributing one-half of the child's support. group may take the deduction if: (3) Amounts received as a scholarship for study at (1) No one person contributed more than half the an educationalt,institution by the taxpayer's child, step- dependent's support, and Child or legally adopted child who is, a student are not (2) Each member of the group, were it not for the taken into. account in determining total support. support test, would have been entitled to the depend- Example:Taxpayer's son receives a scholarship val-ency exemption, and ued at $1,000. In the same year the taxpayer provides (3) The member of the group claiming the deduction the son's only other support of $800. The taxpayer may gave more than 10% of the dependent's support, and claim the son as a dependent as the $1,000 isnot (4) Each member of the group, except theperson counted in determining total support. claiming the exemption, files a Form 2120 indicating (4) An appointment to any Armed Services academythat they will not claim the same exemption in the isnota scholarship. In fact, a relative in an Armedsame calendar year. The Form 2120 must be attached Service academy may not be claimed as a dependent if to the return of the individual claiming the dependent. this person is there for afull year.Nor may a relative in the Armed Services be claimed as a dependent. Such Support Test in Case of Child personis supported by the Armed Services .orself of Divorced Parents supported, whether an officer, enlisted man, cadet,or midshipman. If such relative is in the Armed Services Generally, if-L or one of the academies for only part of the year, such (1) A child receives over half of his support dur- person may be claimed as an exemption if all the five ing the year from the child's parents whoare dependency tests are met. Howev'er, the amount of com- divorced or legally separated and

14 (2) Such child is in the custody of one or both any time during the tax y ear the relationship between parents for mtre than half of that year. the taxpayer and the individual violates local law. A relative for this purpose includes a taxpayer's ,chil- Then dren, grandchildren, great grandchildren, stepchildren, Such child shall be treated as receiving over half of brother,sister,parents, grandparents, stepmother or his support from the parent having custody for the father, a brother or sister of the taxpayer's father or greater portion of the year mother, nieces, nephews and his in-laws. Once any of these relationships are established by marriage they are Unless not terminated by death or divorce. (1) The decree of divorce or separate maintenance Dependency deduction for foster childrenAfoster provides that the parent not having custody shall child is considered to be your child if your home is the be entitled to the deduction for the childandsuch child's principal place of abode and thechildisa parent provides at least $600 for support member of your household for the entire year Thus, for example, you may claim a dependency exemption OR for your foster child even though he has $750 or more (2) The parent not having custody provides $1,200 gross income for 1975 (if the child 'is under 19 years or more (or if there is more than one such child,old or is a student), provided he is a member of your $1,200 or more for all of such children),and the household and you furnish more than half of his support for the year. -parent having custody does not clearly establish that he (or she) provides more for the support of Citizenship Test such child. If the divorced parent having custody is remarried An individual who is not a United States citizen or and his or her new spouse provides support for thenational will not qualify as a dependent unless (1)a child, and the parent and the new spouse file a jointresident of either the United ,States, Canada, Mexico, return, then the support contributed by the new spouse Canal Zone, or the Republic of Panama at some time will be considered to have been contributed by theduring the calendar year in which the taxable year of divorced parent and be added to his or her support for the taxpayer begins, or (2) legally adopted by a citizen purposes of this test. taxpayer and for the taxable year of the taxpayer has Chart 3 in Appendix C provides a step-by-step proce- the principal place of abode in and as a member of the dure in applying the support test for a child of divorced citizen taxpayer's household. parents. A child born to or legally adopted by a taxpayer in the Philippine Islands before A January 1956 may be claimed as a dependent if the taxpayer was a member of Gross Income Test the Armed Forces of the United States at the time the The dependent's gross Income for the calendar year child was born or adopted and Ne child is a resident of must be less than $750 unless the dependent is the the Republic of the Philippines during the taxable year. taxpayer's child and (a) is a student, or (b) has not A child born in a foreign country, whose mother is reached age ,19 by the close of the calendar year. a nonresident alien and whose father is a U.S. citizen, A "student" is defined at one, who during some part is a U.S. citizen and qualifies as a dependent provided of any five calendar months of the taxable year, is inthe other dependency tests are met. full-time attendance at, an educational institution. Joini Return Test For tax purposes, the term child includes the taxpayer's son, daughter, stepchild, legally adopted child, a A taxpayeris not allowed an exemption forthe child placed by an authorized agency in the taxpayer'sdependent if he or she files a joint return. home for legal adoption, or a foster child. Example:Taxpayer supported his daughter for the Example.Taxpayer's 23-year-old son earned $750 entire year while her husband was in college and workduring the calendar year while he Was a full-time stu-ing. She and her husband filed a joint return. Even dent. His 18-year-old daughter earned $800 during the though taxpayer meets all the other tests, the daughter year. The taxpayer provided over half the support for may not be claimed as a dependent because she filed a both children. The taxpayer is entitled to a dependencyjoint return. exemption of $750 for each child, even though the Note:There is one exception to this rule. A depend- children will file their own returns and also claim theirenCy exemption, otherwise allowable, will not be dis- own exemptions. allowed if a joint return is filed by the dependent and In making the gross income test, the gross receiptshis or her spouse merely as a claim for a refund and if from rental property is considered as gross income with- no tax liability exists for either spouse on the basis of out reduction for taxes, repairs, etc. separate returns.

Member of Household or Relationship Test Summary To be claimed as a dependent a person must either bePersonal Exemptions $150 (1) a member of the taxpayer's household and live with the taxpayer for the entire year, or (2) related 'to theSeparate Returns Filed by Husband taxpayer. Husband can claim wife only if she has no U.S. in- An individual is not a member of the household if atcome and isnot the dependent of another (military

15 man's wife who is supported by her father cannot be (3) legally adopted by a citizen and is a member claimed by the military man if he filesa separate of the household of such citizen for the enure year and return). - the principal place of abode is such citizen's household.

A Distinction Between Exemption and Dependent Joint Return Test (Wife v. Relative) Taxpayer cannot claim dependent if such dependent files a joint return. Exemptions for Dependents$750 (is not prorated) Quizzes for Chapter 2 Note. No additional exemptions are allowablefor dependents who are 65 or blind. QuestionAnswer Quiz Death of dependent during the year has no effect on the exemption. L What are the income tax exemptions granted to an individual United States citizen taxpayer under 65 Dependency Tests and not blind. a. who files a separate return? Five dependency testsSupport, gross income, mem- b. who files a joint return with his spouse? ber ofhouseholdorrelationship,citizenship,joint return. 2. What proof of blindness is required? Support Test 3.Give the five general tests which must be satisfied to entitle the taxpayer to an exemption for a de- ( I) Furnish over 50% support during calendar year pendent. (2) Scholarships are not considered in determining total support 4.a. Is the exemption for a dependent ever allowed (3) Items considered as support: for an individual who has $750 or more gross Food income? Medical care b. If so, give the circumstances. Shelter Recreation Clothing Child care 5.Is the requirement for citizenship or residence of a Transportation Education dependent ever waived? If so,please explain in Child support (but not alimony) detail. Note: Armed Forces academy appointees who are 6. What expenditures are included in the term "sup- there for the entire year are not dependents. However, port"? if appointees for only part of year they may be dependents if other tests are met. 7.Is the amount of a Class "Q" allotment properly Relatives in the Armed Forces are not dependents of considered to be a support payment by the member anyone. of the Armed Forces who makes the allotment? Total dependency allotments and B.A.Q. allotments are considered as support provided by military person- 8.Is a spouse ever considered to be a dependent? nel (both his pay and that paid by the Government). If Why? such allotment is used to support another relative the 9. The wife of Colonel Briggs is a Greek citizen. Her military man may also claim dependency for such other sister lived in the Briggs' home in Athens, Greece, relativeall other tests being met. for the entire taxable year and Colonel Briggssup- Pultiple Support DeclarationSee Form2120. plied more than 50% of her total support. a. May Colonel Briggs claim his sister-in-law as a Gross Income Test dependent? b. What would be your answer to (a)if the Must be less than $750 unless sister-in-law were a Canadian? (1) Child is-under 19 at the end of year,or (2) Full-time student. 10.Jane Farley lived in her father's home in Indianap- olis, Indiana, for the entire taxable year. Her father Member of Household or Relationship Test supplied more than 50% of her total support, how- (I)Must be member for entire year (including foster ever, her husband, an army private on duty abroad, children), or filed a joint return with his wife. (2) must be related (children, grandchildren, great a, May Jane's father claim her as a dependenton gran,dchildren, parents, grandparents, stepchild, brother, his return? '' sister, stepmother or father, brother or sister of father b, Had Jane's husband fileda separate return, or mother, nieces, nephews and in-laws). would he have been entitled to claim heras an exemptionif her father, who supplied more Citizenship Test than 50% of her support, also had claimed her on his return? (1) Must be citizen or national of the U.S.,or (2) resident of U S., Canada, Mexico, Canal Zone,or II.The 19-year-old son and the 17-year-old daughter Panama at some time during the year, or of Major Albeer were full time students who lived

16 at home and attended the Munich branch of Mary- Assumption No.1 (based on the above separation land University. During vacation, the son earned agreement) $800, $500 of which he invested in common stocks which he planned to hold for long-term growth. During 1975 Bill paid the $3,600 for the support of The daughter earned $100 which she used to buyNancy and $900 for the support of the child. Nancy clothes for her own use. Major Albeer paid morespent $1,700 for the total support of the ehild-. Bill and Is than 5 0 rIc of the total support of the children Nancy did not file a joint return for 1975. Major Albeer entitled to dependency exemptions Who is entitled to the child's exemption for 1975? for both of his children? If not, explain. 12.Colonel Howard, a native of Miami, Florida, owns and maintains a small house there which is used as the home of Mrs. Howard's parents. The parents have no other income except Social Security bene-Assumption No. 2 fits, but do receive spme amounts from another son, Andrew, and adaughter, Bettsy. Andrew anfl Assume the same facts asin Assumption No.1, Bettsy signed written agreements that they would except that on January I, 1975, Bill and Nancy entered not claim their parents asiidependents. The SocialInto a written agreement which stated that Bill would be Security benefits amounted to less thanW2 of,Mrs. entitled to the child's exemption on his tax return. Howard's parents' total support. Who is entitled to the child's exemption for 1975? a. IsColonel Howata entitledtoclaimMrs. Howard's parentsas dependents on his joint U.S. income tax return? b. Suppose the home had a fair rental value of $200 per month, and that Andrew and Bettsy Assumption No. 3 contributed $2,000 each to the support of their parents, who would be entitledto claim the parents as dependents? During 1975 Bill paid the $3,600 for the support of Nancy and $900 for the support of the child. In addi- 13. The wife of Captain Thompson isa native oftion, he had custody of the child for seven months Izmir, Turkey, and she has never visited the Unitedduring the year. During this seven month period he Statibio proiided '$1,000 toward the child's support. The total a.Is Captain Thompson entitledto an exemp-support (provided by both parents) of the child was tion for his wife on his U.S. income tax return?S4,000 for the year. b. Assuming Mrs. Thompson earned $2,000 as a Who is entitled to the child's exemption for 1975? secretary' for a United Nations Mission to Tur- key, would your answer to question "a" remain the same? 'c. May Captain and Mrs. Thompson file a joint return under either "a" or "b"? 14. Warrant Officer Jones is unmarried and has lived abroad for many years. His mother, a widow, lives with another widow, a life-long friend, who ownsReturn Preparation Problem and maintains the house in which they live. W/O Jones contributed $1,200 to his mother's support. His married sister contributed $500 in cash and Prepare Form 1040A, usinginformationbelow. clothing valued at $150 to their mother's support.(Compute balance of tax due or overpayment) If the fair rental value of the quarters supplied byJoseph P. Brown, E7, U.S. Army, unmarried the friend was $1,200 (a) who may claim an exemption for the mother? and (b)isa multiplePermanent Home Address: support agreement necessary? (c) If so, by whom should it be signed? 2000 Main Street Rockville, Maryland 20850 Montgomery County Support Test Problem

Facts Social 'Security Number: 452 - 22'6389 Filed previous year's return from same address Bill and Nancy Coslow were separated under a written separation agreement in 1965. Thewritten separation agreement provided that Bill would pay $300 perSalary: U.S..Army $6,163 month for the support of Nancy and $75 per monthfor (Tax Withheld $816.00) the support of their child. Asprovided in the agree- Dividends, X Corp. 62 ment, Nancy had custody of the child for theentire Interest, National Bank year 1975. (savings acct.) 315

17 Tait Computation Problems

Complete the tax for the taxpayers in thefiling situations below (not able to itemize) Use Optional Tax Tables which show the taxbefore the $30 credit for 1975.

Adjusted Gross Income Filing Status Income Tax

(a) S 9,200.00 Married, filing jointly Two children (b) 6,803,00 Single (c) 7,322.00 Married, filing jointly o (d) 8,733.00 Husband 66; wife 60 and blind Husband filing separately Spouse not filingno income. Two dependent children One child, blind (e) 6,378.00 Taxpayer, age 65 One dependent child Head of household (1) 11,112.00 Married, filing jointly Three dependent children (g) 12,126.00 Married, filing separately, two depndent children, spouse also filing (h) 13,202.00 Single

18 Chapter '3. Gross Income Introduction be taxed. For. example, gross income does not include (1) the unrealized increase in value of property owned You learned in Chapter I that the liability of a tax- by the taxpayer, (2) the rental value of one's own home, payer for filing a return is determined by the amount of (3) the value of the wife's services in the home or (4) his ''gross income," Determination of "gross income" is the value of livestock and products raised on the farm thefirststep in the computation of an income tax and consumed by a farmer and his family. liability. This chapter deals first with those items of income which are specifically taxable to the Armed Military Taxable Wages Subject to Servicemen (various types of military pay) and then to other types of taxable income which apply to all taxpay-Withholding and Reported on Form W-2 ers (dividends, interest, etc.). When reference is made to a particular part of Form 1040 or Form 1040A, look Basic Pay at the Form. In this way you will become familiar with Monthly basic pay is prescribed for each pay grade the returns. according to cumulative years of creditable service of the member. Objectives Incentive Pay Participants should be able to explain the following concepts: (1) AviationPay for the performance of duty in- (1) The different types of income to be reported, volving frequent and regular participationinaerial e.g., military pay and other income; and where such flights. items are reflected on Form 1040 or Form 1040A. (2) ParachutePay to members holding a para- (2) The law and practical application of Form 1040. chute rating when required to engage in parachute (a) Supplemental income, Schedule E = jumping from an aircraft in aerial flight. (b) Capital gains and losses, Schedule D (3) DemolitionPayfordemolitionduty when Applicable forms for this chapter include. member performs such duty as a primary assignment., (4) LeprosyPay for duty involving intimate con- Form No. tact with persons afflicted with leprosy. Schedules A & B, Itemized Deductions and Dividend (5) Human acceleration or decelerationDuty as a and Interest Income human acceleration or deceleration experimental sub- Schedules E & R, Supplemental Income Schedule and ject. Retirement Income Credit 'Computalion (6) Experimental Pressure Chamber DutyDuty Schedule D, Capital Gains and Losses within a pressure^ chamber during stress experiments 2350 Application for Extension of Time for Filing U.S. (either as human test subjects or research technicians). Income Tax Return (7) Thermal stressDuty as a human test subject in (U.S. Citizen Abroad Expecting Exempt Income) thermal stress experiments. 2119 Sale or Exchange of Personal Residence 4798 Capital Loss Carryover Special Pay Income Defined- (1)Foreign Duty PayApplicable to enlisted members only. Pay for duty at designated places outside the "Income" has been defined as the gain derived from fifty states and the District of Columbia. capital, from labor, or from both combined provided it (2) Sea DutyPay for duty performed on a vessel is understood to include profit gained through a sale or pursuant to orders of competent authority, other than conversion of capital assets. when the'vessel is restricted to service in the inland Since income is not present unless there is a gain, you waters of the United States. can see that a mere return of capital is not included in (3) DivingPay for duty while engaged in diving gross income. For example, the total of money and operations. other property received from a sale of property is not (4) Medical and DentalPay to certain medical and includible in gross income except to the extent that the dental officers entering on active duty. total amount received exceeds the adjusted basis of the (5) VeterinaryPayto certain Veterinary Corps property. In other words, only the gain on the sale is a officers. part of gross income. (6) Proficiency PayPay to enlisted members who have been designated as poisessing special proficiency Form of Income in a military skill. Gross income includes income realized in any form, Lump-Sum Payment for Accrued Leave whether in money, property;sor services. Income may be realized in the form of services, meals, accommoda- A member of the Armed Forces separated under tions, notes, stock or other property, or the right to re-' honorable conditions, who is not required to carry leave ceive property,as well as cash. Income received inforward, will be compensated for a maximum of 60 forms other than cash must be included at fair marketdays accrued leave standing to his credit at time of value. However, income must be "realized" before it can separation, based on the following pay and allowances.

19 (1) OfficersBasic pay and basic allowances for The above mentioned items appearon Form 1040, quarters and subsistence applicable on date of separa-line 9, or Form 1040A, bile 9 ifthis form can be tion. used. (2) Enlisted membersBasic pay applicable to such members on date of separation plus a subsistence allow- Notes: ance at the rate of $0.70 per day for all enlisted grades (I) If the taxpayer has W-2s frommore than one and a quarters allowance at the rate of $1.25 per dayemplo\er or if,in filing a joint return, both taxpayers for enlisted persons in pay grade E-5, having depend-have a W-2 form the wages are added togetherand the ents at the time of separation. The maximum beingtotal entered on Form 1040, line 9or Form 1040A, line $6.48 received by enlisted persons in pay grade E-9. 9. Note: Only the amount of accrued leave payment (2) Attach a copy of all W-2 foims to thereturn. that represents basic pay is considered taxablewages subject to withholding and reporting in Form W-2. Forms 1040 and 1040A for 1975 Either Form 1040 or Form 1040A is used to report Reenlistment Bonus income from wages, salaries, and tips regardless of the A member who reenlists in.the Regular Army within amount. These forms, however, may not be used by 3 months after the date of his discharge or release from nonresident aliens. active duty is entitled to a bonus computed on the basis of the number of the reenlistment (first, second, third, Form 1040A fourth, etc.) and the monthly basic pay to which the member was entitled ora specific amount for each The gross income of most military perst41 fits enlistment period. within the framework of Form 1040A. However,see Chapter 1for certain restrictions as to the use of Form 1040A. Severance Pay Each Regular Army officer removed from the active'Form 1040 with Schedules list and honorably discharged will usually be paid severance pay if on the date of removal he is not eligible for Any taxpayer,,other than a nonresident alien, may file voluntary retirement under any provision of the law.this form regardless of the source of income. If a taxpayer has income from sources other than salaries or Severance payis computed by multiplying 1 or 2 month's basic pay at rate applicable on date of removalwages, schedules are provided as follows: .by the number of years of active Federal commissioned Schedule B, for dividends over $400or interest over $400; service (but not over 12). Maximum payable is 1 or 2 Schedule C, for business or self-employment income; year's basic pay or $15,000 whichever isless. Schedule D, for gains or losses on sales or exchanges of property; Readjustment Pay Schedules E and R, for income from pensions, etc., A Reserve member who isinvoluntarily separated rents, partnerships, estates, small business corpora- from the active service and who has completed, immedi- tions, retirement income credit; ately prior to such separation at least 5 years of continu-Schedule F, for farm income and expenses. ous active duty, is entitled to'a lump-sum readjustment pay ment Member will receive 2 months' basic pay in theForm 1040X Amended U.S. Individual grade in which serving at the time of separation, multi-Income Tax Return plied by the number of years of active Federal service (but not over 18), not to exceed 2 years' basicpay or Form 1040X may be used to correct an individual $15,000 whichever is less. There are two exceptions. income tax return for any year filed. While theuse of Readjustment pay equals one-half of 1 month's pay the form is not mandatory, the Internal Revenue Service multiplied by the years of active service, if the member prefers that it be used rather than an amended Form is separated 1040, Form 1040A or Form 843 since the Form is (1) Because his performance of dirty falls below designed to expedite processing. standards prescribed by the Secretary of the Army, or Form 1040X can be filed only after filing an original (2) Because his retention is not clearlyconsistent return Form 1040X must be filed within 3 years from with the interests of national security. the date the original return was filed (a return filed early is considered to have been filedon the due date) Dislocation Allowance or within 2 years from the time the tax was paid, whichever is later. The dislocation allowance (DLA) partially reim- burses a member with dependents for the expense in- Income From All Sources curred in relocating his household upon a permanent change of station. The amount of this allowance isOther Than Wages equal to the applicable monthly rate of basic allowance Form 1040, lines 10, 11, and 12 are used to report all for quarters of the member. other income other than wages; salaries, tips, etc. Refer- Thefefore, DLA is added to other active 'duty payence is made to Schedules B, C, D, E, and F (Form and is normally taxable. 1040) which represent the total of all other income.

20 The breakdown consists of the following items. In addition, any transaction having the effect of in- Dividends and Interest, Schedule B creasing a shareholder's proportionate interest in the Business Income, Schedule C corporation's assets or earnings and profits may be taxa- Capital Gains and Losses, Schedule D ble even though no stock or stock rights are actually Supplemental Income, Schedule E distributed. Farm Income and Expenses, Schedule F Basis. In a nontaxable distribution, the basis of your As you can see you are again referred to other parts old stockisallocated between the old and the new of Form 1040 (e.g., Schedules C, D, E, F, etc.). From stock. thepractical standpoiht of preparing a Form 1040 which has "other income" it is imperative, therefore, to Dividends on Stock Sold complete all the appropriate Form 1040 schedules and their attachments. When completed, their net results can When stock is sold, dividends declared and paid after easily and correctly be entered on the Form 1040. the sale are income to tht purchaser. When the stock is sold after the declaration, but before payment of the dividend, the dividend received by the seller is income DividendsSchedule B to him, because he was the owner of record. The fact that the purchase price may- have been increased in Dividends are distributions of cash or property by a .ontemplation of the next dividend does not exempt the corporation to its stockholders. Most distributions aredividend from tax. The increase in purchase price is made out of the earnings of a company and ark taxable merely part of the purchaser's price of the stock. as dividends. Taxable dividends are the.most common type of dividends and can be assumed to be taxable Dividends on Insurance Policies unless the paying corporation indicates otherwise. Dividends paid by mutual insurance companies to policyholders are not true dividends but art in effect a Nontaxable Distributions (Dividends) partial return of the premiums previously paid. They reduce the cost of the insurance contract and are not (1)No Earnings and ProfitsSometimes a company includible in gross income until they exceed the accu- will make distributions not out of earnings and profitsmulated net premiums paid for the contract. However, which are not taxable since they are, rather, a 'return the interest on such dividends is taxable as interest. to the stockholders of a part or all of their investment inthe corporation. However, this situation israre. The taxpayers,in such situations, are well advisedDividends From Mutual Funds by the companies. If a taxpayer owns stock in a mutual fund, the divi- (2) Stock DividendsStock dividends are usually dends he receives which are true dividends (subject to nontaxable because, while a stockholder now owns more the dividend exclusion) are the amounts so designated shares in a corporation, his percentage of ownershipby the company in a written notice. mailed to the tax- remains the same. For example if XYZ Corporation is payer,The amount which is designated in the notice as owned by two shareholders, A and B, both of whom a capital gains dividend should be so reported by the have 100 shares of stock in the corporation and XYZtaxpayer on line 7, Part II, Schedule D of Form 1040. Corporation distributes as a dividend a further 5 shares to each person. A and B now own 105 shares each, but their percentage of ownership (50%) has not changed Dividends From Savings and Loan Associations nor has XYZ Corporation enlarged itself in any material For income tax purposes dividends on deposits and way. (The pieis the same size but cutinto more withdrawable accounts from Savings and Loan associa- pieces.) There are several exceptions to a stock dividend tions are not treated as dividend income but rather as being tax free: interest income. (a) When you have the election to receive cash or other property in place of stock or stock rights; Dividend Exclusion (b) When the distribution results in the receipt of cash or other property by some shareholders and an Gross income does not include amounts received by increase in the proportionate interests of other share- an individual as dividends from domestic taxable corpo- olders in the corporation's assets or earnings and prof- rations (called qualifying dividends) to the extent that the dividends do not exceed $100. Dividends received (c) When the distribution is in convertible pre- from nonqualifying corporations (foreign corporations ferred stock and it has the same result as in (2), above,and nontaxable domestic corporations) are nonqualify- (d) When the distribution results in the receipt of ing dividends. preferred stock by some common shareholders and On a joint return each spouse can exclude, to the common stock by other common shareholders, andextent received, $100 in qualifying dividends. If the (e) When the distribution is with respect to pre-spouses jointly own stock then the dividend income ferred stock (other than an increase in the conversionshould, for exclusion purposes, be split between them. If ratio of convertible preferred stock made solely to take one spouse received $160 and the other $70 in ordinary into account a stock dividend or stock split with respectdividends, the exclusion would be limited to $170 since to the stock into which such convertible preferred stock one cannot use the other's excess of exclusion over is convertible). dividends received.

4 21 Chapter 11 in Publication 17 gives the reader a de- resulting from dealing in property. Some situationssur- tailed discussion of dividends and other corporate distri-,rounding the receipt of gross income giverise to a butions. special treatment of such income. The special treatment is afforded gains and losses resulting froin dealings in InterestSchedule B property. For sales or other dispositions of property, a determi. All interest istaxable except excluded interest onnation must' be made as to whether the gainor los,i certain State and municipal obligations. interest on obli- should be included in or deducted from incomein the gations of, the United States is fully taxable. This in- usual mannerthat is, as ordinary income or lossor cludes the interest on tax refunds and U.S. Bonds. whether a special treatment is in order. Most taxpayers elect to defer reporting interest on For the purpose of this course the term "sale" means U.S. Savings Series E Bonds until the bonds are ma- the transfer of property for money only, or fora prom- tured or cashed. However, it is permissible to report the ise to pay money, such as a note. An "exchange" isa interest each year by including in income the increase in transfer of property for other property. redemption value. Other types of fully taxable interest income include: General Rules (1) Interest on savings and other bank deposit. Note: The fair market value of automobile, boat, or A gain from a sale or exchange of property is, gener- other property received for making long-term deposits ally, income in the amount of the difference between the orfor openingaccountsinsavingsinstitutionsis amount realized and the taxpayer's cost of the property. .interest and must be reported as income in theyear This gain isordinarily taxable whether the property received. disposed of is business or nonbusiness. (2) Interest on notes, mortgages, corporate bonds, A loss on the sale or exchange of business property and debentures. is. generally, deductible in the amount of the difference (3) Interest portion of a condemnation award. between the taxpayer's adjusted basis of the property (4) Interest on legacies. and the amount realized (sale of rental property). A (5') Interest on life insurance proceeds held underan loss on the sale or exchange of property held forper- agreement to pay interest thereon. sonal use is not deductible (sale of a personal resi- (6) Interest on Veterans InsuranceIf the taxpayer dence). elects to leave the insurance dividends on deposit with The amount of a taxpayer's taxable gainor deductible the Veterans Administration, the interest paidor cred- loss depends upon the nature of the asset soldor ex- ited on the accumulated dividends is includiblein gross change4 to produce the gain or loss and the length of income Note that it is not the dividends but the interesttime it was held. Ordinarily, business gains and losses on such dividends that is taxable. are usually includible in income or 'deductible in full, (7) Interest on Armed Forces leave bonds,or on but capital gains and capital losses are subject to special payments for leave. rules and limitations. (8) Interest received on Soldiers' Deposits when., withdrawn or made available for payment, whichever is What Are Capital Assets earlier. (9) Interest sometimes called "dividends" received All assets which are sold or exchanged have to be from Mutual Savings Banks, Cooperative Banks, Credit classified as(1) capital assets, (2) noncapital assets, or Unions, Building and.Loan Associations, and Savings (3)assets which may be treated as either capital or and Loan Associations. noncapital depending on the circumstances. (10) Foreign sourced interest unless excluded by Capitalassets are everything an individual owns, Treaty. except: Interest is taxable when it is received. The interest on (1) Stock in trade (assets in inventory); savings accounts is considered received when itis credit- (2) Property held for,sale to customers.in the ordi- able to a taxpayer's account and subject to withdrawal nary course of the taxpayer's trade or business; even though it has not yet been entered in the passbook. (3) Notes receivable and accounts receivable; (4) Depreciable business property; Tax-Exempt Interest (5) Real property used in taxpayer's trade or business: Interest on obligations of a State,or a political subdi-(6) A cops right, a letter or memorandum, a literary, vision thereof is wholly tax-exempt. This includes.such musical or ,artistic composition or similar property (but bodies as Port Authorities, Toll Road Commissions,not a patent or invention) held by the taxpayer who Utility Service Authorities, and other similar bodiescre- created it; ated for furtherance of public functions. It also includes (7) Certain short-term government obligations. State and Municipal Bonds purchased at a discount and Note that Locks, bonds and personal residencescan Obligations of the District of Columbia, Puerto Rico, normally be classified as capital assets. a possession of the United States, or a political subdivision thereof. Computation of Capital Gain or Loss Capital Gains and LossesSchedule D Net Long-Term Capital Gain All capital gains and losses, both long-term (from Included in the concept of gross income are gains sale or exchange of capital assets held over six months)

22 C " and short-term (from sale or exchange of capital assets (b) one-half of the excess of net long-term held six months or less), are initially taken into gross capital loss over net short-term capital income at 100%. gair1, and If net long-term capital gain exceeds net short-term (c) the net short-term capital loss plus half capitalloss,a deduction of 50% of the excess is the net long-term capital loss. allowed. If there is no net short-term capital loss, the Illustration.Mr. A. in 1975 has taxable income of deduction allowed is 50%, of the net long-term capital$10,000 and net long-term capital losses over net short- gain. term capital gains of $1,800. He could deduct the smal- Example.On 6 July taxpayer sold for $3,600 stocklest of (1) $10,000 (2) $1,000 or (3) $900 (1/2of which he had purchased on 6 March, for $4,800. The $1,800). Since $900 is the smallest, his deduction of $1,200 is a short-term capital loss since the stock hadcapital losses against ordinary income would be limited riot been held for more than six months. to $900. On 20 July he for $10,000 stock which he had Illustration:If his net long-term capital losses over purchased on 5 January for $7,500. The long-tdm gain net short-term capital gains were $5,000, he could is $2,500. deduct a full $1,000, under number (2) because num- On 3 August he sold for $3,000 stock which he had ber (3) would be raised to $2,500 and number (2) purchased on 1 March, for $2,800. The short-term capi- would be the smallest. tal gain is $200. The $1,000 loss offset to ordinary income is on a On 16 December he sold for $5,700 stock which he per-rettirn basis. If a joint return is filed, the $1,000 had purchased on 2Februaryfor $6,400. The long-term limit applies to both the husband's and wife's com- capital loss is $700, since the stock has been held for bined losses. more than six months. If married persons file separate returns and both have capital losses, they are limited to a $500 deduction for Reported on Schedule D, Part I each return. (1) Short-term loss ($1,200) Short-term gain 200 Net short-term (loss) (Schedule D, Part I) ..($1,000) Capital Loss Carryover.

Reported on Schedule D, PartII If capital losses are in excess of the limitations listed (2) Long-term loss ( 700) above, the excess may be carrieddyer to subsequent Long-term gain 2,500 years until it is completely absorbed. Whencarried bver, .. 1,800 Net long-term gain (Schedule D, Part II) the loss will retain its original character as long-term or (3) Excess of net long-term gain over net short-term loss (Schedule D, Part III)..$ 800 short-term; thus, a long-term capital loss carried over (4) Deduction-50% (Schedule D, Part III) ( 400) from a previous year will offset long-term gains of the (5) Taxable portion (Schedule D, Part III) ....$ 400 current year before itoffsets short-term gains of the current year. When carrying over an unused long-term loss, 100% Net Short-Term Capital Gain of the loss is carried to the next year and is treated as if it were incurred in that year. An individual's capital A net short-term capital gainis taken into income at 100%, unless it is reduced by net long-term capital losses. loss carryover is computed on Form 4798. Example: In determihing the capital loss carryover,short-term Net short-term capital gain (Schedule D, Part losses are applied first, even if they are incurred after a I) $1 ion long-term loss. If, after applying the short-term loss, the Net long-term capital gain (Schedule D, Part limitations previously described above have not been II) 1,000 reached, apply the long-term losses until the limit has Net capital gain (Schedule D, Part III).. $2,500 been reached. Since long-term losses are only deducted Less: (1) 50% of excess of long-term gain over short-term loss or (2) 50% of long- at 50%, twice the amount needed to reach the limita- term gain whichever is smaller (50% ..of tion represents the long-term loss which may still be $1,000 minus zero) (500) deducted. Taxable portion (Schedule D, Part III) $2,000 Example:On A's 1975 return his capital loss deduction limit is $1,000 and he realized short-term losses of . $400 and long-term losses of $2,300. His carryover to Capital LossesShort-Term and Long-Term 1976 is computed as follows: If the net capital losses exceed the net capital gains, the deductible lossislimited to the smallest of the following amounts: (1) Maximum amount of capitol loss deduction $1,000 (I) Taxable income for the year, (2) Less: Short-term capital loss 400 $ 600 (2) $1,000.00, or (3) Remaining available capital loss (3) Net capital loss, which is thesumof (4) Long-term capital loss $2,300 (5) Amount needed to reach $1,000 limitation at (a) the excess of the net short-term capital 1.200 capital 50% (Line 3 $600 x 2) lossesoverthenet long-term (6) Long-term capital loss carryover to 1976 $1,100 gains, 23 2 Pre-I970 Long-Term Capital LossesNet long-termFair Market Value Less Than Dait or's Adjusted Basis capital losses carried overifrom ayear beginning before 1970 are If the property was given to the taxpayer and its faire not subject to the reduction by 50% formarket value at the time of the gift was less than the long-term capital losses applied against $1000 of ordi- adjusted basis to the donor just before the gift, hizba.sis _ . nary income each year. These carried over long-termfor depreciation, depletions or amortization, losses, to the extent not offset againstnet capital gain, and for gain on its sale or other disposition is thesame as the are deductible dollar for dollar up to $1,000 againstdonor's adjusted basis. The taxpayer's ordinary income for years beginning after 1969. They basis for loss is its fair market value at the time of the gift. It heuses the must also be deducted before any net lone-term capital basis for determining gain and computes losses occurring in 1970 and later a loss, and then years. uses the basis for determining a loss and computes a gain, he will have neither a gain nor a loss. Computation of Alternative Tax Fair Market Value Greater Than Donor's Adjusted It may be to the taxpayer's advantage touse the Basis alternative tax computation shownon Schedule D, Part If the property was given to the taxpayer and its fair VI, page 2, if the net long-term capital gain exceeds the market value at the time of the gift was greater than net short-term capital loss, or if there isa net long-term the donor's adjusted basis just before the gift, his bpis capital gain only, and if the taxpayer is filing. for depreciation,' depletion, or amortization, and for (a)a separate return from one's spouse with taxable gain or loss on its sale or other disposition is the donor's income exceeding $26,000, or adjusted basis at the time of the gift, increased by the (b) a joint return, or as a survivingspouse, with gift tax paid with respect to the gift to 1-.1'm but such taxable income exceeding $52,000, or basis is limited to the fair market value of the property (c)as a single taxpayer or head of household with at the time of the gift. taxable income exceeding $38,000. From this you can see that the average military man*Selling Price need not concern himself with the alternative taxcom- putation. If the problem does arise, follow the form The selling. price of a security can easily be ascer- on tained by reference to the broker's advice slip which the Schedule D and enter the tax computedon Schedule D, on line 16a, Form 1.040, and check Schedule D box. taxpayer should keep to substantiate the sale. The price isthe net amount which would be received by the taxpayer resulting from the completed transaction ,Smar-., Additional Schedule D TransaCtions ket price less broker's fee and any other selling' expenses). This amount is reflected on $chsdule D, Part I Two Transactions, common to military personnel,or Part II. which are reflected on a Schedule D are: (1) The sale of corporate stock. (2) The sale of a residence. Holding Period Chapters 28 and 30 in the Publication 17 give an To determine if the taxpayer held property over excellent tax return presentation of these transactions. Months he should begin counting on the day following the day he acquired the property. This same day of each Sale of Corporate Stock succeeding month is the beginning of a new month regardless of the number of days in the preceding Three tax aspects must be considered in computing month In his computation he should include the day he the gain or loss on the sale of stock. disposed of the property. For example, if he purchased (1) The basis an asset on 4 January, he should ,start counting on 5 (2) The selling price January and the 5th of each succeeding month is the (3) The holding period beginning of a new month. Thus, if he sold the property on 4 July, his holding period would not be over 6 Basis months. If he soldit on 5 July, his holding period would be over 6 months. The basis of purchased stock is its cost to the purchaser. This may be obtained from a brokerage advice Exception slip wniLh should be kept to substantiate the basis. The (1) If the taxpayer receives a gift of property, and if cost includes brokerage fees, tax and any other cost of his basis is determined by reference to the basis in the acquisition. The cost of purchased stock is the basis hands of the donor, the first day of his holding period is regardless of whether the disposition results in a gain or the same date which the donor used in computing his loss. holding period. The basis of inherited stock will generally be its fair (2) Capital gain dividends from mutual funds are market value at the date of the decedent's death (or at treated as long-term capital gains regardless of how long the alternate valuation date): Such basis is used regard- the taxpayer owned the stock in the mutual funds. less of whether the disposition results in a gain or a loss. The Sale of a Residence To determine the taxpayer's basis of property, acquired by gift, he must know its adjusted basis to the General Rule donor, its fair market value at the time of the gift, and The salt of a personal residence is treated as the sale the amount of gift tax paid. of a capital asset subject to taxation. However, the tax

24 2J is postponed, but not forgiven if a newprincipal resi- somewhere between the basis of the old home and the dence, If purchased and occupied by the taxpayer within_sales price of the old 'home, the Individual would be 18 months before or 18 months after the date of saletaxed on only a portion of the total gain. That portion of the old residence and if the cost of the new residence not taxed is a reduction in the basis of the newresi- equalg or exceeds the "adjusted price' oltheOld-derree:-This sOmewharcomplex-eomputation-of-tric residence. The 18-month period may be extended to 24- able and nontaxable gain in this situation is best com- months when the taxpayer constructs or builds a newputed on Form 2119. principal residence to replace the old residence. Con- The adjusted salespriceof the old residenceis struttion- must begin either 18 months before the date usually the same as the amount realized. However, of sale of the old residence or not later than18 months "fixing-up" expenses are deducted from the amount after the sale, and the taxpayer has 24 months after the realized to determine the adjusted sales price. date of sale in which to occupy and use the 'new resi- "Fixing-up" expenses must meet the following tests: dence as a principal residence. The 18-month or 24- (1) Be for work performed during the'90-day period month period after sale is suspended during the time a ending on the day on which the contract to sell was member serves on active duty (puksuant to 'a callor made. ,order for a period over 90 days or for an indefinite (2) Paid within 30 days after the date of sale. period) except that the total period shall not extend (3) Be otherwise nondeductible in computing taxable beyond 4 years after the sale of the old residence. How- inco me. expenditures or improvements, , ever, if a member is in a combat zone, the running of (4) Not be capital and , the 4-year period is suspended during the time of such service, and for the next 180 days thereafter. (5) Not be taken into account in computing the If within the 18-month (or 24-month) period a tax- amount realized. payer buys more than one residence which he uses as ."Fixing-up" expenses are considered only in deter- hisorincipal residence within 18 months after the sale of mining the amount of gain on which tax is postponed. the old residence, only the last- such residence consti- They are not deductible in determining the actual profit tutes the new residence for putposes of postponing taxon the sale of the old residence. ing the gain. Any other principal residences bought during this period will be treated as ordinary capital Special Rule-Taxpayers 65 or Older assets subject to !taxation. An individual may elect to exclude from gross in- The taxpayer will not be denied the benefit of thiscome any gain attributable tp the first $20,000 of the provision simply because he did not actually occupy the adjusted sale price of his personal residence if he was old residence on the date of sale or because it had been 65 or older before the date of the sale or exchange and temporarily rented prior tothesale. The question if the property has been owned and used by him as his whether a residence was converted to rental property or principal residence for a period of time totaling at least remained a principal residencemust be determined 5 years du,ring the 8-year period ending on the date of upon the facts and circumstances in each case, inchiding such sale. If the adjusted sale price was $20,000 or less, the good faith of the taxpayer, and a showing that his and the taxpayer elects this exclusion, his gain is never intention, up to the time of sale, was to reoccupy the taxed. If the adjusted sale price exceeds $20,000, only property as his residence. the proportion of the gain in the ratio which $20,000 A houseboat or trailer may qualify as your principal bears to the total adjusted sale price is excludable. How- residence if you actually live init. A condominium or ever, the rules discussed above for the postponement of cooperative apartment may also qualify as your princi- tax on the qualifying balance of the gain may be appli- pal residence if you are the title owner or shareholder, cable. The election to exclude such gain can only be and if you use as your principal residence the apartment made once in a lifetime. which you are entitled to occupy by reason of your ownership. See Chapter 5 for the discussion of the 5% credit on Alimony purchase of a fiew principal residence. Receipts of periodic payments for alimony or separate maintsnance are generally included in income' if The Computation they are paid under: (1) A decree of divorce or separate maintenance, A loss on the sale of a principal, residence isnot (2) Written separation agreement, or dedaclible and will not have any efiht on the basis of (3) Decree for support any new residence acquired. If a divocce decree provides for both alimony and Ifthe residence is sold at a gain and' the individual "child support," only that portion so designated as ali- has bought or intends to buy, at the time of filing, amony is taxable. If no separate amount is stated for new home for more than the adjusted sales price of the either alimony or "child support," the full amount is old one, the sale is reported on _Scpedule D with a considered as alimony. Income from alimony is reported notation "none" in column (f). If upon expiration ofon Form 1040, Part I, line 34. the specificperiod a new home has not been purchased or one has been purchased for, a lesser amount, theMiscellaneous Income return for the year of sale should be amended to report the profit and compute the additional tax4plus interest. Form 1040, PartI,' Line 35 (Other)reflects the However, if the purchase price of an old home is following types of income:

25 3 0, Prizes and Awards Assigned Compensation

Prizes and awards are taxable in the year theyare A taxpayer who has the right to receive incomemay received. They are not considered nontaxable gifts. Ifnot escape tax thereon by arranging to have payment th'y are-paid-ini-merchandise or=- services -they are in- made to another individual. By exercising hispower to cluded in income at their fair market value. Contestcommand the income, the taxpayer has enjoyed the awards, employee suggestion awards, door prizes, lucky benefit of it and must include such amountsin this gross number, etc.,are taxable. However, if an individual income. refuses to accept a prize it is not included in his.income. Post Exchange Income Gambling Winnings Income earnedbya U.S.citizen from services performed in a post exchange or officers' club located in A taxpayer's total winnings must be included in either the United States or a foreign country is taxable; income. He may deduct his losses from gambling only indeed, income earned from all nonappropriatedfund to the extent of his winnings and provided he itemizesorganizations is taxable. his deductions. Proceeds from lotteries and rafflesare gambling winnings to the extent of the excess of the proceeds over the cost of. the ticket. Winnings in other For the Following -Types .of Income, .than cash are included in income at their, fair marketSee Publication 17 value. Pension and Annuities, Chapter 13 Partnership, Estate and Trust Income, Chapter 7. Hobby Income Income from a hobby, including a farm operated forSummary recreation and pleasure, must be included in the taxpayer's return. From this income, he may deduct items that Income Defined are ordinarily deductible, whether incurred in a business Gain from capital, labor or both provided it includes or nonbusiness activity. Examples of such expenses are profit gained throughsaleor conversion of capital interest and taxes. If his income exceeds these expenses, assets. he may deduct the following expenses, in the order shown, but only to the extent of the excess: Form of Income (a) Interest and taxes, determined without regard to the profitability of the activity; (1) Moneyat face value (b) Operating expenses (except those in (c) below) (2) Propertyat F.M.V. to the extent gross income exceeds deductions allowable (3) Servicesat F.M.V. under (a) above; and (c) Depreciation and other expenses involving ad-What Military Pay is Found on W-2 justments to the basis of propeity to the extent gross income exceeds deductions allowable under (a) and (1)Basic pay (b) above. (2) Incentive pay To the extent that his normally deductible expenses (3) Special pay (such as taxes and interest) exceed the hobby income, (4) Lump-sum payment for accrued leave that excess may, be carried over from the appropriate (5) Reenlistment bonus schedule (such as Schedule E for rental income) and (6) Severance pay deductc4 011 Schedule A (Form 1040) if he itemizes (7) Readjustment pay his deductions. (8) Dislocation allowance Losses sustained in pursuing the hobby are not de- Note Attach W-2's to return. Enter total of all W-2's ductible. on line 9 of Form 1040 or line 8 of Form 1040A if this Note: Gain on sale of an entire stamp, coin or other form can be used. hobby object collection is taxable as a capital gain; the loss on such sale is NOT deductible. Income From All Sources Other Than Wages . . Form 1040, lines 10, 11 and 12 are used to report all Rewards other income other than wages, tips, etc. Compensation for special services, such as preventing Form 1040A, lines 10 and 11 are used to report a bank robbery or informing on an income tax violator, dividends and interest. Except for these two items of must be included in the gross income of the one re- income no other income other than salaries, wages, tips and other employee compensation can be reportedon warded. Form 1040A. Services of a Child Dividends Compensation for personal services of a child is gross Types income to the child and not the parent even though (1) Ordinary dividendstaxable such amounts are not received by the child, (2) Return of capital.pontaxable

211 31 (3) Capital gainsfrom mutual fundsSchedule DWhat are Capital Assets (4) Tax free dividends ($100 exclusion of qtialifying Everyffiing an individual owns except dividends (domestic corporations)) (1) Stock in trade (2)--Property held for sale -to-customers: Stock Dividend (3) Notes and accounts receiVable. (1) Taxable if in lieu of cash (4) Depreciable business property. (2) Nontaxable if not. (Spread cost of old stock to (5) Real property used in taxpayer's business. include stock dividend) (6) Copyright, a letter or memorandum, literary, musical or artistic composition held by the .taxpayer who created it. Dividends on Insurance Policy Stocks, bonds, personal residences are usually capital (1) Nontaxablesince they are a partial return of assets to the hands of military personnel. nondeductible premiums. Note: Interest on such dividends is taxable as interest Computation of Capital Gain or Loss lr (1)Review Schedule D, Part I and II (Capital As- Dividends From Mutual Funds sets): (1) Ordinary dividends (2) Short-term capital gain is the gain from the sale (2) Capital gains dividendsLong term no matter or exchange of capital assets held six months or less. what. (3) Long-term capital gain is the gain from the sale or exchange of capital assets held o$er six months. Note: Company should so designate between ordi- (4) Note tax advantage given the excess of long-term nary and capital gains. gains over short term losses (50% nontaxable portion Section 1202 deduction). Savings and Loan Dividends (5) If net capital losses exceed net capital gains the deduction is limited to the lesser of: Interest not dividend income. (a)the taxable income for the year, (b) $1,000.00, or Interest (c) the net capital loss. (1) Types of interest includible in gross income (6) Computation of Alternative Taxsee Schedule D for benefit. (a) Savings bank (a) separate returntaxable income must exceed (b) Notes, mortgages, bonds $26.000 (c) Interest on life insurance proceeds (b) jointreturntaxable income must exceed (d) Interest on Veterans Insurance _ $52,000 (e) Armed Forces leave bonds (c)single taxpayer or headof householdtaxable (f) Soldier's Deposits income must exceed $38,090 (g) Mutual Savings banks% Cooperativebanks, Credit" Unions, Bldg. & Loans Assns. and Savings and Note: Will not normally apply to servicetnen. Loan Assns. (h) U.S. Government bonds. Sale of Corporate Stock (2) Interest taxable when creditable to passbook even though the bookkeeping entry has not been made. Basis (3) Tax Exempt InterestObligations of a State or (1)PurchasedCost political subdivision thereof. (2) InheritedEstate Tax Return Basis Note: Reference for further studyPub. 17, Chapter (3) GiftedDonor's basis 10. Sale of a Portion of Holdings

Gains and Losses From Sales and Exchanges Selling a block of stock by actual security number to get the highest basisotherwise sales are treated on first-in first-out basis as fat as cost is concerned. Gain on Sale ti Again from a sale or exchange of property is, gener- Selling price ally, income in the amount of the difference between the amount realized and the taxpayer's cost of the property. Use broker's advice slip to determine selling price. This gainisordinarily taxable whether the property disposed of is business or nonbusiness. Holding period to determine long or short-term gain Loss on Sale (1)1st day is the day after purchase or acquisition. Loss on sale of business property is generally deducti- (2) The same day on each succeeding month is the ble. (Rental Property) beginning of each new month. Loss on sale of a personal assetis nondeductible. (3) The day of disposition should be included in (Personal Residence), computation.

27 Exception Miscellaneous Income (1) For gifted property holding period begins with Reflected on Form 1040, Part 1, Line 35 that of the donor. (1) Prizes and awards. (2) Capital gains from mutual fundsor regulated investment companies are long term even though the Gambling- winnings: taxpayer owned the stock of the mutual fund 6 months (3) Hobby incomelosses not deductible. Sale of or less. stamp collection may be capital gain. (4) Rewardsinformer's claim, etc. (5) Services of a childtaxable to childeven though Sale of a Residence not received by hi,rn. (6) Assigned compensationtaxpayer who has the General Rule right to receive income cannot assign such right,e.g., (1) Gaincapital gain parent owns stock, he cannot assign dividends toa (2) Lossnondeductible child.

Tax postponed but not forgiven if Quizzes for Chapter 3 (1) New principal residence is purchased andoccu- pied within 18 months beforeor 18 months after theMultiple Choice Quiz date of sale of the old residence and if thecost of the new one equals or exceeds the adjusted selling price of DirectionsCircle the appropriate letter to select the the old one. answer to each of the following questions. Note: The 18 month period is extended to 24 months 1.Gross inco does not include A. savings when the taxpayer builds or contracts fora new house ccount interest within 1.8 months and occupies within 24 months. B. rents (2) Adjusted selling price means selling price less C. commissions selling expenses (commissions, advertising and work D. unrealized increases in value of property performed in fixing-up the old residence fortsale). E. alimony andseparate maintenance payments. (3) Basis of new residence is cost minus postponed R. a single person, received the following: wages gain on. the sale of the old residence. $,000: interest $100: bonus paid in corporation (4) Holding period of old residence is addedto that stock valued at $475: rents $100: and a prize from' of new residence for determining shortor long-term a TV quiz program valued at $200. R's gross in- gain on future sale of new residence. come is (5) If adjusted 'sales price of old residence exceeds A. $5,100. B. $5,300. C. $5,400. D. $5,775. E. cost of new one, the gain taxed is limited to lesser of $5,875. (a) Gain realized on sale of old residence. 3. R served as a private inthe U.S. Army for 4 (b) Excess of adjusted sales price of old residence months. He received the following Compensation over the cost of the new one. for this service:total base pay for the period, $600; pay for hazardous duty, $100;severance Special Rule pay, $200; and a nondisability pension of $800. R's gross income is Taxpayer 65 or older before date of sale of old A. $800.B. $900.C. $1,400.D. $1,600.E. residence. $1,700. Excludes gain attributable to first $20,000 of adjusted 4. On 1June, T. in lieu of giving his son an allow- sale price provided the property has been owned and ance, assigned his right to alldividends on 100 used by him as a principal residence for at least 5years shares of stock owned by him in the Mortality Life during the 8 year period ending on the date of such Insurance Company(a Canadian corporation). sale. During 1975, equal quarterly dividends of $2per Note. If adjusted sale price was $20,000or less share, payable January 15, April 15, July 15, Octo- gain is never taxedif more, only the proportion of the ber 15 were paid by the company. T'sgross income gain ina ratio which $20,000 bears to the total adjusted for this source is sale price is excludable. A. $800. B. $600. C. $400. D. $200. E. nothing. This is a once in a lifetime exclusion. 5. On 5 January 1974, M openeda savings account with a local bank by depositing $3,000. Another Alimony $3,000 was deposited on 5 January 1975. Interest of $150 was credited on his accounton 31 Decem- ber 1974, and interest of $304.50 was credited to. Periodic payments for alimony or separate mainte- his account on 31 December 1975, but nance are taxable when paid under: were not (1) Decree of ditiorce or sep...ite maintenance entered in passbook. On 10 January 1976, M with- (2) Written separation agreement drew the entire balance in his account including (3) Decree for support interest. What amount and in which year should the in/Crest be included in gross income? Note: Child support is not taxable. A. $150.00 in 1974 and $304.50 in 1975 Where no stated amount is for alimony and child B. $454.50 in 1975 support it is all considered alimony. C. $304.50in 1973 and $150 in 1975

28 3 3 D. $150.00 1975 and $304.50 in 1976 Capital 0 Nohcapital E. $454.50 in 1976 j. The vacant lot next to his store which is used as 6. M received the following amounts called dividends a parking lot for his 'customers. by the payor: City Mutual Savings Bank, $200; C] Capital 0 Noncapital CarMotor Co9$400,--X__Domestic Savings_anc1 k. _The_copyright to a_song_he_wrole. Loan Association, $500; U.S. Talk Co., $100. In Capital 0 Noncapital addition M receives interest from a savings account I. A note receivable which was given to him by a at a local bank of $200. Assuming that all divi- customer in payment of the balance on the dends are fully taxable, M must include as income customer's charge atthe store. from dividends Capital 0 Noncapital A. $1,400. B. $1,300. C. $700.p. $500. E. None 2.Indicate by a check whether the following state-, of these. ments are true or false. 7. All but one of the following are includible in gross a.Tliealternative tax computation should be income. Select the EXCEPTION made by each taxpayer who has capital gains, A. Cash dividends distributed by a domestic corpo- regardless of the amount of his taxable income. ration True 0 False B. Property distributed in lieu of cash by a domes- b.Short term capital gains or losses arise from the tic corporation sale or exchange of capital assets which have C. State lottery winnings been held for six months or less. D. Cash dividends paid by mutual insurance com- True 0 False panies c. A loss sustained on the sale of a taxpayer's E. Interest on refund of Federal taxes principal residence which has been used as such 8. H and W, husband and wife, were divorced. The up to the date of the sale, is deductible within wife was awarded the custodyof their minor certain limitations. daughter by the court. Under the court decree the True 0 False husband is to pay his former wife $275 a month d. A 65 year old taxpayer sellingin 1975 his for the support of herself and the minor daughter. principal residence in which he had lived for The wife received a total of $3,300 for this pur- the past 8 years may elect to exclude from pose, $900 of which was designated by the decree gross income all gain on the sale if the ad- to be for the support of the minor daughter. In justed sales price does not exceed $20,000. addition W received from H $500 for mediCal bills True 0 False incurred by the daughter. This payment was not 3 Fair market value generally represents the amount required under the terms of the court decree. W which an owner, who is not under a necessity of must include in her gross income. selling, is willing to take and which another person, A. $3,000.B. $3,300.C. $2,400. D. $900. E. who is not under a necessity of buying, is willing to $500. pay. True 0 False 4.While the loss on the sale of a personal residence Quiz is not deductible, the amount of the loss may be added to the cost of the new residence. I. John Smith operates a variety store and owns the True 0 False following property: (indicate by an "X" in the 5.Sergeant Spruce won $100 at the races in"January. appropriate box whether such property is a capital He returned to the track and lost $50 in December. or noncapital asset in the hands of Smith.) He is claiming the standard deduction on his re- a. An automobile used solely for pleasure. turn. He should report $50 as "miscellaneous in- Capital 0 Noncapital come." b. His private residence. True False Capital 0 Noncapital rt c. The building housing his variety store. Capital 0 Noncapital Continuing Problem d. 100 shares of American Talk stock. Part 1Income Capital 0 Noncapital e. An apartment building. Enter the following information in appropriate spaces Capital Noncapital on Form 1040, and compute the taxable portion of divi- f. An automobile used solely to run business er-dends. Do not compute the income tax. rands. Save the Form 1040 to be added to later. Capital Noncapital John A. Mankat, 1st Lt., USAF Soc. Sec. No. 218 36 g. A diamond ring, which is a family heirloom. 5387 Capital Noncapital Wife: Betty Mankat (Secretary) Soc. Sec. No. 218 h. 16 bicycles which have been in store inventory 423678 for at least one year. John received: Capital 0 Noncapital i.12,000 board feet of lumber with which he Salary, USAF $8,550.00 Dividends, X Corp. 150.00 intends to build a hunting lodge for his son and Dividends, ABC Fund: Ordinary 118.00 phimself Dividends, ABC: Capital gains dividend 15.00

29 Dividends, German industries, GmbH, Frankfurt. Part 1 of the problem. When Schedule D is completed, DM100.00 at 430 43.00 carry the result to line 29(a), Form 1040. Interest, 1st National Bank 200.00 Interest, Municipal Bond 60.00 John A. and Betty Mankat Betty received: Cal John A. Mankat sold 100 shares of X Corp. common Dividends, US Talk 150.00 sTock on 16 May 1975-51 a grosssales price of $2,800.00. He paid a broker's commission of $100.00 Part 2Income on the sale. From the following information, prepare a Schedule He had purchased the stock on 20 April 1960 for D. taking into account the capital gain dividend from 51,000.000.

30 Chapter 4. Exclusions and Deductions to Arrive at Adjusted Gross Income Introduction the first $500 he received for any month during which the member served in a combat zone or qualified for In previous chapters, consideration was given to theHostile Fire Pay. Also he does not have to pay tax on the various types of includible income. .. first $500 a month received while hospitalized for sick- This chapter discusses the items which are excludable ness or injury resulting from combat zone service. or deductible from gross income in arriving at adjusted This exclusion ceases for any month beginning more gross income (Form 1040, line 15). Such Items includethan two years after termination of combatant activities. combat zone exclusion, prisoner of war exclusion, sickIn the case of,the Vietnam conflict, the exclusion for a pay exclusion,subsistenceandquartersallowance, service member who is hospitalized as the result of moving expenses,certaintravelexpenses,andlife combat zone service ceases to apply to any month be- insurance proceeds. The subject matte; is broken down ginning more than two years after January 2, 1975. into two parts: The ply of members of the Armed Forces and (1) Excludable or deductible items received from thecivilian government employees, during the time they Armed Forces were prisoners of war or missing in action because of (2) Excludable itents from other sources the Vietnam conflict, is not taxed. The computation of adjusted gross income must be Accrued leave payments, attributable to active service accurate since the following items are computed inin a combat zone, paid to members of the Armed accordance with its amount: Forces at the time of their discharge from the service (1) Income tax liability from the optional tax table are excludable from gross income. (2) The percentage standard deduction (3) The maximum contribution deduction Hostile Fire Pay (4) The medical expense deduction The relevant "adjustments" contained on Form 1040, Members of the Armed Forces who perform military line 14 are covered in detail inthis section of theservice in an area outside an area designated as a com- course, so that after studying Chapter 4, the studentbat zone by executive order, which service is in direct should know what taxpayer's adjusted gross. incomesupport of military operations in such zone and is per- consistsof,i.e.,wages, plus other income, minus formed under conditions which qualify such members adjustments. for Hostile Fire Pay (as authorized under section& 9(a) Note. In deducting certain eligible items discussed inof the Uniformed Services Pay Act of 1963 (37 U.S.C. this chapter from gross income, Form 1040 must be 310)), will, during the period of such qualifying service, used. These items are not deductible on Form 1040A. be deemed to have served in such combat zone. Accord- ingly, he is entitled to the combat pay exclusion for the period of service. Objectives - Participants should be able to explain the followingLimitation to Above Excludable Items concepts: (1) Those items of income which are excludable or For periods after November 11, 1970, Armed Forces deductible from gross income in arriving at adjusted members who (a) are present in a combat zone while gross income (Form 1040, line 15). on leave from a duty station located outside a combat (2) The use'of Forms to support adjustments. zone, (b) pass over or through a combat zone during Applicable forms for this chapter include: the course of a trip between two points both of which lie outside such a zone, or (c) are present in a combat Form No. zone solely for their own personal convenience, are not 3903 Moving 'Expenses Adjustment considered to have served in a combat zone and are not 2106 Employee Business Expenses entitled to the combat pay exclusion. 2240 Sick Pay Exclusion Prisoner of War Exclusion Excludable or Deductible Items Received From the Armed Forces A member of the Armed Forces is entitled to exclude all compensation received for active service for any Service in a Combat Zone (and Prisoners of Warmonth during any part of which such member is a or Missing) prisoner of war or in a missing status as a result of the Vietnam conflictifimmediately before such status An enlisted member does not have to pay tax onbegan he was performing service in Vietnam or was wages for any month during which he servedin aperforming service in Southeast Asia in direct support combat zone or qualified for Hostile Fire Pay. Further- of military operations in Vietnam. The income exclusion more, he does not have to include wages receivedapplies to both officers and enlisted personnel. while in a hospital because of injuries or sickness result- Both POWs and MIAs are included inthe term ing from combat zone service. "missing." A missing serviceman is one who is officially A commissioned officer does not have to pay tax on carried, or determined to be, absent in a status of.

31 0- 0 (1) missing; Basic Allowance for Subsistence (BAS) (2) missing in action; (3) inter,ned in a foreign country; Allowances for subsistence, including R.O.T.C. sub- (4) captured, beleaguered, or besieged by a hos-sistence, and rations furnished in kind to enlisted mem- tile force; or bers are excludable. (5) detained in a foreign country against his will. A "family separation allowance", receivedby a An individual is in a missing status for tax purposes member who is separated from his family because of an onlyif immediately before the status began he was overseas duty assignment, is a subsistence and commu- performing service in a combat zone or was performing tation of quarters allowance and is excludable from his service in direct support of the military operations in agross income. combat zone. Missing status does not include a-period in which it isMoving Expenses officially determined that the member was officially ab- On changes of permanent duty or station, or upon sent from his post of duty without authority. This exclu-reporting for active duty, or upon employment at a new sion is retroactive to 28 February 1961. Claims for alocation requiring a change of principal residence, a refund of taxes paid for service on or after that datemember of the Armed Forces is entitled to deduct from should be filed on Form 11:140X or Form 843. Thehis gross inpome certain reasonable expenses incurred in running of the statute of limitations on filing claihis for the tr,-.nsfer subject to certain time and distance require- refund is suspended while persons are serving in Viet-ments and dollar limitations. The taxpayer may deduct nam, but even if the regular time for filing a claim forhis allowable moving expenses even if he does not item- refund has expired it may be filed within two years after ize his deductions. All reimbursements (including mile- the missing status is terminated. age and per diem) must be reported on the taxpayer's return in the manner as explained later, (1) Distance and Time RequirementsTo be eligible Combat Death W4iver for the moving expense deduction, the distance between the new duty station or place of work and the former The tax liability of a serviceman who dies as a resultresidence must be at least 50 miles farther than the of wounds, disease, or injury sustained in a combat zone distance between the former residence and the former is cancelled for the year of his death and for any priorduty station. Therefore, if the distance between the for- year ending on or after the first day he served in a mer residence and the former duty station were 16 miles, combat zone. to qualify for a moving expense deduction, the distance The income of a serviceman listedas missing inbetween the new duty station and former residence must action or as a prisoner of war in Vietnam remains be at least 66 miles. Where there was no former duty exempt from Federal income tax even where the serv- station (as when first entering the service), the first duty iceman is later found to have been dead during thisstation must be at least 50 miles from the former resi- time. The date of death, with respect to a missing mem- dence For purposes of the deduction, the measurement ber, is considered not to be earlier than the date onof distance between two points is the shortest of the which a determination of death is made. The forgive-more commonly 'traveled routes between the two points. ness of tax applies through the year in which the miss- Additionally, the taxpayer must either: (1) work in ing statusis changed rather than the year of actualthe general area of the new employment full-time at death. least 39 weeks (need not be consecutive) in the 12- In the case of Vietnam,. the tax forgiveness benefits'month period immediately following arrival,or (2) end for taxable years beginning after 2 January 1977. work full-time or perform services as a self-employed Inthe case of those servicemembers ina missingindividual on a full-time basis in such general location, status the taxes will be forgiven even though Vietnam during at least 78 weeks, of which not less than 39 is no longer designated as a combat zone if the dateweeks are during the above 12-month period. Note: Ifa his missing statusis changed iswithin any taxableGovernment employee employed, by the United States, year beginning not later than 2 January 1977. returns to the United States to retire without any plan for employment during the current taxable year, the expenses incurred in the return move can not be deducted as moving expenses since the individual is not a Compensation Other Than Active Duty Payfull time employee meeting the aforementionedtune requirements. Basic Allowance for Quarters (BAD) In an instance of retirement or other separation from service, the member need not work for the same em- The following items may be excluded from income: ployer as long as employment is in the same general allowance for quarters, including cash differences forlocation. These time requirements do not applyin situa- inadequate quarters, temporary' odging pending assign-tions where the member is unable to satisfy the,condi- ment of permanent quarters at a new post of duty tions because of death, disability, involuntary separation outside the continental United States; housing and cost- from work (other than for willful misconduct) or trans- of-living allowances abroad whether paid by the United fer for the benefit of the Government. If filinga joint States or a foreign 'government, uniform allowances;return, and the member's spouse is also a full-time em- or quarters, heat, and light furnished in kind; and, toployee in the new location, either spouse may satisfy the the extent expended for the purpose for which pro-time requirement but the periods can not be added vided, evacuation allowances. together.

32 (2) Deductible Moving EApensesBelow are quali-does not take place within that time, the expenses or- fying moving expenses incurred by the taxpayer for dinarily will not be deductible: himself and his family. For purposes of the deduction, The move must have been necessary to the com- ' family" means members of the taxpayer's householdmencement of work in the new location. A move is who lived at the former residence before the move andgenerally not necessaryif the distance from the old moved to the new residence. A member of the taxpay- residence to the new place of work is shorter than the er's household includes any individual residing at thedistance from the new residence to the new place of taxpayer's residence who isneither a tenant nor anwork. A move is considered necessaryifeither the employee of the taxpayer, unless the tenant or employeemember is required to liveat the new residence or is also a dependent of the taxpayer. From this languagecommuting time or expense is decreased. it can readily be seen that a member of the Armed The deduction for premove househunting expenses, Forces stationed overseas who returns to the United temporary living expenses, and qualified residence sale, States on leave and marries while there may not deductpurchase or lease expenses are subject to an aggregate as a moving expense the cost of returning to his foreigndollar limitation. The limitation is $2,500 of which no station with his spouse. more than $1,000 may be for househunting trips and The t4payer may deduct the expenses of movingtemporary quarters. For an explanation of the aggregate household goods and personal effects of the taxpayer dollar limitations for married persons filing separate and family from the former to the new residence.returns see Publication 17, chapter 17. This includes expenses of transportation or hauling, (3) Reporting ProcedureMoving expenses are gen- packing, crating, intransit storage, insurance, shippingerally deductible in the year paid or incurred. However, an automobile, and shipping a pet and similar expenses a cash basis taxpayer may elect to deduct the expenses but does not include the expenses of moving furniturein the taxable year in which reimbursement is received, purchased while en route to the new residence. Arather than the taxable year when he pays the expense, deduction is allowed for expenses incurred in movingwhere the moving expenses are paid: (1) in a taxable household goods and persOnal effects from a place otheryear prior to the year of reimbursement, or (2) in the than the former residence only to the extent the ex-taxable year immediately following the reimbursement penses do not exceed what it would have cost to moveyear, provided the expenses are paid on or before the them from the former residence. normal due date for filing the return of the taxable year in which the reimbursement is received. The taxpayer is entitled to deduct the expenses of Reimbursement& and allowances shown on Form traveling (including meals and lodging) for himself andW-2 are reported in gross income for year received and his family from the former residence to the new place are reported on line 9, Form 1040. Expenses are listed of residence:Also deductible is the expense of lodging,on Form 3903. incurred in the general location of the former residence If reimbursements and allowances are not shown on within one day after the former residence is no longer Form W-2 and the moving expenses exceed reimburse- suitable for occupancy because of the removal of Wouse- ments and allowances, enter the excess on line 13, Form hold goods and personal effects. Qualifying travel costs3943 and line 38, Form 1040. If reimbursements and should be calculated for the shortest, most direct route allowances exceed expenses, enter that excess on line available by conventional means of transportation. Ex- 14, Form 3903 and line 35, Form 1040, penses on vacation side trips do not qualify. When using If Form 3903 is not used to report moving expenses, an automobile, the taxpayer has the option of deducting a statement must be attached to the tax return setting actual, recorded out-of-pocket expenses (but no depre- out in broad categories the type and amount .of ex- ciation) or deducting seven cents per mile. penses, locations of old and neW residences, old and The taxpayer is entitled to deduct the cost of pre-new places of employment, and appropriate dates of the move house-hunting trips after obtaining employment at transfer. the new site. Stik,h deductible costs include roundtrip Ordinarily, moving services furnished in kind by an expenses and meals and lodging. Additionally, the tax-employer, either directly or indirectly, to the taxpayer payer may deduct the costs of meals and lodging whileor to members of the family will be treated as reim- occupying temporary quarters in the general location ofbursements received for moving expenses. However, the new principal place of work during any period of 30 a serviceman was not required to account in, his tax consecutive days after obtaining employment. return for any reimbursement of moving expenses in Also qualifying as a deductible expense is the cost ofkind from the Armed Forces. Servicemembers can selling the former residence (excluding fix-up costs anddeduct moving expenses in excess of reimbursement real estate taxes), settling the old lease, purchasing a even if they fail because of a required service transfer ., - new residence or acquiring a lease. This includes attor-to meet the 50-mile or 39-weeks requirement. ney's fees, escrow fees, appraisal, and real estate agent's Full-time work test not met. If the return is due and fees,title and 'loan costs (excluding interest payments the taxpayer has not yet satisfied the full-time work and prepayments), "points,- and sivilar expenses inci- test, but expects to do so, he is given a choice asto dent to the sale or purchase of a hate. These expenses,how to claim the deduction: if deducted as moving expenses, may not be used to (1) He may claim the moving expenses on his 1975 either reduce the amount realized upon the sale of the return. He need not wait until the date his return is due residence or increase the cost basis of the new residenceto make this election, but may elect on an early return when determining gain on the sale of a residence. on the basis of his knowledge at that time. If, after- The move should be within one year from the timewards, he fails to meet the full-time work test he must the taxpayer fipstaireports to the new job. If the move either report the amount of his, deduction as income in

33 the year he failed to meet the test, or amend his 1975 to support an expenditure. Such evidence will ordinarily return. be considered adequate to support an expenditure if it (2) He may file his 1975 return without Claiming his shows the amount, date, place and essential character of moving expenses; if he later satisfies the test, he maythe expenditure. either file an amended 1975 return on Form 1040X, claiming the deduction, or file a claim for refundon Notes: Form 843 based upon his allowable moving expenses (1) No deductions will be allowed for approxima- deduction. tions, estimates or unsupported claims. No matter which option the taxpayer may choose, (2) If a member travels with his family on TAD, any reimbursement must be reported in the year re-only the member's expenses are deductible and itis ceived. necessary to allocate an equitable portion of the family's expenses to him. Since the cost of lodging of the 'family, Travel Expenses andtransportationunlesstravelingby automobile, would exceed that for one person, the cost of a single Ordinary and necessary traveling expenses in excess rate for similar accommodations may be deducted. of allowances for travel when carrying on official busi- (3) Mess Bills AfloatThe amount paid by a mem- ness are deductible. Thus, expenses incurred on tempor-ber of the Navy on duty afloat may not be deducted for ary or temporary additional duty, such as thosein- the period that his ship is away from its home port. A curred for meals, lodging, taxicabs, laundry, and clean- naval officer who is assigned to permanent duty aboard ing, in excess of reimbursements, are deductible if away a ship which has regular eating and living facilities, such from home (ship, base, or station) overnight. Personalas an aircraft carrier, battleship, cruiser, destroyer, sub- expenses incurred for entertaining, sight-seeing, or social marine, or supply ship, has his "home" for traveling visiting are not deductible. expense purposes aboard the ship to which he is as- The taxpayer must keep records and supporting evi- signed. dence to prove the following elements with respect to If claiming ,change of permanent station expenses, deductions for traveling expenses (including meals and enter excess expenses on line 38 of Form 4040 anti lodging while away from home): (1) the amount of attach Form 3903 or a statement of expenses and reim- each separate expenditure for traveling away from home bursements to the return. If claiming TDY, TAD,_ or such as the cost of transportation or lodging, but the reservist expenses, enter excess expenses on line 38 of daily cost of breakfast, lunch and dinnei, and other Form 1040 and attach Form 2106 or a statement of incidental elements of such travel may be aggregated if expense's and reimbursements to the return. they are set forth in reasonable categories, suchas for meals, for gasoline and oil, and fur taxi fares; (2) the date of departure and return from each trip,and usability Retired and Disability SeverancePay the number of days spent on business away from home; (3)destination orlocality of travel describedby (1) Disability severance pay, and retiredpay received name or city or town'or other similar designation; andfor temporary or permanent disability retirement under (4) the business reason for the travel or the nature of Chapter 61, Title 10, U.S. Code, elected on the basis of business benefit derived or expected to be derived. If thepercentage of disability may be excluded. If computed taxpayer wishes to claim an excess of traveling expenseson the basis of years of service. or at 57 percent under over reimbursement, he must compute his expenses37 U.S.C. 115 for service in World War I and II, the for all such trips made during the taxable year and portion of disability retired pay which exceeds basicpay reduce it by all reimbursements (i.e., if he had one tripmultiplied by percentage of disability is not excluded. during the year which cost him more than his reim-The net disability retired pay of a retired regularcom- bursement, he cannot deduct such excess and forgetmissioned officer (pay grade 0.1 and above), reduced about the other field trips made where his reimburse- , under the Dual Compensation Act byreason of Federal ment may have exceeded his cost.) employment, is excludable in the same proportion that Records to substantiate travel expenses should behis total retired pay is excludable under the foregoing maintained in an account book, diary, statement of ex-rubes. The compensation received during Federal civil- pense or similar record (supported by adequate docu- ian, employment is fully includiblein gross income. mentary evidence) which is sufficient to establish theThus the disability portion of the reduction required elements for these expenditures, discussed above. under the Dual Compensation Act does notcarry-over The taxpayer's records must be current. He should to the civilian salary, but the regular exclusion may be record each separate expenditure at or near the time'of resumed upon the termination of the civilian employ- the expenditure. However, he may make one daily entryMent. A waiver of retired pay in favor ofa Veterans for such categories as cab fares, telephone calls,his Administration pension or compensation, however,ap- meals while traveling, gasoline and oil, and other inci-plies first to the portion of disability retiredpay ex- dental costs of traveling. Tips may also be grouped withcluded on the basis of percentage of disability. Such the cost of service rendered to him. waiver is not retroactive for income taxpurposes.. Documentary evidence is required to support all ex- (2) This exclusion from retired pay is computed by penditures for lodging while he is traveling away from the Finance Centers;itis not subject to income tax home and for any other expenditure of $25 or more, withholding or included in "wages" reportedon Form except that, if such evidence is not readily available for W-2, and does not terminate at "retirement age." Any transportation charges it will not be required. Documen- excess is subject to withholding of Federal income tary evidence is a receipt, paid bill or similar evidenci taxes.

t3 Sick Pay Some Miscellaneous Exclusions

(1) Active Duty PayActive duty pay received for (1) Mustering-out 'pay may be excluded from gross periods_of absence from duty by reason of injury or income. sickness may be excluded from gross income, limited, (2) Uniform gratuity or clothing allowance Paidto however, to the lesser of actual pay or a weekly rate of officers and nurses, and uniforms furnished in kind or $100 ($14.29 per day on the basis of a 7-day week for by .allowance to enlisted members are excludable. naval or military personnel). There is a 30-calendar day (3) Death gratuity pay (6 months' pay to beneficiary waiting period before active duty members quality. The of deceased officer or enlisted member) may be ex- computation is made on Form 2440 and entered on line cluded from the beneficiary's gross income. 37, Form 1040 (Adjustments). (4)Amount received and expendedbyattaches under an allotment for maintenance and official enter- Nontaxable income, 'such as basic allowances fortaining is exc!udable. quarters or subsistence, isnot considered in apply ing (5) Allowances received from foreign government by this formula. No adjustments for withholding are being members of military missions to such government for made bythe defense departments for the "sick pay" required extraordinary entertainment and livin0ex- exclusion. For this reason it is iratportant that the con-penses may be excluded. sultant ask the taxpayer all the questions relevant to sick pay exclusion when the information on the W-2 forms is being transposed onto the taxpayer's income taxExcludable Items From Other Sources return. (2)DisabilityRetired Pay"Wages continued" Life Insurance (Private Companies) (amount received in excess of that excluded on percent- Amounts received under a life Insurance contract age of disability) becaqe of retirement for personalpaid by reason of the death of the insured, whether in a injuries or sickness resu4ig from active service in thesingle sum or otherwise but if such amounts are held by Armed Forces is excludable as "sick pay" until attain-the insurer under an agreement to pay interest th...... , ment of retirement age. the interest payments shall 'be ,includedin gross in- If retired directly from active duty (and not on the come)'. sick list) the exclusion is limited to a weekly rate of $75 If, under an agreement in an insurance contract, an during the first 30 days of absence, because disabilityamount is held by the insurer for payment in install- retired pay does not exceed 75 percent. of regular pay, ments at a date later than death (if death occurred on and thereisa 7-calendar day waiting period unless or after 17 August 1954), the amount held is to be hospitalized because of this disability at least one aay prorated over the period for which payments are to be during the period of absence before reaching normal made, such as a fixed number of years, or years of life retirement age. After 30 days Itis limited to a weekly expectancy of the beneficiary, and excluded from gross rate of $100. If retired while absent from active duty on Income. The excess of such excluded amounts received account of personal injury or sickness for a continuouseach year is to be reported as interest income. However, period of more than 30 days, the 30-day waiting period if interest is paid to a surviving spouse of the decedent, is charged against the active duty absence, and the $1,000 of such interest may be further excluded each retired pay exclusion is immediately allowable up to ayear. For this purpose a surviving spouse means the maximum weekly rate of $100. spouse of the insured at date of death, including a spouse- legally separated but not absolutely divorced. An extra computation is required if an active duty member is placed on the sick list and retired within 30Government Insurance or Indemnity days without returning to duty. If the weekly rate of combined active duty and retired "wages continued" Amounts paid byreaski of death of the insured; exceeds 75 percent of the regular weekly rate of active dividends,includingregular and special, on United duty pay for the last four weeks of the month immedi- States Government and national service life insurance. ately preceding the l-ommemement of the period of proceeds from maturing United States Government and absence, there is a 30 day waiting period and thereafter national service endowment insurance contracts, and tho $100 per week limitation applies. If 75 percent or proceeds from surreudcrcd United States Government less, the exclusion is computed in the same manner as and national service life insurance policies. for retirement directly from active duty, as discussed above. No additional sickness or injury need be estab- Commercial Insurance lished and the percentage of disabilityis immaterial. Retired members are not entitled to the exclusion from Dividends represent refundof nondeductible pre- retired pay when employed by the same employer. Ac- mium payments. Interest earned on such dividends left cordingly, otherwise qualified retired members are not on deposit is taxable. entitled to the "sick pay" exclusion from retired pay when performing services for the United States, whether Survivor Benefit Plan (formerly the Retired inthe same department or in another department,Serviceman's Family protection Plan) Annuities agency, or branch of the United States Government including nonappropriated fund activities and Govern Finance centers furnish full information to survivors ment-owned corporations.. on how to report their annuities under the above rule.

4 kJ Compensation for Injuries or Sickness civilian employees have been held not to constitute scholarships for this purpose. (1) Amounts received under workmen's compensation acts. Military personnel may generally exclude from income amounts .provided as a scholarship under the (2) Amount of damages received whether by suit or Armed Forces Health Professions Scholarship Pro- agreement. gram (or a substantially similar, approved program) (3) Amounts received through accident or health for the years1973, insurance other than amounts attributable to contibu-, 1974, and 1975. Thisapplies tions by the employer and not includible in the employ- whether training is received while on active duty or in ee's gross income, or amounts paid by the employerfbut an off-duty or inactive status and without regard to see (1) below. whether a period of active duty is required as a condition of receiving the payments. (4) Amount* receied as a pension, annuity,or similar allowance for personal injuries or sickness resulting from active service in the Armed Forces of any country. Income of Minor Son or Daughter Amounts Received Under Accident and The earnings of an unemancipated minor son or Health Plans daughter are the separate income of such son or daughter and not the income of the parent. (1) Amounts received as reimbursement for medical care except to the extent a deduction was allowed for medical expenses for any prior year. Alimony Income Attributable to Property (2) Payments for permanent loss or loss of use of a member or function of the body, or permanent disfig- "Periodic payments" to a divorced or legally sepa- urement of a taxpayer, his spouse, or a dependent. rated wife which are paid out of the income of property assigned or transferred in trust or otherwise in discharge Claims by Foreign Claims Settlement of a legal obligation incurred by a 14band under a Commission decree of divorce, separate maintenanclor for support, or under a written instrument incident such divorce Claims by foreign claims settlement commission, In- or separation, shall not be includible in husband's gross cluding payments to former prisoners of war. income, to the extent they are includible in the gross income of the wife. Meals and Lodging The "convenience-of-the-employer" rule is the sole Social Security Benefits test with respect to Meals if such meals are furnished on the business premises of the employer at the place of Amounts received from the Federal or State govern- 'the employment. The value of lodging furnished in kindments under the Federal social security program. by the employer is excluded from gross income if furnished on the business premises of the employer for the convenience of the employer and the employee is re-Veterans Administration Benefits quired to accept such lodging as a condition of his VeteransAdministrationbenefits(exceptinterest employment. earned on insurance dividends left on deposit) paid to veterans and their families. A full or partial waiver of Gifts taxable retired pay already received in favor of nontaxable disability compensation is not retroactive for Federal The value of property acquired by gift, bequest, de-income tax purposes. vise, or inheritance is excluded, but the income there- from is not. State Bonus Scholarships and Fellowships Payments by a state to veterans for services rendered Amounts received for a scholarship or a fellowshipto the United States. grant are excluded from gross income unless they represent: (1) compensation for past, present or future employment services, (2) payment for services which are-Form 1040Line 14 (Adjustments) subject to the direction or supervision of the grantor (giver), or (3) amounts paid' to enable the individual to The subjects discussed in this chapter either appear pursue studies or research primarily for the benefit ofon Form 1040 (e.g., sick pay exclusion, moving ex- the grantor (giver), The exclusion is limited, however,penses or expenses in excess of reimbursement) or are if the student or fellow is not a candidate for a degree, omitted from the return altogether (e.g., B.A.Q., B.A.S. to S300 times the number of months a grant is receivedlife insurance proceeds, etc.), in a year, for no more than 36 months in a lifetifne, and All appropriate adjustments to income (with their only if the grant is from a Government or tax-exemptsupporting schedules attached, e.g., Forms 3903, 2106, organization. , 2440) are entered on line 14 of Form 1040 and de- Appointments to the Arfned Forces Academies andducted from the 'mime reflected on line 13 to arrive at under the Navy's educational assistance program for adjusted gross income (Form 1040, line 15).

36 4I .,

Summary 1.Benefit payments under the Social Security Act are not subject to tax. Adjusted Gross Income , True False 2.The sick pay exclusion may not exceed a rate of Consists of wages,:plus other income, minus adjust- $100 per week for the first 30 days of illness. ment (exclusions or deductions). O True False 3.Taxpayer reached retirement age and was retired Excludable or Deductible Items Received From from the Navy with pay based on length of service. Armed Forces The taxpayer immediately thereafter filed claim with the Veterans Administration for and did re- Combat Pay ceive, disability rating of 20% for phlebitis in- Hostile Fire Bay curred prior to retirement. Taxpayer is entitled to The above items are not excludable if in zone on exclude 20% of his retirement .pay from gross in- leave, while passing through, or present for personal come since he could haveetirefor disability. convenience.' O True False Prisoner of War Exclusion44%. 4. On Form 1040 "adjusted gross income" is line 15 Earned Pay Forfeited by Court-Martial 0 True False Basic Allowance for Quarters 5. The following items are excludable from gross in- Basic Allowance for Subsistence come: Travel expenses(current records necessary; excess a.Prizes won in a raffle over reimbursements deductible) Disability, Retired and Disability Severance Pay, Sick 0 True False b.Disability and death payments Pay False Moving Expenses (reimbursements) includes mileage O True c.Reimbursement of moving expenses shown_ on and per diem, are included in gross income) Form W-2 (1) Deductible if: (a) change in residence and duty station, and True False r, d. Gambling winnings (b) the distance between the new duty station and the former residence is at least 50 miles farther than the True False e.Interest on municipal bonds distance between the former residence and the former duty stations, and 0 True False f. Child support payments received by wife (c) the member remains at least 39 weeks in the True False general area of the new duty station during the 12 g. Tips month. period following the move. O True False (2) Deductible expenses- include: h. Gifts and inheritances (a) meals and lodging while en route. False (b) transportation sir hau,lifig. 0True, A (c) packing. i. Clothing allowance (d) crating. 0 True False (e) intransit storage. 6.Moving expenses are deductible even if a member (f) insurance. uses the standard deduction instead of itemizing, (g) shipping an automobile or pet. his deductions. Notes: ' O True , False (1)All travel must be listed, not just one expensive trip. Multiple Choice Quiz (2)Records must be kept. - DirectionsCircle the appropriateletter to sel the answer to each of the 'following questions. Excludable Items From Other Sources 1.Gross income includes Life InSurance Proceeds From Private Companies A. the value of property acquired by inhfiance. Government Insurance or Indemnity B. the value of property acquired in exchange for Certain Compensation for Injuries or Sickness services performed. Meals and lodging (if satisfies convenience-of-the- C. the value of property acquired by gift. employer rule) D. the value of services donated to an exempt Scholarships and Fellowships (subject to dollar limi- charitable organization. tation, and qualifying conditions) E. none of the above. Social Security Benefits 2.Gross income includes Veterans Administration Benefits A. interest on savings account acquired by inherit- State Bonus ance. * B. income from property acquired by gift. N.-".... C. income from property acquired by bequest. Quizzes for Chapter 4 D. income from property acquired by purchase. TrueFalse Quiz E. all of the above. .1 3. The sick pay exclusion for a person who receives Indicate whether ea.h of the following statements are his regular salary and is absent from work because true or false by inserting "X" in the appropriate box. of injury but not hospitalized starts on the

37 A. first day of absence. exclusion on any part of his compensation received B. thirty-first day of absence. during such hospitalization? If he was hospitalized, C. seventh day of abience.- as the result of combat wounds, in the U.S.A. on D. eighth day of absence. 4 April would he be entitled to the combatzone E. thirtieth day of absence. extension for filing his income tax return? *4. Gross income includes 2.Cpl. Peter Primrose was involved inan automobile A. cash inherited from a decedent parent. accident. He received $1,500 from the insurance B. uniform allowance paid to U.S. Army officer. company as payment for physical damage caused C. mustering out payment to-enlisted man. by a whiplash to his neck. Should he include such D. quarters and subsistence furnished to an en- amount as gross income? listed man. 3.How should the following items be treated for E. none of the above. income tax pur.pc.ses? 5.Gross income includes a.Reimbursement of $175 for official travel, the A. basic family allowance for quarters paid toa actual cost otwhich was only $150. serviceman. b.Allowance for required official entertainment of B. veteran's pension for injuries resulting fromac- S500, the actual expense of which was 5650, tive service in the British Army., including $20 for extra maid (cost of maidnot C. military retirement pay, based on length of ordinary and necessary). service. c.Reimbursement of 5380 for movement of de- D. bonuses paid by States to veterans. pendents on official permanent change ofsta- E. value of automobile received bya disabled tion, the actual cost of which was 5275. veteran. 4.If the distance -between a member's formerresidence and his former duty station is 21 miles, how many miles must his new duty station be frpm his QuestionAnswer Quiz former residence' to qualify fora moving eipense deduction? 1.If an enlisted seryicemanis hospitalized in the 5.How long must a rfiember work in hisnew duty United States as t$e result of wounds suffered in station in order_to qualify fora moving expense the combat zone is he entitled to a combatzone deduction?

38 4'J) Chapter 5: Percentage Standard Deduction, Low Income Allowance, Itemized, Deductions, and Credits

Introduction less. On the separate returns of a married taxpayer, the percentage standard deduction is limited to S1,300. As This chapter discusses deductions allowable from pointed out in Chapter 7under the seculndealing with adjusted gross income to_ 4711.0,,e at taxable income The taxpayer may elect to itemize deductions, take the per- is married to a nonresident alien must file a separate centage standard deduction, or low income allowance return and is limited to a $1,300 percentage standard These deductions are in addition to "deductions for deduction. The percentage standard deduction may not adjusted gross income" discussed earlier The taxpayer be used by one spouse if the other itemizes deductions. should, of course, elect the type of deduction that gives him the greatest tax benefit. This chapter also discusses Illustration-1975 certain credits allowed to individuals beginning in 1975. (1) Gross Income (Wages, interest, dividends, etc.) S18,000 (2) Sick Pay (Deduction for adjusted gross income) 500 Objectives (3) Adjusted Gross Income $17,500 (4) Deductions From Adjusted Gross Income: Participants should be able to explain the folkiwing .Percentage Standard Deduction 2,600 concepts: Deduction 'for Exemptions (2) 1,5004,100 (1) The advantages of using the percentage standard (5) Taxable Income R S13,400 deduction, the low income allowance, or itemized deductions. Adjusted Gross Income of Less Than $15,000 (2) Those nonbusiness expenses which can be deducted from adjusted gross income to arrive at taxable In this situation taxpayers whose standard deduction income, i.e., is not limited and who are not itemizing deductions (a) Medical expenses mustuse the optional tax tables. The tables. can be (b) Contributions found in the "Instructions for preparing your Federal (c) Taxes income tax return for 1975." (d) Interest (e) Other expenses Applicable forms for this chapter include: Low Income Allowance Form No. The low income allowance benefits low income tax- 2441Expenses for Household and DependentCare,payers by removing many of them from the tax rolls. Services In 1975, this allowanceis $1,600 for single persons, and 51,900 for married persons filing joint returns (and Percentage Standard Deduction surviving spouses). For married persons filing separate returns the low income allowance is 5950. The Tax In most cases the amount of the percentage standard Tables automatically take this allowance into account. deduction depends upon the amount of the taxpayer's The low income allowance may not exceed the tax- adjusted gross income. The percentage standarddeduc- payer's earned income when the taxpayer's dependency tionisallowed insteadof itemized deductions and exemption is allowable to another taxpayer. certain credits. The taxpayer should use it when it ex- For example, an unmarried full time student who is ceeds the total of his deductions which may be itemized an eligible dependent of his father has S600 from wages on his return and when it is notadvantageousto claim (earned income) 4nd $1,800 from dividehds (unearned a foreign tax Credit. Its use relieves him of substantiating rnt.ome). The low int.ome allowance orS1,600 is limited itemized deductions. to the earned income of 5600. In this case the Tax An individual who may be claimed as a dependent by Tables carmot be used. The tax must be figured by another taxpayer, and had unearned income during the folluwing the special instructions contained on the tax year, is subject to a limitation on his standard deduction. return. The taxpayer's standard deduction is based only on the amount of "earned income" such as: wages, salaries, Married Person Filing Separate Returns fees, or other amounts received as compensation for personal services actually rendered. Dividends, interest, If a husband and wife file separate returns,both alimony, royalties, and rents do not qualify as earnedmust itemize orbothmust take the standard deduction. income but are examples of unearned income. If they do not itemize, one spouse may not use the For further details concerning thislimitationsee low income allowance if the other spouse uses the per- Chapter 1of Publication 17. centage standard deduction. However, if one spouse For 1975 tax years the percentage standard deduction uses the standard deduction column the other may use on the return of a single individual is 16% of adjustedthe low income allowance if: gross income up to a maximum of $2,300. On the joint (I) the first spouse's taxis higher under the low retn of husband and wife the maximum amount is income allowance column than underthestandard S ,600 or 16% of adjusted gross income, whichever is deduction column;

39 4.i (2) the first spouse's tax is lower under the low in- (3) He is able to substantiate the deductions claimed. come allowancecolumnthanunderthestandard The more common types of allowable deductions are. deduction column; and Medical and dental expenses (3) the combined tax of both spouses lower than Charitable contributions it-would be if both used the standard deduction column. Education Certain investor's expenses' Interest expense Married Individuals Living Apart State and local taxes Alimony Married individuals living apart are not subject to the Household and dependent care expences dollar - limitations--nor the restrktions-on-the use-of -the--Tax- return-preparation-fee itemized or nonitemized deductions. If they meet the Work clothes test below, they are not considered married. Therefore Casualty losses they may fife as single persons and, if they otherwiseMedical and Dental ExpensesSchedule A, qualify, use head of household rates, and mayuse (Form 1040) whatever method of deduction they choose, subject only to the applicable limitations.. If deductions are itemized a taxpayer may deduct To qualify for this exception: medical and dental expenses in accordance with certain the spouse must file a separate returnand limitations. The rules for determining the amount of the the spouse must maintain as her (or his) home,a medical deduction, the definition of the term "medical household which, for more than one.'half of the entire expenses," and a list of the more common expense items taxable year, is the principal place of abode ofa de-are set out below. pendent who is a son, daughter, stepson, or stepdaughter The expenses of the taxpayer, his spouse, or depend- for whom the spouse is entitled to a dependency deduc- ent may be deducted to the extent that the expenses tionand exceed three percent of adjusted gross income. In com- the spouse must furnish more than one-half of the puting medical expenses, however, drugs and medicines cost of maintaining the householdand can Be taken into account only to the extent that they the other spouse did not live in taxpayer's home at exceed one percent of adjusted gross income. any, time during the tax year. In addition, one-half the amount paid for deductible Both or either spouse may qualify for the special medical insurance will be allowed as a deduction with- exception under the definition. out regard to the three percent limitation. This deduction will be limited to $150. The other one-half you pay for such insurance, plus the excess over the $150 limit, will Optional Tax Tables be deductible but subject to the regular three percent Optional tables are provided to determine tax liabili- rule. ties of persons not itemizing deductions, whose gross There isno maximum limitation on the medical income isless than $15,000. The tables for married expense deduction. persons filing joint returns and unmarried persons auto- Medical Expenses of Dependent matically take into consideration the greater of the per- In computing medical -expenses the taxpayer may in- centage standard deduction or low income allowance.clude amounts paid on behalf of a dependent or a For married persons filing separately two tablesare person who could be claimed as a dependent except for 'provided; one using the percentage standard deductionthe fact that such person had income of 5750 or more and the other using the low income allowance. or filed a joint return. This status must exist at the A married person who files a separate returnon time the expenses were paid or incurred. Form 1040 or Form 1040A and elects to have his tax Example: computed by the Internal Revenue Service will find that In 1975, Major Fox furnished more than such tax is computed under the percentage standard half the support of his son, including medical expenses deduction rather than under the low income allowance,of S800. His son, age 22, is not a student and earned S900. He cannot be claimed as a dependent since he unless he attaches to his return a statement that thetax of his spouse was not determined on the basis of thehad income of S750 or more. Nevertheless, in comput- percentage standard deduction. ing medical expenses, the taxpayer may include the A taxpayer with a reduced percentage standard de- S800 medical expenses paid on behalf of his son. duction because his dependency exemption .is allowable The taxpayer may deduct the medical expenses paid to another taxpayer may not use the optjonal tables. for an individual for whom the taxpayer meets the support test under a multiple support declaration, even if the taxpayer may not claim the person asa dependent Itemized Deductions because of the $750 income test. As previously explained, the taxpayer has a choice of Only the medical expenses actually paid by the tax- itemizing deductions, claiming the percentage standard payer will be included in the deduction. Amounts paid deduction, or claiming the low income allowance. A by other parties to the agreementmay not be deducted by anyone. But, if the taxpayer actually taxpayer's decision to itemize deductions dependson pays all the whether: person's Medical expenses, the taxpayermay include all those in computing deductible medical (1) His itemized deductions exceed thepercentage expenses. standard deduction or the low income..allowance, When Deductible Reimbursements (2) It is advantageous for him to claim the foreign Medical expenses are deductible only 'in tax credit, and the year paid. Thus, prior years' medicalexpenses paid in the 40 45 current year are includible in computing the deductionare dues to a lodge or veterans organization. Gifts to but advance payments are not. Advance payments ,areindividuals are not deductible. Nor may a deduction be considered to be deposits and may be deducted in theclaimed for amounts given to a charitable organization year that such deposits satisfy an actual medical cost. if the taxpayer is permitted to specify that his contribu- The total expenses must be reduced by any reim-tion is to benefit an individual of his choice bursement received from Insurance or other sources. Contributions to or for the following are not de- Amounts received as reimbursement for loss of earnings ductible: or damages for personal injuries are not considered as Pre-adoption expenses reimbursements fOr medical expenses. If a taxpayer is Civic leagues, social clubs and international organizations allowed a medical expense deduction in one year and is,Communist organizations reimbursed in another, the reimbursement must be in- Chambers of Commerce Gifts to individuals cluded in gross income in the year received, to the Blood donated to Red Cross or other blood banks extent of the deduction claimed. Cash or property Definition of Medical Expenses Contributions must actually be paid in cash or prop- 'Medical expenses" is broadly defined. It includes any erty before the close of the tax year to be deductible If payment for the diagnosis, cure, treatment, mitigation or the contribution is made in nonappreciated property, the prevention of diseaSe, or for the purpose of affectingfair market value of the property, not its cost nor its any bodily function or structure, premiums paidforsentimental value, is the controlling factor in determin certain accident or health insurance, and transportation mg the amount of the contribution for purposes of the expenses primarily for and essential to medical care. deduction. Special rules apply to contributions of appreciated Some of the more common deductible items are: property, that is, all property which would give rise to (a) Fees paid to physicians, dentists, osteopaths, etc any gain if sold. In certain cases, dependihg on the type (b) Fees paid to practical or registered nurses of property, the use which is made of the property, or (c) Cost of medicine and drugs (d) Fees paid to hospitals for care the identity of the recipient, the taxpayer giving appre- (e) Artificial limbs and teeth, bearing aids ciated property must reduce the amount claimed as a (f)X-rays, electrocardiograms, blood tests deduction. Should you incur this type of contribution, The following items are not deductible: please refer to Chapter 23 in Publication 17 for additional information. (a) Cost of illegal operauoils The fair market value of property must be used as (b) Cosmetics (c) Vitamins for general health not recommended by, a the amount of the deduction if the fair market value at physician the time of the gift is less than its cost (e.g., used (d ) Vacation trips (under most circumstances) clothing). The value of services rendered or the reason- (e) Toothpaste and brushes able rental value of property, the use and occupancy of (f)Maternity clothing; diaper service (g) Funeral expenses which is donated to a qualified organization, are not (h) Veterinarian fees deductible contributions. However, amounts, expended Notes: (1) Since almost all the medical and dentalfor travel expenses (including board and-lodging while tretment of military personnel and their dependents'is away from home overnight, gas and oil, but not depre- adninistered free of charge, a tax deduction for such ciation) in connection with donated services are allow- expenses will be rare except where It involves amounts able contributions, if reimbursements are not received paid on behalf of a dependent not covered by military Also deductible are some "out-of-pocket" expenses facilities. (e.g., ments) which are paid in rendering services to a qualified (2) For firth t information regarding medical and organization. dental expenses see Publication 17. Note: Instead of a deduction for actual expenses for gas, oil, etc. of an automobile, taxpayers may deduct a ContutionsSchedule A (Form 1040) standard mileage rate of 70 per mile, plus parking fees apd tolls as a contribution. Depreciation, insurance, and Individuals may deduct contributions they make to repairs are not deductible. qualified organizationsthose which have been ruled as qualifying ornizations for purposes of the contribution Time for Deduction it has deduction. Generally, an organization knows if The deduction isjallowable only for the tax year in received a favorable ruling. Some organizations which which the contribution is actually paid. Thus, a pledge qualify are: of a contribution, even though it might be enforceable. Official ship, station or post funds used solely for recreation, does not give rise to a deduction. amusement and welfare of service personnel, United Funds, Chests or Foundations, Churches, Schools and Hospitals (nonprofit), YMCA-YWCA, Police Boys Clubs, Boy and Limitation on the Deduction Girl Scouts, DAR, American Legion and Amvets. Ingeneral, the taxpayer's charitable contributions cannot exceed 50% of adjusted gross income for, the Nondeductible Contributions year (computed without regard to net operating loss A contribution is deductible only if made without any carryback). Contributions to most charities may be consideration or benefit coming to the donor. Thus, deducted up to 50% of adjusted gross income. How- tuition to a parochial school is not deductible, neither ever, contributions to certain nonoperating foundations,

41 4 veterans' organizations, fraternal societies andcemetery (8) State inheritance, estate, legacy and gifttaxes organizations, and contributions for theuse of any (9) Foreign personal property, general sales,or gaso- charitable organization, are limited to 20% of adjusted line taxes. gross income. Also, there is a 30% of adjusted gross income limitation that applies only to contributions of Realtstate Taxes certain capital-gain property. Refer to Chapter 23 of Publication,17 for additional These taxes can be dedu ed only by theowner of the information concerning these limitations. real estate upon which the tax is imposed. If thepur- chase of real property involves the assumption of back Carryover taxes the payment of such taxes is not deductible. When, real property is sold the deduction for realestate taxes If the taxpayer's contributions to organizations which must be apportioned between the buyer and seller are subject to th,50% deductibility limit (or 30% limit according to the number of days in the real propertytax for capital gain (oroperty) exceed that limit in the yea?year that each held the property. Real.estate taxes paid paid, then such excess may be deducted in subsequent in escrow are not deductible until paid out of theescrow years. The amount in excess of 50% (or 30%) of his account to the taxing agency. adjusted gross income may 'be treated asa charitable contribution in each of the five succeedingyears in order Taxes Paid for Another of time (until it is used up) but not beyond that time. The 50% (or -30%)limitationondeductionfor Since, normally, taxes are deductible only by theper- charitable contributions remainsin effect with respectson upon whom they are imposed, taxes paid foran- to . the five succeeding years. - other are not deductible. Thus, for instance,a husband Contributions which may be carried.,over are onlyfiling a separate return may not deducttaxes paid on his those made to the organizations for which deduction wife's property or the payment of herstate income may be taken in an amount of up to 50% (or 30%) oftaxes Of course, these taxes could be deductedon a the taxpayer's adjusted gross income. Therefore, it doesjoint return. not include contributions to private foundationsto which the 20% limit applies. When Deductible Chapter 23inPublication 17 containsadditional Generally, taxes are only deductible in theyear they information concerning contributions. are paid. Thus, amounts withheld from a taxpayer's salary for state income taxes are only deductible in the year they are withheld. TaxesSchedule A (Form- 1040) . Nondeductible Taxes Generally, taxes for which a taxpayer is legally liable are deductible only in the year paid. Those which may Regulatory Taxes, such as marriage licenses, hunting be taken as deductions are certain foreignincome taxes licenses and dog tags are not deductible. Service charges, (except when foreign tax credit is claimed) and foreign such as water and sewer bills, are.also nondeductible. real property taxes and the following State, municipal, Assessment for Local Benefits which tendto increase and county taxes: the value of a taxpayer's property, suchas assessments (1) real property for the construction of water andsewage systems, are (2) personal property not deductible. (3) income Note: Chapter 22 in Publication 17 deals further (4) general sales (see tables in Federal Income Taxwith the subject of tatty. Forms) .. Note: When using the Sales Tax Tables to determine Interest Expense Schedule A (Form 1040) the amount of sales tax deductibleon Schedule A (Form 1040), add to the amount shownon line15, Generally, all interest paid bya cash basis taxpayer Form 1040 (adjusted gross income), nontaxableitems on debts for which he is legally liable is deductible. The which increase spendable income suchas social security, debt must.(1)result from an actual debtor-creditor railroad retirement benefits, sickpay exclusion, untaxed relationship in which repayment of the loan is intended, portion of long-term capital gains, etc. Thismay increase and, (2) be based on a valid obligationto pay a fixed or the sales tax deduction. . determinable sum of money. (5) gasoline(see tablesin Federal Income Tax Thus, a deduction is not allowed for interestpayments Forms) made by a taxpayer on behalf of anotherperson if the taxpayer has no legal obligation to make the payments. Taxes which ?ritzy not be taken asa deduction are: Exaniple: A taxpayer lives ina home owned by his (1) cigarettes, tobacco and liquor mother, whom he supports. He makes thepayments on (2) auto registration and inspection fees her mortgage. He cannot claiman interest expense de- (3) drivers' licenses, except if they _qualifyas per- duction since he has no legal obligationto make such sonal property tax payments. (4) poll taxes Interest payments on personal loans, home (5) admission taxes mortgages (including prepayment penalties) and installmentpur- (6) Federal taxes chase contracts are the more commontypes of interest (7) Social security taxes deductions. The amount of interest is usually separately

.. stated on personal loans and home mortgages and they Installment Payments do not present a prob:em of computation. However, If personal property, such as an automobile, radio, discounted notes and installment buying may require television set, etc., is purchased on the installment plan special computation. in which the carrying charge or finance charges are separately stated, but the interest charge cannot be Forfeited interest Deduction ascertained, a portion of the payments may be treated For tax years beginning after 1972, individuals may as interest. deduct from gross income the amount of interest for- The amount of the carrying charge that may be feited on premature withdrawal of funds from a time- deducted as interest is the lesser of: (a) an amount savings account. which represents six percent of the average unpaid Form 1099-INT usually indicates the "total" interest balance, or (b) the portion of the total fee or service payable on the time-savings account. Any interest for- charge allocable to the year. Because of this limitation, feited and not received is deductible from gross income. two computations are necessary: Enter the loss on line 41 of Form 1040. FirstDivide the total stated carrying charge by the number of months in the contract. This gives the Note Discount monthly carrying charge. Then multiply this monthly carrying charge by the number of months the contract When money is borrowed, the note sometimes is for was in existence in the taxable year. This gives the total more than the amount received. That is, the interest is carrying charge that may be allowed for that year. subtracted from the face amount of the note and the borrower receives the balance. A cash basis taxpayer, in SecondThe average unpaid balance is determined such a case, can only deduct the interest as the pay- by adding together the amount of the unpaid balance ments on the note are made. Part of each paymentat the beginning of month of the year, during represents interest and is deductible in the year paid. which the contract was in existence. This total must be divided by twelve to get the "average unpaid balance," Example: Taxpayer signs El note for $1,200 on 30 regardless of the number of months the contract was in March, payable in twelve equal monthly installmentsexistence. Compute six percent of this "average unpaid beginning 30 April. The note is discounted and he balance." receives only $1,128. The discount of $72 is considered The amount of the deduction is the lesser of the paid in twelve equal installments of $6. Thus, for the amounts determined above. .10 first year the deduction is $54, or nine payments of $6 Example: On 22 June, taxpayer purchased a home each. freezer for $254 plus a carrying charge of $20. He Mortgage interest and Service Charges made a down payment of $50 and agreed to make sixteen monthly payments of $14 each, on the twenty- Only the portion of the mortgage payment attributa-second of each month, beginning 22 July. The portion ble to interest is deductible as such. The term "points" of the carrying charge deductibie as interest is computed is sometimes used to describe the charges paid-by theas follows; bUrrower to the lender as loan origination fees, maxi- (1) Carrying charge S 20.00 . mum loan charges, or premium charges. If these charges Carrying charge per installment ($20. are paid solely for the use or forebearance of money, divided by 16 installments) 1.25 they are deductible as interest. If the payment Of these Multiply by number of installments charges is compensation for specific services that the paid in the return year X 6 lender performs (such as the lender's appraisal fee, the Carrying charge allocabletoreturn year 57.50 cost of preparing the mortgage note or deed of trust,(2) Unpaid balance(including carrying settlement fees or notary fees,etc.)thenitis not charge) outstanding: interest. July 1 ($254 .4- 20 $50) 224.00 The amount of "loan origination fees" charged by August 1 210.00 September 1 196.60 the lender in addition to the maximum rate of interest October 1 182.00 permitted to be imposed upon VA insured loans is not November1. 168.00 interest, "Points" which are actually loan placement fees December1 154.00 that the seller may be required to pay the lender as a Total monthly unpaid balance 51,134.00 condition to arranging financing terms for the buyer Average unpaid balance ($1,134 divided by 12) ... 94.50 are not deductible as interest. Prepayment penalties 6% of $94.50 $5.67 required to be paid to the holder of a mortgage for the (3) Interest deduction allowable (Lesser of privilege of prepaying the mortgage are deductible as computation under (1) or (2)) $5.67 interest. A deduction may be taken for interest paid on tax For more information on mortgage interest refer to deficiencies, but any amount which is designated as a Publication 17. penalty is not deductible. No interest is deductible if A charge levied by a retail store on its "revolvingborrowed money is used to purchase or carry tax- charge account" customers only in the event the fullexempt securities. balance of the account is not paid within 30 days is deductible as interest if the charge is (1) not a fixed fee but is based on the customer's unpaid balance (2) com- Paid in Advance puted monthly, and (3)solely for the privilege of A taxpayer using the cash method of accounting who deferring payment. pays interest in advance for a period. extending more

43 43 than 12 months beyond the enct of his current tax The deductible lossis limited to the lesser of the year must deduct this amount ratably over the tax years differences obtained in Step (1) or (2), minus the $100 involved. Interest paid in advance for a period not in reduction, or $2,900. excess of 12 months following the end of his current (2) A loss occasioned by damage to taxpayer's auto- tax year may be deducted by a cash method taxpayer mobile maintained for pleasure is deducible to the ex- in the year paid, if the deduction does not give rise to tent it exceeds $100 and is not covered by insurance,_ a material distortion of income. unless itis the result of a willful act or the willful negligence of the taxpayer. If damage to his automobile LossesSchedule A (Form 1040) results from the faulty driving of the operator of an LossesDeductible automobile With which the automobile of the taxpayer collides, the loss occasioned to the taxpayer by such (1) Losses to taxpayer's property used for personal damage is likewise deductible. The loss must be caused purposes sustained as a result of fire, storm, shipwreck, by an identifiable event of a sudden, unexpected, or sonic boom, or othercasualty,or from theft,are unusual nature, not deterioration. deductible to the extent they exceed $100 for each cas- Example. .An, automobile not used for business was ualty or theft. Such losses must be further reduced by involved in an accident. The original' cost of the auto- the insurance or other compensation the taxpayer re- mobile was $2,800. Its fair markbt value immediately ceives or expects to receive. . before the accident was $1,400. After the accident, the Progressive deterioration of property through a stead- only value was salvage value of $150., The amount ily operating cause is not considered a casualty. Termite recovered through insurance was $750. Taxpayer had damage to a residence normally occurs over a prolonged deductible casualty loss of $400, computed as follows: period of time and is not considered a casualty. Nor is it a casualty when an individual loses an article throughFair market valueof autoimmediatelybefore carelessness or negligence. Further, the deduction is lim- casualty $1,400 Fair market value of auto immediately after casualty 150 ited to the taxpayer's property. Damages paid by the Difference, but not in excess of cost or adjusted basis $1,250' taxpayer for injury to someone else's property are notInsurance recovery 750 deductible unless the injuries arose out of the taxpayer's Total loss .$ 500 business. Less: $100 reduction 100 Loss arising from Theft or embezzlement is considered Deductible loss $ 400 sustained during the taxable year in which the loss is discovered by the taxpayer. (3) If a taxpayer sustains a loss from a disaster, and The amount of loss to be deducted is the lesser of the disaster occurred in an area later determined by the (1) the decrease in the fair market value of theprop- President of the United States to warrant assistance erty as a result of the casualty, or (2) the taxpayer'sby the Federal Government under the Disaster Relief adjusted basis in the property. This amount must beAct of 1970, he may elect to deduct that loss on his reduced by insurance or compensation received orreturn for the tax year immediately preceding the expected. taxable year in which the casualty occurred. If he Example. Capt. Black had purchased a parcel of land makes the election, the loss will be considered as having in prior years for $1,000 and had erected his residenceoccurred in the preceding year. See Chapter 37 in thereon-at a cost of $7,000. Subsequent improvementsPublication 17 for procedures for making the election. to the property were made at a total cost of $2,000. (4) Wagering losses to the extent of wagering gains. Immediately before a storm, the land and house had a fair market value of $18,000. The storm completely LossesNot Deductible destroyed the house, leaving no salvageable residue. The land, despite some storm damage, had a fair market (1) Damage to household furniture or furnishings in value immediatelyafter the storm of $2,000. The transit or storage unless occasioned by fire, storm, ship- amount recovered through insurance was $7,000. The wreck, theft, or other casualty. taxpayer has a deductible casualty loss of $2,900, com- (2) Fines and penalties imposed by courts-martial puted as follows: and civil courts. (3) Accidental losses of property, such as a ring from Step (1): a finger. Fair market value of property immediately before (4) Unrealized depreciation in the market value of casualty $18,000 stocks and securities. Fair market .value of property immediately after casualty (5) Wagering losses in excess of gains. 2,000 (6) No deduction is allowable for loss resulting from Decrease in fair market value $16,000 Insurance recovery 7,000 sales or exchanges of property Difference $ 9,000 (a) Either directly or indirectly between members Step (2): of a family, which includes the taxpayer's spouse, broth- Adjusted basis of property: ers and sisters (whether by the whole or half blood), Cost of land $ 1,000 ancestors, and lineal descendants. Cost of house 7,000 (b) Except for distribution in liquidation, between Cost of improvement 2,000 an individual and a corporation in which the taxpayer, Adjusted basis of property $10,000 owns individually or in conjunction with members of his Insurance recovery 7,000 family, owns more than, 50 percent in value of the Difference $3,000 outstanding stock.

44 (c) If within 30 days before or after the sale or to that month. In the case of a married couple, the exchange of stock or securities, the seller acquires bycombined adjusted gross .income of the husband and g purchase or taxable exchange, or contracts to acquirewife on their joint return is taken into account for this substantially identical stock or securities. purpose. The adjusted gross income limithas been (d) Used as the taxpayer's personal residence up to raised to $35,000 for calendar year taxpayers beginning the time of sale. fn 1975. (7) Losses from death to trees as a result of diseast Reduction of Expenses by Certain Payments Or attack by insects. (8) Amounts paid by taxpayer for damages to anoth- Ifthe expenses are incurred during the year for a er's property. ,disabled dependent, they are reduced by the amount Refer to Publication 17 for information on how tothat the sum of (1) his adjusted gross income for the report these losses. 4. year and (2) the nontaxable payments he receives (except gifts) because of his physical or mental condition Miscellaneous DeductionsSchedule A exceeds $750. (Form 1040) Example:The taxpayer, a wiw, incurredemploy- ment-relatedexpenses of S200 peronth for 1975 on The remainder of this chapter will be devded to.behalf of a disabled son'. The son had-an adjusted gross those itemized deductions which, if deductible, shouldincome of $500 for 1975 and received S1,152 ($96 per be entered in the last category of itemized deductionsmonth) for 1975 from the Veterans Administration as on Schedule A (Form 1040),(i.e ,miscellaneous de- disabilitycompensation,SinceS1,652(S500plus ductions)," and to miscellaneous items which are not$1,152) exceeds $750 by S902, the taxpayer may de- deductible. duct only $1,498 ($2,400 less $902) as employment- related expenses on her 1975 return. Expenses for Child and Dependent Care Services If the expenses are incurredfor a physically or mentally incapacitated spouse, they are reduced only by The amount paid by a taxpayer for these employment- re- related expenses are deductible if he furnishes over halfthe nontaxable disability payments (exceptgifts) ceived by the disabled spouse. the cost of maintaining a home which is the taxpayer's The amount of the deductible employment-related principal residence as well as the principal residence of expenses is reduced by these payments before the over one or more of the followng individuals: $18,000 ($35,000for1976)adjustmentdiscussed (1) A dependent of the taxpayer under the age of 15 above is made. for whom the taxpayer is entitled to claim a dependency exemption. Married Couples (2) A dependent of the taxpayer (or a person who If the taxpayer is married at the close of the taxable could be claimed as a dependent, if it were not for theyear, the deduction is allOwed only if the taxpayer files gross income test) regardless of age who is physically`anoint return with his spouse, and the deduction Applies or mentally incapable of self-care, or only during any monthin that part ofthe year when (3) The taxpayer's spouse if physically or mentallyboth spouses are gainfully employed on a substantially incapable of self-care. fulltimebasis(unlessonespouseisphysically or If the taxpayer is married, over half of the cost of'mentally incapable of self-care). maintaining the household must be supplied by the tax- If the taxpayer is married but is living apart from his payer and spouse, and the taxpayer and spouse mustspouse, he is considered as unmarried for purposes of live together. this deduction if he meets thetest explained at the Limitations on Deductible Amounts beginning of this chapter under "Married Individuals Living Apart". The deduction is limited to the amount incurred during any month, but it may not exceed 5400 per month Payments tct Related Individuals when the expenses are incurred in the taxpayer's house- No deduction is allowed for payments made for em- hold. When incurred outside the taxpayer's household ployment-related expenses if the payments are made to for the careofa dependent under 15,the expenses area related individual or a dependent household member. deductible only to the extent they do not exceed in any A related individual for this purpose includes the tax- one month the following amounts: payer's child, stepchild, grandchild, brother, sister, step- (1) $200 for one child, brother, stepsister, parent, ancestor of either parent, (2) 5300 for two children, stepparent, niece, nephew, aunt, uncle, in-laws and an (3) S400 for three or more children. individual (other than taxpayer's spouse) who is a mem- Expenses incurredoutsidethe taxpayer's householdber of the taxpayer's householdandlives with him for on behalf of a disabled dependent (unless- under 15) orthe entire year and is his dependent. a disabled spouse are not deductible as household or Form 2441 is used to figure the deductible expenses dependent care expenses. However, such expenses mayfor child and dependent care services. Chapter 25 in qualify as medical expenses. Publication 17 treats this subject in depth. When the taxpayer's adjusted gross income exceeds S 1 8,000 for the year, the amount of the deductible expenses incurred during any month must be reduced Uniforms by that portion of one-half of the excess of the adjusted It is the position of the Service that the cost and gross income user $18,000 which is properly allocablemaintenance of uniformi are allowable deductions if.

t-- . k) tt (1) the uniforms are specifically requiredas a condition the excess, if any, alimony. For taxpurposes a minor of employment, and (2) are not ofa typt adaptable tochild is anyone who has not attained the age of 21 general or continued usage to the extent that they takeregardless of what state law says. the place of ordinary clothing.-In order to determine whether both of the required tests have been met,con- What are alimony payments? sideratioh Must be given to the particular factsin each The deductionis limited to amounts qualifying as case, and the occupation of the taxpayer-is, net necessar-periodic payments. ily controlling, The fact that a uniform might bere- (I) Required under the terms of the decree of divorce quired as a condition of employment is not, of itself,or separation, or a written instrument incident to such sufficient to warrant the allowance of the deduction. For decree, made in discharge of a legal obligation based example, military apparel is specifically required to be on,the marital relationship, and paid after the decree. worn by members of the uniformed services. However, (2) Made under awrittenseparationagreement such apparel is adaptable generally to continuedwear to entered into after 8, 16/ 54, made after the agreement the extent that it replaces regular clothing; consequently, was executed, and the husband and wife live apart and no deduction is allowable for the cost and maintenance file separate returns. of such a uniform. ,(3) Made under a decree for support or any type of Note..The deduction of the cost and maintenance ofcourt order entered after 3," I ;54 because of the marital uniforms of a distinctive type does not extend to ordi-relationship; and husband and wife live apart and file nary work clothing, the cost and maintenance of whichseparate returns. is a nondeductible personal expense. What are periodic payments? (1) Army Officers' Equipment Periodic payments are payments to be made over an The cost of equipment, to the extent only that it isindefinite period of time. This is the normal situation. especially required by this profession and does not take Installment payments on a lump sum settlement do not the place of articles required by civilian life, such asqualify as periodic payments and as suchare not de- corps devices, Sam Browne belts, epaulets, campaign ductible as alimony unless: bars, aiguillettes and swords, are deductible. (1) They cover a period of 10 years or less andare (2) Naval Officers' Equipment subject to termination because of contingencies(e.g., The cost of gold lace, cap devices, and insignia of death of either spouse, remarriage of the wifeor change rank, which are additions to the uniform and are re- in economic status of either spouse.) quired by his profession, are deductible. (2) They cover a period over 10 years. In this case they are periodic payments and deductible but only to (3) Reservists of the Armed FOrces the extent that the sum of the payments received during Reservists of the Armed Forces may deduct the costthe spouse's taxable year do not exceed 10% of the and maintenance of uniforms which may be worn onamount specified. Payments made for back years in the active duty for training or for temporary perrqds whencurrent year are deductible when paid by the husband attending service school courses or training assemblies.and includible bythewiferegardless ofthe 10% However, such costs must be reduced by the reimburse- limitation. However, advance alimony paymentsare ment received. subject to the 10% natation and could result inan excess of 10% of t ipcipal sum being nondeductible Fatigues. by the husband ando taxable to the wife. Example: A divorc d cree granted in 1973 obligated Amounts expended by members of the armed servicesa husband to pay his $120,000 in installments of of the United States on active duty for the purchase andSI0,000 for 12 years: band paid S10,000 in 1973, maintenance ofrequired military Vatigue uniforms, no payments in 1974 an$30,000 in 1975 ($10,000 where local military regulations proffibit then off -duty back alimony, S10,00i cu ent and advanced 1976 ali- wear, are, to the extent the expensehxceed allowances mony). received therefor, deductible for Federal income tax purposes as ordinary and necessary business expenses 1(rl$10 000 drdw.tile by t e husband indudible by wife provided such taxpayers itemize their deduction. 1975$22,000 [$10,000 back plus $12,000 (10% limit)]

Alimony Payments Allotments Generally alimony payments are deductible by the A serviceman, un decreeor support, may husband and are includible as taxable income by theauthorize a monthly allotment for, his wife, from whom wife Such payments cannot be counted by the husbandhe is separated. The allotment includesa tax-exempt in determining how much support he pays for his chil- quarters allowance to which he isentitled,plus an dren to establish them as dependents. In fact, unless amount withheld from his pay. He may deduct, and his payments are specifically designated by the terms of thewife must include in her income, only theamount with- decree, instrument or agreement as support of a minor held from his pay. child, such payments constitute alimony, deductible by the husband and includible by the wife. If payments are Lump sum settlements made for both child support and alimony, and the hus- Payments of a lump sum or installments not qualify- band pays only a portion of such payment, the amounting asperiodit., payments are not deductible by the designated as child support will be considered first and husband or includible by the wife. They may represent

46 sY propertysettlements. A transferof property(e.g., (2) Any committee,association,ororganization house) owned by the husband to a wife for the purposeorganized and operated exclusively for the purpose of of extinguishing her ini.loate dower rights in discharge supporting a candidate seeking elective public office for of a property settlement must be treated as a taxable its use in furthering this purpose, event. (3) The national committee of a national political party, or Example: .(4) The State or local committee of a national politi- FMV of house $30,000 cal party as designated ,by the national or State com- Basis 20,000 mittee of the party. Capital gain $10,000 An amount paid for a ticket in -alottery,raffle, drawing, etc.,for valuable prizes, organized for the The wife, who receives property in exchange for herpurpose of raising funds in a candidate's campaign is marital rights, realizes neither gain nor loss, since thenot considered a contribution or gift and therefore is rights she relinquished are taken to be equal in value not eligible for the deduction. However, the cost of a to the property. ticket to a political dinner or fund raising function for a In a community property state no gain or loss is to be political candidate, where the event is essentially politi- reported because thisis merely an equal division of cal, i.e., primarily devoted to political speeches or dis- community property. cussions, is a deductible political contribution. Alimony trusts and other indirect payments Periodic payments attributable to property held in Expenses for Education trust, to life insurance, endowment or annuity contracts, A taxpayer may deduct educational expenditures as although taxable to the wife justas though she had ordinary and necessary business expenses if the educa- received cash directly from her husband, are not deduct- tion either: ible by the husband. Instead, the husband would have (1) maintains or improves skills required by the indi- an exclusion as to the trust income which would other- vidual in his present employment or trade or business, wise be taxable to him. or Alimony is reported by wife (2) meets express requirements set by the individual's employer or by law, which are a condition of the em- Alimony payments by cash or through commercialployee's retaining an established employment status or annuity contract or endowment or life insurance policyrate of compensation. are reported on Form 1040, Part I, Line 34 as income. However, even if one or both of the above require- Income from an alimony trust is reported on Sched-ments is met, expenses are not deductible if the educa- ule E (Form 1040) Part HI as income from a trust. tion either: (1)is required so that the taxpayer can meet the r. Contribution to Candidate for Public Office minimum educational requirements for qualification in A taxpayer is allowed a deduction for the amount ofhis present employment or trade'or business, or political contributions made after1971 and before (2) qualifies the taxpayer for a new trade or business. January 1, 1975 up to a maximum of $50 for a single Self-employed persons may ordinarilydeduct ex- person or a married person filinga separate return. penses for education if it is customary for other estab- The deduction may not exceed $100 on a joint return. lished members in the trade or business to undertake Alternatively, the taxpayer may claim a credit againstsuch education to maintain or improve skills required in tax for his political contributions instead of claimingtheir trade or business. Employees may deduct such them as an itemized deduction. The amount of the expenses if incurred primarily for a bona fide business credit is one-half of the amount of the political contri- purpose of their employer and not primarily for their butions made with a maximum credit of $25 on a joint own benefit. Eniployees' expenSes for educational activi- return and $12.50 on a separate return of a married ties may be deductible even though such expenses are person or a single person. incurred voluntarily and even though the courses carry For political contributions made after December 31,academic credit or eventually result in an increase in 1974, in taxable years beginning after that date the salary or in a promotion. amount of allowable deduction or credit has been in- Amounts spent for tuition, laboratory fees, books, creased. Thus, for 1975, the amount of allowable de-and similar items are examples of expenses incurred for ductions will be $100 for a single person and married educational purposes. If the educational activities other- persons filing separate returns, and will be $200for wise qualify, then the cost of local transportation (but taxpayers filing joint returns. not commuting expenses) and the cost of travel, meals, The maximum credit for 1975 is $50 on a joint re-and lodging while away from home overnight is also turn and $25 for single persons and married persons deductible. filing separate returns. For self-employed and for individuals employed as A political contribution for purposes of the deduction outside salesmen, educatiorfalexpenses, thecostof or credit is a contribution or gift of money to: travel, meals and lodging while away. from home, and (1) An individual, who has publicly announced that local transportation expenses incurred in the pursuit of he isa candidate for nomination or election to any such educational activities are deductible in arriving at Feder* State, or local elective public office in any adjusted gross income. primary, general, or specialelection, for his use in Employees, other than outside salesmen, may deduct seeking office, expenses for education only in arriving at taxable in-

47 come if the -standard deduction is not elected (i.e., as Employment Agency Fees itemized deductions). But travel, meals and lodging away from home overnight and local transportation ex- Expenses incurred in seeking new employment in penses incurred in the pursuit of the educational activi- the same trade or business are deductibleeven though ties are deductible in arriving at adjustedgross income new employment is not obtained. whether or not`the standard deduction is elected. Reim- bursed education expenses are reportedinii statement Miscellaneous ItemsNot Deductible, attached to the income tax return., theamount of ex- Thefollowing items are not deductible from atsted penses in excess of reimbursements is deductible fromgross income: adjusted gross income in arriving at taxableincome. (a) Personal, living, or family expenses/other than The deductible educationalexpenses of a veteran of outlined above. the Armed Forces are not required to be reduced by (b) Living expenses of personnel stationed in pile tax-exempt educational benefits received from the Vet- erans Administration. locality or overseas for an indefinite period. (c) The cost of daily transportation between home The qualifying requirements outlined abovewere ap- and office. plied in disallowingthe following: (d) Tax penalties. (1) Nondeductible education expenses.If the pri- (e) Traffic fines. mary purpose for which they are incurred is to: (f/ Ordinary repairs, alterations, and depreciationon (a) Obtain a new position. a building occupied as a personal residence by the (b) Fulfill the general educational aspirationsofowner or his family. the taxpayer. (g) Any amount paid out for new buildings, (c) Meet the minimum requirements for qualifica- or for permanent improvements made to increase the value of tion or establishment in an intended tradeor business, any property or estate. These are capital costs. profession, or specialty therein, then such educational expenses are not deductible. (h) Premiums paid on any life insurance policy. (i) Expenses of visiting home whileon furlough, (2) Nondeductible travel expenses incurred in theleave, or liberty. pursuit of educational' activities: (j) Amounts paid for the purchase of ignitedStates (a) Commuting from home to the place ofeduca- savings bonds. tion on a nonworking day. (k) Mortgage of other insurance preminms ona ser- (b) In general, a taxpayer's expenditures for travel sonal residence.- as a form of education are deductible to the extent a (I) Expensesof education ofa spouse or dependent. major portion of the travel activity during the period of (m) Club dues and initiation fees. travel directly maintains or improve's the skills required (n) Ceitain expenses of a hobbyin excess of hobby in the taxpayer's employment, trade,or business. income. (c) If the taxpayer engages insome personal activ- (o) Uniforms for active duty perionnel midship- ities such as sightseeing, social visitingor entertaining, men, and cadets. then the expenses attributable to such personal activities are not deductible. (p) Legal fees not connected with productionor collection of income, management of (d) If the taxpayer's travel away from home property heldlor is production of income, or incurred inconnection with primarily personal, expenses for travel, mealsand lodg- the determination, collection or refurid of ing (other than meals and lodging incurred during any tax. the For Example time §pehtin participating in deductible educational Amounts paidasaresult of suits pursuits) are not deductible. brought against the taxpayer for alienation ofaffection, (e) Costs of meals and lodging in the pursuit ofbreach of promise to marry, slander, defamationof character, attorney's fees paid in educational activities not involvingaway from home a suit for divorce or travel is not deductible. separate maintenance, or amounts paid toprevent the filing of such suits are personal legalexpenses and are not deductible. Brokerage Fees (q) Attorney's fees for the preparation ofa will. Brokerage fees which the taxpayer pays toa broker, a (r) Bar examination fees. bank, Or similar agent to collect his taxable'bond interest Dotes: or dividencds on shares of stock are deductible on (1)Subschedules should be used is Schedule A (Form 1040). A fee' which he pays toa if there not enough space on the return to list the broker to acquire investment property, suchas Stocks or particular item- bonds, is not deductible, but is added to the cost of the ized deductions. The total amount shownon such sub- property. A fee paid in connection with the sale of prop- schedule shou'd be inserted in its appropriate placeon Schedule A (Form 1040) and thecomment "see sched- erty is a selling expense and may only be used to deter- ule # mine gain or loss from the sale. A fee paid to purchase .. attached" written across the schedule. "nontaxables" (e.g., State bonds) is nondeductible. (2) Having acquired all this knowledge aboutitem- ized deductions, the consultantis now faced with a practical problem. To prepare all'the Safe Deposit Box Rent schedules of itemized deductions is time consuming, and, after such effort Safedeposit box rent is deductible if the box is usedhas been made, to learn that the taxpayer would benefit for the storage of stocks, bonds, etc., the income frommore by taking the percentage standard deductionor which is taxable. The rent is not deduc,tible if the box isthe low income allowande than by itemizing his deduc- used to store personal effects or tax-exempt securities. tions can be downright harassing. The followingques- 48 tions to a military taxpayer,Toill, generally, answer tPITsNo amount received as a pension or annuity is included problem. in earned income. (a) Does the' taxpayer own a personal residence in The credit can be claimed by married individuals the United States! It he does, then the taxes and onlyif, theyfilea joint return, The creditisalso mortgage interest on such property wafrant itemizing allowed only with respect to a full taxable year. deductions. In addition, the earned income credit is allowed in (k), Does the taxpayer make alimony payments toexcess of tax liability. Any amount of the credit in an ex-spouse? excess of tax liability will be the equivalent of an over- (c) Do the taxpayers pay household and dependent payment of tax and will be refundable to the taxpayer care expenses so that they may be gainfully em- (a form of negative income tax). ployed? For example, if Pvt. Jones has income from wages (d) Did the .taxpayer have a large casualty loss of $3,900 and interest income of $150 and meets the during the taxable year? other requirements discussed above, his earned income (e) Did the taxpayer pay any large medical bills,credit will be $390. The interest incomeisnotin- not covered by insurance for a parent? cluded in the computation sinceitisnot earned in- If the answer to all of these questions is negative, then come. If Pvt. Jones had a tax liability of $250, he the probability will be that the taxpayer should notwould receive a refund of the difference of $140 ($390 itemize his deductions. minus $250). On the other hand, if Sgt. Smith receivediS6,500 of earned income, the maximum credit of S 00 (10% Credits x $4,000) would be reduced by 10% of the excess of the earned income over $1,000. In this case it would .Credit for Personal Exemptions be reduced by $250 (10% x $6,500 minus $4,000). _for 1975, an individual taxpayer is alloWed a creditSgt. Smith's total earned income -credit would be $150 against tax liabilityin the amount of $30 for each ($400 minus $250). ,dependent the taxpayer is entitled- to claim as a personal exemption (other than those for age and blind-Credit for Purchase of New Housing ness). An individual is allowed a credit against his income The total credit cannot exceed the total tax liabilitytax liability equal to 5% of the purchase price of a for the.yox. Furthermore, the tax liability is reduced by new principal residence purchased (or constructed) by the credit for personal exemptions before reduction bythe individual. The credit is allowed for only one resi- the following credits: dence and is limited to the tax liability for the year up (1) the foreign tax credit, to $2,000 (or $1,000 for married taxpayers filing sepa- (2) the retirement income credit, rate returns). If the residence ig purchased by more (3) the investment tax credit, than one individual (other than husband and wife) the (4) the work incentive program credit, and political orga- credit may be allocated among them but may not ex- (5) the crediki for contributions to ceed $2,000. nizations. A "new principal residence" means a principal resi- - dence the original use of which began with the tax- Credit for Certain Earned Income payer. For 1975, an individual who meets certain require- The term includes single family structures, a resi- ments may be entitled to a tax credit -based on thedential unit in a condominium or cooperative housing individual's earned income. To be eligible, thb indi-project, the taxpayer's unit in a duplex or row house, vidual must: and mobile homes. Renovated buildings (regardless of ((1) maintain a household which isthe principal the extent of renovation) do not qualify for the credit. place of abode. of that individual and also the principal Original use means the property has never been lived in place of abode of a child for whom the taxpayeris prior to acquisition by the taxpayer. entitled to claim a dependency exemption. "Purchase price" for the purpose of computing the (2) not be entitled to exclude any amount of in- credit means the adjusted basis of the residence. One come from foreign sources (or from U.S. possessions).situation where the adjusted basis is less than thepur- (3) must have "earned income." chase price would be if the taxpayer had deferred part If these three tests are met, a taxpayer will be en- or all of the gain on the sale of the residence being titled to a, tax credit of up to $400. This amount isreplaced by the new one. See Chapter 3 for a compu- computed by taking 10% of the taxpayer's earned in-tation of deferred gain. come (up.to $4,000). However, the $400 credit must The credit applies to a new principal residence: be reduced by 10% of the amount of the taxpayer's (a) the construction of which began before 26 adjusted gross income (Or earned income if greater) March 1975, that exceeds $4,000. (b) which is acquired and occupied by the tax- Earned income for this purpose means wages and payer after 12'March 1975 and before 1 June 1977, and other employee comFensation as well as net earnings (c)if not constructed by, the taxpayer, which was from self-employinent. These amounts are taken into acquired by thetaxpayer under a binding contract consideration only if the individual must include them enteted Info before 1 January 1976. in gross income. Also, the earned income is takeninto Generally, the taxpayer must acquire the residence account without regard to community property laws.after 12 March 1975, and before1 January 1976.

49 However, the taxpayer may still be entitled to the (4) Individuals filing a short year return in case of a credit even though the contract was entered into prior change in accounting period to 13 March 1975 if settlement and occupancy occurs (5) Taxpayer whose spouse itemized deductions. on or after that date and before 1 January 1977. Also, the taxpayer is entitled to the credit if he enters intoa Itemized DedttctionsSchedule A contract binding for the purchase of a new residence after 12 March 1975 and before 1January 1976 if General settlement and occupancy occurs before 1 January 1977. (1) See Schedule A (Form 1040) in -Pub. 17 (filled- The contract may be contingent on the taxpayer find- in example) ing a loan and still be considered binding. (2) Some of the items deducted here are: To claim the credit, the taxpayer must attacha state- (a) Medical ment to the return from the seller certifying that the (b) Contributions construction of the residence began before 26 March (c) Taxes 1975 and the purchase price was the lowest priCeat (d) Interest which the residence was offered for sale after 28 Feb- (e) Casualty losses ruary 1975. (f),- Miscellaneous deductions If the taxpayer disposes of the residence within 36 1. Uniforms months after the date acquired (or the date occupied 2. Alimony if constructed by the taxpayer) thetaxpayer must re- 3. Education capture the credit. 4. Investment expen.ses 5. Safe deposit boxes 6. Returns preparation fee Summary 7. Political contributions Introduction 8. Household and dependent care expense's Medical Expense (1) For 1975, if allowable itemized deductions exceed 16% of adjusted gross income up to the maximum Expense fgr diagnosis, cure, treatment, mitigation or discussed earlier, the taxpayer, should itemizeon Sched-prevention of disease. ,ule A (Form 1040). (1) Look at Schedule A (Form 1040) and note 1% (2) If 16% or less use one of the two types Of and 3% *rules for medicines and other medical expenses standard- deductions. respectively. Note: 1 % and 3% rules apply to all taxpayers and - Percentage Standard Deduction dependents. Most military do not have this expense since they What is the percentage standard deduction? receive free treatment. For 1975 the percentage standard deduction is 16% (2) Deductible when paid. of adjusted gross income. (3) Reduced by insurance recovery. What are the limitations on the percentage standard (4) See text for expenses deductible and nondeducti- deduction? ble. (5)See Pub. 17, chapter 21. Limitation's for 1975 are (1) $2,300 for single persons, or Contributions (2) In the case of a married person filing separately (Note citizenmarried to nonresident alien)upiu (1)Deductible: $1,300, or (a) Official ship, station or post funds used for (3) In the case of married persons filing jointre- recreation, welfare or amusement of service personnel. turns, 16% of adjusted gross income up to $2,600. (b) ChestsCommunity What are the advantages of the percentage standard (c) Church and Synagogues deduction? (d) YMCA, boys-clubs (e) DAR, Amvets, American Legion (I) Relieves taxpayer from having to substantiate' deductions. (2)Nondeductible: (2) Taxpayer does not have to keep receipts. (aParochial school tuition fees (3) Easier to compute tax. (b) Lodge dues (4) Can use optional tax tablesif income under (c) Gifts to individuals $15,000. (d) Pre-adoption expenses (e) International organizations What taxpayers cannot use the percentage standard de- (0 Orphanages in foreign countries, because they duction? are not U.S.- organizations or creations (1) Nonresident aliens (g) Communist organizations. (2) Estates and trusts ,) (3) Cash or property (ymv note: (1)tax saving on (3) United States citizens entitled to special benefitsstock donated to charity (2) FMV of old clothes is aceo income received froni a -United States posses, nominal). si r. than Puerto Rico). (4) Deductible only in the year paid not pledged.

r, (5) In lieu of gas and oil on auto used for chantableseparate losses sustained in the same eveat resuifin only organization 7# per mile may be claimed. Note: Depre- one $100 reduction. ciation and insurance are not deductible. (1) The amount of the deduction is the lesser of (a) (6) 20% and 50% limitation. the difference between thefair market value of the (7) Carryover. (5 years for 50% or 30% type con- property immediately before and immediately after the tributions). casualty, or (b)the taxpayer's adjusted basis in the (8) Pub. 17, chapter 23. property, less the amount of any reimbursement or my surance. Taxes (2) The property subject to the loss must,have been , (1) Look at Schedule A and note listed taxes al-the property of the taxpayer and the loss is deductible lowed. only in the year sustained regardless of whether repairs Note: Foreign personal property and gasoline taxesare made that year, a subsequent year, or never made. (3) A theft loss is deductible in the year it is discov- are not deductible. ered. Note: Sales tax can be estimated from table in instructions for 1040 booklet. Note: See text for losses not deductib (2) Look at text for nondeductible taxes. (3) Deductible when paid. State income taxes with- Miscellaneous Deductions held plus tax due for prior year paid in current year are deductible in current year. The following deductions all go in the last section of (4) Pub. 17, chapter 22. Schedule A (Form 1040): (1) Uniformsmilitarynondeductibleexcept braid, Interest corps, devices, campaign bars, etc. Fatigues can, in certain situations depending on certain local mittary-regu--- paid There will be allowed arededuction all interest lations, be deductible to the extent expenses exceed al- indebtedness. To or accrued within the taxable year on lowances. be deductible, interest must be on a debt for which the (2) AlimonyIf the taxpayer is legally separated or taxpayer is legally liable. Nonbusiness interest payments, divorced, separate maintenance payments made by him such as that paid on a mortgage on, a residence, on a are taxable to his former wife anddeductible by the personal loan, or on an installment purchase of personal taxpayer if these payments are: property, may be deducted on Schedule A.-In case the (a) required under the terms of the decree of interest on an installment purchase is stated separately,separation or divorce; the amount actually paid is deductible. However, whete (b) paid in discharge of a legal obligation based the actual interest isnot distinguishable from 'other on the marital relationship; charges, a deduction may be made of 6 percent of the (c) paid after the decree; and 1/12 of average unpaid balance (computed by taking (d) are periodic payments. day of the sum of the unpaid balances as of the "Periodic payments" are payments ofafixed each month), provided this amount does notnot exceed the amount for an indefinite period, or payments of an ratable share of the total finance charges allotted to the indefinite amount (as 10 percent of a variable income) taxable year. for either a fixed or indefinite period. Under certain A deduction may be taken for interest paid on taxconditions "installment payments" or other payments deficienc-;-c, Nit any penalties invroved are net ciaduar: made under a separation agreement entered Go after ble. The interest on a discounted note, which is to be August 16, 1954, or a decree for support after March 1, repaid in a lump sum, is not deductible by a cash basis°1954, may be classified as "periodic payments' and be taxpayer until the note is paid.' Where the discounted taxable to the wife and deductible by the husband. note is repayable in installments, a proportionate part of (3) Education deductible if for purpose of the discount is deductible for each payment, on the cash (a) Maintaining present job and not to obtain a basis. Interest paid for funds used to purchase tax-better job. exempt securities is not deductible. (b) Education expenses. are:tuition, laboratory fees, books, eta. Casualty Losses (4) Expenses for Child and Dependent Care This provision applies -to the loss of property not (a) The maximum deduction is $400 per month. (b) Must be incurred to enable taxpayer to be connected with trade or business if such loss arises gainfully employed. - from fire, stormy shipwreck, or other casualty or from (C) Taxpayer must maintain household which in- theft. Nonbusiness casualty and theft losses of individu- cludes as a membcr one or more qualifying individuals. als will be deductible only to the extent the loss from (d) Qualifying individual is:. each casualty or theft exceeds $100. (1) taxpayer's dependent under 15, Where two items of loss result from a single event, (2) taxpayer's dependent who is disabled, or only one $100 reduction is required. On joint returns, (3), taxpayer's spouse who is disabled. the taxpayers are treated as one taxpayer and therefore (e) Limiiution on deduction when taxpayer's ad-

51 I) o justed gross income exceeds $18,000 (or $35,000 for .c. Taxes on rental property. calendar years beginning in 1976). d. Repairs on rental property. (f) Reduction of deduction by certain payments e. Repairs on personal residence. received by disabled dependent and disabledspouse. 2.Which of the following insurance premiums paid (g) Married couples muste joint return unless would be deductible? they qualify as not married unr- married but living a. Insurance on personal dwelling. apart test. b. Insurance on personal jewelry. c. Insurance on daughter's life. Nondeductible Expense (See Text) d. Liability insurance on personal auto. e. Node of the above. 3.Capt. Smith incurs and pays the following during Quizzes for Chapter 5, the year: general property taxes on residence $105, State income tax $110, Federal I9come Tax, $416, TrueFalse Quiz excise tax $5 and State gasoline ,fix $25. What is Capt. Smith's maximtun allowable de- Indicate whether each of the following statementsare duction for taxes on his calendar year cash basis true or false or deductible or nondeductible, by inserting return? "X" in the appropriate box. a. $656.b. $546.c: $240.d. $245.e, $215. 1 All interest prepaid on a three-year loan is not 4.Jane Adams, upon arriving home from a theater on deductible in the year of payment by a cash basis 10 September, discovered that her diamond ring taxpayer. ) was missing. She remembered taking off the ring in O True False the wash room of the theater. She called the thea- 2. Legal fee of $50 paid by an individual to have ter manager But the ring was dot found. She had Federal income tax return prepared. purchased the ring in 1973 for $475, An appraiser 49-Deductible- -9-Not-deductible I I C ,3. Commercial school tuition paid by a typist to ob- Jane's allowable loss on her return? tain a position as private secretary. a. $550.00. b. $512.50.c, $475.00. d. The re- O Deductible Not deductible placement cost. e. Nolte. 4. The cost of a uniform in excess of reimbursement. 5.In May, Commander Black learned that his per, by an officer in the Armed Forces Reserves, used sonsl residence, which cost $18,000 in 1954 was during summer training periods. severely damaged by termites. The inspector told 'Dedtictible Not deductible him that the termites had infested the property for 5. Insurance premiums paid on a dwelling osJlted and several years. The fair market value 'prior to the occupied by a taxpayer. discovery of the damage was $28,000 and after the Deductible Not deductible \ discovery was $12,000. He paid $14,000 to repair 6. Federal tax on railroad transportation inctirred on the damage on 15 August. What. is his allowable a vacation trip. loss? O Deductible Not deductible a. $28,000. b. $16,000.c. $14,000.d. 57.200. 7. Interelt paid on -Federal income tax deficiency. e. None. 4 Deductible Not deductible 6.An individual could not deduct a contribution to 8.Y, a single taxpayer, filed his calendar year income which of the following organizations? tax return. He Shadadjusted gross income of a. Daughters of American Revolution. $10,000 and claimed a medical deduction, com- b. American Bar Association. puted as follows: c. Church, for pew rent. d. Camp Fire Girls. Drugs and medicine $1110 Less 1% of adjusted gross income 100 e. American Legion. Remainder includible in medical expense $ 80 Doctor, dentist, etc. $1,200 Less amount reimbursed 800 QuestionAnswer Quiz Amount not reimbursed 400 Net medical expenses 1. Under what circumstances may a U.S. taxpayeruse Less 3% of adjusted gross income 300 the standard deduction Medical deduction claimed $ 180 a. Wliat are the limitations of this deduction? b. If a' taxpayer chooses to-use the standard de- Y's computation of his medical deduction is correct. duction, marhe also claim a foreign tax credit? True False c. May a husband and wife filing separate returns each use the standard deduction or itemize their Multiple Choice Quiz deduction, at their individual discretion? 2. Captan Reynolds on duty afloaton a ship based DirectionsCircle the appropriate letter to select the in the Mediterranean, made gifts and donations answer to each of the following questions. to numerous persons and organizations as shown be- 1. Which of the following expenses are not deducti- low. Disregarding limitation, indicate the items and ble? amounts which may be deducted on his returnas a. Alimony payments contributions. b. Taxes on personal residence. a. His personal services and the use of his auto- 52 r r mobile at a cost of $10, for the benefitof the c. The cost of gold braidfor decoration of cap Italian Boy Scouts. and uniform. United States Steel com- 0 Deductible 0 Nondeductible b. A gift of 10 shares of the mon stock held over 6months to Harvard d. The cost of a treatise on investments by University, his Alma Mater. This stock cost taxpayer who has an investment portfolio. him $50 per share and the market quotation on 0 Deductible 0 Nondeductible . educational institution the date of gift was $55 per share. e. An unpaid pledge to an c. A cash gift of $20 to theItalian Red Cross. in the United States. d. A donation of 2 pints of blood forthe benefit 0 Deductible 0 Nondeductible of the wife of a fellow officer who wasinjured f. Interest paid on money borrowed to purchase a in an Italian train wreck. diamond ring. e. Weekly donations to theChaplains fund on his 0 Deductible 0 Nondeductible ship, in the total amount of $52. operating f. The donation of the use of his car, Continuing Problem 320 miles, to assist in a fund-raisingcampaign for the American Red Cross. Part 3Deductions 3. Which, if any, of the following itemswould be deductible on the return of a Second Class Petty A. Following are expensesof John A. and Betty Officer of the U.S. Navy, on duty in theIndian Mankat, whose joint return you started preparing ear- De- Ocean, if he itemizes his deductions? lier. Determine the amounts allowable as Itemized a. Auto license of $20 paid tohis home state (not ductions and enter the appropriate information on -ad valorem). Schedule A, (Form 1040); then carry forward the total b. Real estate taxes paid to his home state onhis to line 44. home which was not rented dUring the taxable Interest: year. 1st National klanIc 44a:00 c. Income taxes paid to hishome state. Department Stores 7.00 d. Fishing license issued by the localgovernment of Okinawa. Contributions: e. Sewer tax paid tohome city, representing his St. Anthony's Church, Oxon Hill, Md. 150.60 United Givers Fund, Washington, D.0 100.00 share of construction costs of a community 40.00 (assume home USAF Base Chapel (Germany) sewer for use in his home area Frankfurt Children Orphanage 50.00 is not rented). Daughter Ann's Parochial School fees 200.00 f. Outgrown suit of clothes given toAmerican Red Cross. Fair market vale of $5(cost $50). Taxes: In ,connection with the sale of hispersonal resi- 'Purchase tax" (sales tax) levied on the retailer 4. $ 42.00 dence, Sgt. Wm. Paton, who was on dutyin Nor- by foreign country, included in purchase price Dog license 10.00 way, received $125 monthly fromthe purchaser. Maryland sales tax 155.00 Each payment represented principal andinterest of Maryland gasoline tax 31.00 $100; real estate taxes of $20 and insurance pre- Maryland income tax 500.00 mium- payments of $5. Sgt. Paton agreed to accu- mulate the payments made on taxes and insurance Other: and to pay the annual tax and insurancebills when Alimony $ 600.00 Insignia for uniform 12.00 6 due. Dependent care expense for Ann (qualifying) 520.00 a. Is Sgt. Paton entitled to anydeduction for the payments of taxes and insurancewhich he made Casualty: subsequent to, the sale of the property? If not, Auto accident: cost of car $3,000.00 2,200.00 explain fully. % FMV. before accident FMV after accident 900.00 5.Indicate by placing afl X in the appropriate column Redeived from insurance company 500.00 whether the, following items are deductible or nondeductible on the U.S. income tax, return of acash Lieutenant Mankat's mother, Mary Mankat,is 67 basis' taxpayer who; is a 'nfrmbor of theArmed years of age and lives in rented quartersin Dallas. Forces on duty outside the United States. Lieutenant Mankat contributed $500.00 to her support a. The cost of anArmy Dress Blue uniform (less during the year. She received $800.00 fromother, non- 'shoulder boards or gold-stripe on pants)include taxable, Sources. She worked part-time and earned ing cape. 1595.00. This constituted her entire support for 1975. 0, Deductible Nondeductible She did not' spend any of her savings duringthe year. b. The cost of a full Army'.Gmenuniform (less She remarried on 23 December 1975 and haschosen to braid), ' files a joint return with her now husband for that year. ODeductible, ci Nondeductible e . Chapter 6. RentalIncome and Depreciation

Objectives Repairs' (1) To familiarize participants withrental income and how it Expenditures for keeping the rentalproperty in an is handled for taxpurposes. ordinarily efficient operating (a') Rental income or 'usable condition are considered a repair expense. Any expenditurewhich (b) Rental expenses appreciably adds to the (2) To familiarize participants - value, utility, or useful life of with the three princi- the property is a capital expenditureand not a, repair pal methods of computingdepreciaton. expense.

Rental Income Other Expenses Other expenses include such items Gross income specifically includesincome from rents. as advertising, jan- "Rent" is generally the money itor and maid service, water, fuel, fireand liability in- or consideration receivedsurance, taxes and interest. Insurance premiums paid in -tor the occupancy of real estate oruse of personal property. advance are deductible over the period the insuranceis in effect. A worthless debt from unpaidrent is not deductible unless the unpaid amountwas included in income. When Reported V Rental income may be reportedon the cash or ac-Part BusinessPart Personal crual basis, but rent received in advancemust be included in income in theyelurs,eiyestregardlessofthe If a taxpayer rents his residence toa tenant,the_. accounting method used. In addition, theamount ofdepreciation, repairs and otherexpenses incurred in advance rent may not be reduced byexpected expenses. connection with such propertyare deductible in full. Example: Taxpayer enters intoa ten-year lease to However, if only part of the residence is rentedout, the expenses must be allocated. rent his property for an annual rental of $5,000.In the first year, in addition to $5,000 for thatyear's rent, he Example. A taxpayer ownsan eight room house, and also receives $5,000 in advace for thelast year of the rents two rooms to college students. In determining the lease Taxpayer must report $10,000in income without amount of expenses attributable to the rental portion, reduction for anticipated'expenses or losses in the firstthe house is consideredV4 rented. The following ex- year. penditures would be prorated as shawn:

Security deposits received for the lessee'sperformance Deductible under the lease are not usually includedin income when Allocations row Tic° Rooms received. Howeveri,--They are includedas income when and to the extent appropriated by Utilities $400 x 1/4 $100 the lessor because of.Repairs 200 x 1/4 50 a default by "the lessee. If an amount designatedas a Taxes 600 x 1/4 150 security deposit. is to be applied interest 300 x 1/4 75 as payment of rent for Depreciation the last year of the lease, it isadvance rent and must be 500 x 1/4 125 reported when received: Upon converting rental property into hispersonal Amounts received by a landlord froma tenant for residence, the owner will be deprived ofdeductions for cancellation of a lease hre income inthe year received.depreciation, upkeep, and other business-typeexpenses Any expenses of the landlord paid bythe tenant mustsuch as insurance. Mortgage interestand real estate also be included in the landlord'sincome since, in effect, taxes will continue to be deductible, but onlyas an the tenant is paying additionalrent. itemized deduction from adjustedgross income. Improvements by a tenant to leasedproperty, gener- The conversion of the propertyto a personal resi- ally are not income to the landlordeither when made dence will not be a "disposition" forthe purposes of the 03 or when the lease ends. Gainor loss is recognized onlydepreciation recapture rules. Therecapture will occur when the property is disposed of.But, when a tenantwhen the property is soldor otherwise disposed of in a makes an improvement instead ofpaying rent,'the fair transaction in which gain is recognized. market'value of the improvement isincome to the land- A taxpayer who rents toa friend or relative without lord when the improvement ismade. When the fairthe objective of makinga profit may deduct certain market value of these improvementsare included initems such as interest and stateand local property gross income as rent, an adjustment to the basisof the taxes. These are deductible whetheror not profit is the property may be made. objective. The taxpayermay also deduct certain items that would normally be deductible only ifthe rental activity were engaged in' for profit, Thesedeductions Rental Expenses are limited to the extent that gross income from the rental exceeds deductions allowed whetheror not the The expenses deductible from gross rentsare divided rental is engaged in for profit. The deductionsmust be into three broad groups: (1) depreciation,(2) repairs,taken in the following order: and (3) other expenses. (1) interest and taxes; 54

r t) (2) operating expenses, except those in item (3)(to (b) Furniture, fixtures, and machinery used for the extent of income) ; business or rental purposes. ,- . (3) depreciation and other basis adjustment items. (2) Some examples of intangible property are: Where property is held primarily for personal use, (a) Patents, copyrights, licenses and franchises. but is occasionally rented, such as a vacation home,the (b) Contracts which have a definite life. expenses are deductible only to the extentof any rental income received. Basis for ComputingDepreciation ..., In general, the basis for computing depreciationis the Depreciation same as the basis .used to determinegain if an asset is and its sold. This means that basis is dependent upon the man- In this section, depreciation will be defined ner in which an asset is acquired. If an assetis acquired purpose discussed alongwith an explanation of the by an outright purchase, the basis is cost. If an assetis depre- methods available to the taxpayer for computing acquired by an exchange with no cash paid or received, ciation. the basis is the same as the basis of the asset given upin the exchange. If the asset is acquired by gift, thebasis Depreciation Defined shall be the same as it would be in the hands of the 4 donor. If the asset is acquired by inheritance.the basis In general, depreciation of an asset,due to Stich decedent's death or later normal obsolescence, is a ,is the fair market value at causes as wear and tear, or alternative date, if elected. other basis of an asset to means of spreading the cost or Example: If a taxpayer exchanges rental property the period of time over which itis estimated that a asset.), having an adjusted basis of $20,000 for another rental benefit wjlI be derived from the ownership'of such property having a fair market value of $35,000, hisbasis in the property acquired is the same as the property Conditions Necessary to given up, or $20,000. Allowance of Depreciation The term "adjusted basis" may be defined as the cost exist of the property plus improvements less depreciation There are three basic conditions which must deducted or deductible, whichever is greater. before an allowance for depreciation maybe taken: In the case of property acquired for personal use (1) There must be a depreciable interest in property. such as a residence or automobile, and subsequently That is, the taxpayer must be the owner of theproperty. converted to business use, the basis of the property is its (2) The property must be used in thetaxpayer's cost or fair market value, whichever is lower, atthe income. trade or business, or held for the production of time of conversion. (3) The property must have a limited anddetermi- If an asset is used for- both business and personal nable life because the investment to be recoveredby purposes, only that part of the depreciationwhich is depreciation allowances must be charged off over theproperly allocable to business may be deducted. useful life of the property. If an asset would lastindefi- Basi- nitely there would be no depreciation allowance. Allocation of Purchase Price Between Land cally, this is the reason why land is not depreciable. and Building When Depreciation is Allowed If a taxpayer purchases improved real'estate,the purchase price must be allocated between land (nondepre- Depreciation begins when the asset is placed in serv-ciable property) and the building. ice and ends when it is retired from service. A propor- Example: Taxpayer purchases an apartment building tonate part of one year's depreciationis allowable forand land for $30,000. Fair market value of theentire the part of the first and last year duringwhich theproperty is $30,000, and the fair Market valueof the asset is.in service. For example, if a taxpayer usingthe building is $20,000. The total price 'should be allocated calendar year purchases an asset and places it inservice $20,000 to the building and $10,000 to the land. on July 1, he is entitled to six months'depreciation for the year. Accounting for Depreciable Property A taxpayer should claim the properdepreciation deduction for, each tax fear. If a taxpayerfailed to Depreciable property may be accounted foi by treat- deduct, reasonable depreciation sustained in pilor years, ing each individual item as an account, or by combining he may,not deduct the unclaimed depreciationin the two or more assets in a single account.Assets Similar in current or any later tax year. kind with approximately the same useful lives may be grouped together or assets may be segregatedaccording Property Subject to Depreciation to use. In general, the property subject to depreciation may Determination of Useful Life or Rate be' classified into two categories: (1) tangible property and (2) intangible property. The useful life of a depreciable asset is the period (1) Tangible property consists of real propertyand over which the asset may reasonablybe expected to be personal property. Some examples of such property are: useful to the taxpayer in his trade or business or in the (a) Buildings used for business purposesor held production of his income. The useful life is dependent upon the age and condition of the asset whenacquired, for rent. r- 55 6u N , ' i. taxpayer's policy as to -repairs andupkeep, and other ,'.., . conditions. value is not deducted prior to applyin&the rate. How- ever, property must not be depreciated below itsreason- 11f the taxpayer doesnot have adequate experience in able salvage value. Under this determinin?, a useful life, or theasset is new to him, he method the greatest may ,,use the general experience in the industry. amount of depreciation is taken in the firstyear of rue, with continually decreasingamounts in later years.

` Salvage Value Twice the Straight Line Rate Salvage value isan estimateof the approximate This maximum rate may be used amount that will be received upon the sale on property having or other a useful life of 3 years or more that is acquirednew or disposition of an asset, when it is retired fromservice. is constructed by the taxpayer after This estimate is determined by the December 31, 1953. taxpayer at the time If real property, it must be acquiredbefore or construc- theassetisacquired. Unless the declining balance tion begun before July 25, 1969, andthe original use of method of computing depreciation isused, salvage value the property must start with the must lie deducted from the basis of the taxpayer. However, all asset to deter- new residential rental property may be depreciatedat mine the basis to be used in computingthe annual twice the straight-line rate. (To qualify depreciation deduction. If personal as residential property (other than rental property 80% of thegross rental income from livestock) with a useful life of threeor more years is the property must come from the acquired, salvage may be reduced by rental of residential any amount up to units, not transient housing, for eachyear twice the 10 percent of the basis of theproperty. straight-line rate is used.) Example: Taxpayer purchaseda new saw for his Methods of Computing Depreciation business two years ago. Cost of thesaw was $4,000 and estimated useful life is 10years. Under the straight line In computing depreciation any reasonablemethod Method of computing depreciation, which is consistently applied by thetax .a er ma be ten years is equiva- use' 4 ,Since-the-saw-qualifies-for-twice owever, the tree methods which are commonlythe straight line rate, used are:(1)the or 20%, depreciation would be straight-line,(2)the decliningcomputed as follows: balance, and (3) the sum-of-the-years-digits. Any change in the method of computingthe depre- Allowable ciation allowances with respectto a particular account is Computation heat eciation Last year.. $4,000 times 20%$800 a change in method or accounting, and sucha change This year.. (S4,0004800) will be permitted only with the $3,200 times 20% $640 consent of the Commis- Next year .. ($3,200-$640)$2,560 times 20%$512 etc. sioner, except that certain changesto the straight line method of depreciation will be permittedwithout con- One and One-half Times the Straight Line sent. Rate This rate may be applied to usedtangible personal .Straight-fine Method property (or new property acquired before January1, The straight-line method of computing 1954), having a useful life of 3years or more, used real depreciation property acquired before July 25, 1969, and may be used for either new or used property. Underthis new real method, the cost or other basis property (other than new or certain used residential less salvage value,is rental property) acquired after July 24, 1969. deductible in equal annual amountsover the estimated 'useful life of the asset. Example: If in the above e:tar.Iple thetaxpayer had .. purchased a used saw, the maximum declining balance Example: On January 2, taxpayer purchaseda ma: chine for $2,800. He estimated the rate would be 15% (11/2 times the straight linerate of useful life of such 10%). Thus, the depreciation for the machine to be threeyears and the salvage value to be year of purchase $400. However, he elects to disregard $280 would be $600 (15% of $4,000) andfor this year of salvage would be $510 (15% of $3,400),etc. value (10% of $2,800). His annual depreciationwould be computed as follows! .L. One and One-fourth Times the Straight Line Rate Cost of machine .. . $2,800 Less: This is the rate that can be usedon used residential Eitimated salvage value 120 rental property adquired after July 24, 1969,and having Depreciable basis .. $2,680 a useful life of 20 years or more that meets the 80% Annual Depreciation ($2,680 x 331/2%) $ 893 gross rental test explained above. .. . Example: Taxpayer purchaseda used apartment Declining Balance Method building at the beginning of 1974 for$100,000. The estimated useful life of the building is 25years. 9'3% of Under the declining balance methodthere are three the gross rental income is from dwellingunits. Under.% maximum rates that may be useddoublethe straightthe straight line method, the line rate, one and one-half the straight-line rate would be 4%, but rate, and onesince the property qualifies forone and one-fourth times and one-quarter the straight line rate. Thedepreciationthe straight line rate, the declining balance is computed by subtracting from rate would the basis each year the be 5%. Depreciation for 1974 would be $5,000 depreciation of the preceding (5% of year and multiplying the $100,000), for 1975 depreciation would be $4,750(5% rate times the constantlydeclining balance. Salvageof $95,000).

56 6i Sum-of.the-YearsDigits Method Election To use the additional first-year depreciation allowance This method is allowed only on property which meets the taxpayer has to make an election. He makes this thestjaight line rite ex- the requirements for twice election on a timely filed return showing the additional plained under the declining balance method. first-year depreciation on a separate line for each asset The depreciation is computed by applying a different selected for such additional write-off. fraction each year to the basis of the property less its For more detailed information concerning deprecia- salvage value. The denominator of the fraction is the tion methods see Chapter 20 in Publication 17. total of the numbers representing the years of useful life of the property. Thus, if the useful life is five years, the denominator is 15 (1-1- 2 -I- 3 + 4 + 5 = 15). Quiz for Chapter 6 The numerator of the fraction is the number of years of remaining life at the beginning of the year for which Continuing Problem the computation' is made. Thus, if the useful life is five Part 4 years, the fraction to be applied to thecost minus salvage to figure depreciation for the first year is 5/15. A. Rental Income The fractions for the remaining years would be 4/15, From the following information, prepare a 3/15, 2/15, and finally 1/15. SCHEDULE E Rental income: House (wood and brick) located at Example: On January 2, 1971, taxpayer purchased an 101.2 Main St., Dallas, Texas. asset for $3,400 having an estimated useful life of five Amount of rent: $200.00 per month for 12 months years. The estimated salvage value is $400. The annual of 1975. depreciation allowance would be: Information for depreciation: Cord or other Depreciation The house and lot were purchased 12 December brim,' iv,. malvage Fraction Allowable 1967 for $22,800.00; of which $20,000.00 was the /971-- 1-3;g,00 11-5 cost of the-house. Lieutenant-Mankat $3,000 41, 800 :115 house until 28 December 1972. The tenant moved 197) 53.000 . 600 January 1973. Fair market value of the 1974 '83.000 215 400 in on 1 1975 53.000 I i5 200 house on 28 December 1972 was $25,200.00. Assume: (1) No salvage value to be considered. (2) The house was rented unfurnished. Additional First-Year Depreciation Method of depreciation: Straight line A taxpayer. except a trust,can elect to claim an Estimated useful life: 40 years initial deduction equal to 20% ofthe investment in Other expenses. Interest on Mortgage .. $500.00 qualifying property in addition to the ordinary first-year Real estate taxes ... .. 400.00 depreciationdeduction.This 20%applies onlyto Insurance 50.00 $10,000 of investment on a single or separate return Realtor fee.. . 120.00 and to $20,000 on a joint return. The full cost or a. fractional part of the cost of ,an item may be selebted B. Completion to for the additional depreciation deduction, but only up Complete the income tax return of john A. and Betty an aggregate cost of $10,000 ($20,000 onjoint return). Mankat begun earlier. Compute income tax and balance The limit applies to each taxpayer, not to eachbusiness of tax *dueor overpayment. Additional information in which he has an interest. - not consideredin computing the needed: Saluage value is Home address: 22 Greenhill Ave., Oxon Hill, Maryland 20%. However, in computing normal depreCiation,the first-year 20021, Prince George's County basis must be reduced by both the additional Lieutenant and Mrs. Mankat have one child, Ann, age .allowance and 'Salvage value (if salvage value is afactor 12, who lives with them, and whose exemption they are in the method of depreciation used). entitled to claim. Example: On January2; a taxpayer, who uses Income tax withheld from Lieutenant Mankat's salary machine straight-line depreciation, paid $10,000 for a by U.S. Air Force: $1,246.40. esti- with a useful life of ten years. Salvage value was Income tax withheld from Mrs. Mankat's salary by U.S. allowance is mated to be $1,500. The initial first-year Air Force: $735.60. $2,000 (20% of $10,000). This reduces the basis for Fill in all appropriate spaces on Form 1040, supplying for normal depreciation to $6,500. Normal depreciation, all missing information as necessary. first year is $650 (10% of S6,500). The total allow-

ance for the year is $2,650. C. Amended Return The additional first-year allowance is allowedin full, regardless of when during the year the propertyis Suppose on 15 May 1976 Lieutenant Mankat realizes acquired,or the depreciation method used. he forgot to claim a $400 interest payment made to the National Bank of Dayton, Ohio on his original return. Qualifying Property Prepare a Form 1040X correcting the original filing. To qualify for the additional first-yeardepreciation (The 1040X can be used to correct any errors, omission the property must be tangible personal propertyand of income, and unclaimed deductions suchas itemized must have a usefullifeof at least six years when deductions. This form is designed to expedite the proc- acquired. The property may be new or used. essing of the claim.)

57 Chapter 7. Aliens

Introduction Discussion of dual-status taxpayers(taxpayers who This chapter discusses the twotypes of aliens, i.e.,are nonresident aliens and resident aliens forpart of fesident and nonresident. Filing requirements the tax year) is not included in thiscourse; however, of residentIriternal Revenue Service Publication aliens (foreign nationals whoare residents of the U.S.) 519 thoroughly are briefly discussed. Special emphasis is covers the tax problems in this area. A dual-statustax- placed onpayer is required to file a Form 1040. soldiers mauled to nonresident aliens (foreignnationals not living in U.S.). Alien Members on ActiveDuty Objectives Alien members on active dutyare treated, for mili- Participants should be able to explain thefollowing tary administrative purposes, as resident aliens,and in- concepts: come taxis withheld on the same basis as that of (1) The different status of aliens, i.e.,resident andcitizens of the United Stateson active duty. This does nonresident. not mean that at the end of a taxableyear an alien is (2) The unusual tax principles applicableto situa-precluded from proving to the DistrictDirector of In- tions where U.S. citizensare married to nonresidentternal Revenue that he was in fact, duringthe year, a aliens. nonresident, alien. A resident alienor citizen of the (3) The application of communityproperty law toUnited States is liable for taxon income sourced both the above situation. withinand without theU.S.A.,' andfilesa Form Applicable form for this chapter: 1040 return. A nonresident alien,however, is liable only Form No. with respect to income sourced withirtthe United States. The source of compensation for services NRiftl:STT-0-1 re_ncleLcdAi.e., nresident alien Income tax return filed military taxable pay) is the place wherethe services are with the IR Service Center, 11601Roosevelt Blvd., performed. A nonresident alien who Phila., Pa. 19155. has performed services in the United States during (betax year files an annual tax return on Form 1040NR,regardless of the Returns Filed' by Aliens amount of his U.S. sourced income. For income tax purposes, aliensare divided into twoEnlistees classes: (1) resident aliens; and As a general rule most alien enlisted personnelin the (2) nonresident aliens. Armed Forces would likely qualifyas reside% aliens for tax purposes. This would almost certainlybe true of the Resident Aliens alien who has lived in the United Statesfor a number of .: years before enlistment. In time ofpeace the pertinent A 'resident alien is an alien who is actuallypresent orenlistment requirements of the ArmedService stipulate residing in the United States and isnot merely a tran-that no person may be accepted forenlistment unlqss he sient ui Jujourner. For income taxpurposes, an alienis a citizen or has been lawfully admittedto the United whose stay in the United States is limitedto a definite States for permanent residence underthe applicable im- period by immigration laCvs is generally heldnot to be a-migration laws. These two characteristics,f.e., voluntary resident alien. However, a rebuttablepresumption enlistment in the Armed Forces andadmittance for residence arises if an alien has resided inthe U.S. *,offorpermanent residence, in most cases,are enough to class- as much as one year. ify an alien enlisteeas a resident alien. Aliens who are The sSme provisions for Klingreturns apply to resi-present in the United States merely becauseof military dent aliens that apply to citizens of the UnitedStatei. assignment and who have agenuine residence outside of the United States are nonresidentaliens. A preponder- Nonresident Aliens ance of Filipino enlisted personnel in the Navyare not immigrants and they do not intendto become citizens. A nonresident alien is an alien individualwhose residence is not within the United States and who is not aMilitary Personnel Married citizen of the United States. He is liable fortax only on To Aliens income from sources in the UnitedStates, andhe files a Form 1040NR on or before 15 June followingthe endGeneral Rules of the calendar year. Why it isimportant for tax pur- It is most important to rememberone rule, . ..a poses to determine the residency status ofan alien isjoint return may not be filed now obvious. A resident alien is taxed if either spouse was a on all of hisnonresident alien during any part ofthe tax year. income, wherever the source may be, buta nonresident Therefore, soldiers married to nonresidentalien wives alien is liable only fqr his U.S. sourcedincome. - may not file a joint return. For detailed information concerning thetax problems The nonresident alien spouse need of an alien an excellent publication is not file a Federal prepared by theincome tax return reporting her income Internal Revenue Service. (Publication519, U.S. Tax from sources Guide for Aliens.) without the United States during theperiod that she remains a nonresident alien. 58 63 The U.S. citizen: interest from certain banking institutions, as well as (1) May claim an exemption for his wife if she hasdividends from certain corporations, are not considerd Publication 519, U.S. no U.S. sourced income. as income from U.S. sources. (See (2) Is limited to a $1,300 maximum percentageTax Guide for Aliens.) This is true, even if the stock is maintained in the husband's name. standard deduction for 1975. the (3) Is limited to a low income allowance of $950 for Dividend income from stocks purchased by husband before the marriage is not community property 1975. (4) Under certain conditions, may claim head ofin most instances. However, if ownership was changed, household status by virtue of maintaining a household to joint ownership, itwould be community property, income. In those cases, one-half of the dividends would for a relative (not his spouse). . belong to the wife. If the nonresidentalienwife has realizedU.S. Servicemen Domiciled in sourced income as the result of applying these commu- Community Property States nity property principles, the income is to be reported on Form 1040NR and taxed at a rate of 30% (or lower (Arizona, California, Idaho, Louisiana, Nevada, NewTreaty rate), but only if the items of income are not Mexico, Texas, and Washington) effectively connected with the conduct of a trade or If the husband is domiciled in a community property business in the U.S. State, serving in a military capacity abroad, and married Married couples claiming the benefits described in to a nonresident alien wife, half of his earningsbelong this section should be certain that the wife has the status to her and half of his withholding tax isattributable to such earnings. Conversely, if the wife has income,halfof a nonresident alien and that the husband is domiciled of her income belongs to him. This is not the case,in a community property State. however, where the husband elects to have foreign com- As to the former, if' the wife has been to the United munity income treated specially. To do so he must fileStates, has ever applied for United States chtizenship, or has a re-entry permit, there is a possibility that she is a the Election for---Treatment-ofIncome_Subject_to Com- resident alien living abroad anti subject to tax, rather munity PrOperty Laws." Under this election community property income' will be genrally treated as belongingthan a nonresident-alien. For example, Sgt. Jones marries a nonresident alien to the spouse earning it. In this connectionownership of such income is determined in accordance with the com-while he is- stationed in England. After serving his tour munity property laws of the foreign domicile. The halfof duty there, he and his wife return to the United of the husband's earnings belonging to the wife is notStates on military orders for a further tour of duty. At subject to tax, because a nonresident alien does not havethis point she will generally be considered a resident alien and a subsequent tour of duty outside the United to pay tax on income from sources without theUnited States; and as previously stated, the source of militaryStates would not change her residency status. The question of domicile is extremely complex and pay is the place where the services areperformed.. Such a marital situation results in a tremendous taxsavings. important and warrants a spmewhat more detailed discussion. Example: If a serviceman domiciled in Arizona is on duty'in England and marries a British citizen, one-half of his pay thereafteris considered to be his wife'swiiat Constitutes Domicile for income, and since his pay is for servicesperformed inCommunity Property Purposes England it is considered to be from a source outside of the-United States. While his wife remains a nonresident The words residence and domicile are often confused; alien she is not required to report her half of his pay ora person may haie severalresidences but only one any of her own income earned outside theU.S.A. fordomicile. Any temporary place of abode may be a resi- federal income tax purposes. dence, but a domicile is a place of abode fixed and The husband would file a Form 1040 to report all hispermanent, or at least, of indefinite duration. Time pay before marriage and one-half of his paythereafter, alone does not make the distinction, for a tentporary and half of her pay thereafter. He may take credit forresidence may extend over years, while a domicile may all taxes withheld before marriage and one-half of those be established by the first moment of occupancy. The withheld after marriage. He may claim a foreign tax question of domicile is a mixed question of law and credit on the taxes paid to the foreign government onfact; the question being largely one of intention to re- the wife's foreign earnings reported by the husband. main for an indefinite time. The domicile of the wife is In addition, he may follow the three general rulesgenerally that of her husband so that for the application outlined above. of the community property doctrines she does not have She would file a Form 1040NR showing no income to reside in the community property state. The intention and claim refund for one-half of the taxes withheldof the taxayer may be determined from actions and after marriage. declarations. A taxpayer's conduct, inconsistent with What constitutes U.S. sourced income to a nonresi- vague expressions of intentions, is more persuasivethan dent alien spouse of a serviceman domiciled in a com-words. If a taxpayer has left an established domicile, munity property stateisinteresting but complicated.there must be a persisting intention to return, or his Generally, all interest and dividend income received by domicile will be considered as changed. Where there is a nonresident alimindividual fromthe United States ordoubt on the question of domicile, the domicile of ori- certain domestic and foreign corporations during his'tax gin may revert. year constitutes gross income from U.S. sources:How- The following are a few court decisions worthy of ever, there are exceptions to this general rule wherebynote on this subject:

59 64 r

(1) Temporary residence,even if of long duration, tialelements of domicile. Supreme CourtDecision in merely to transact businessor engage in employment is Texas v. Florida. 306 U.S. 398 (1939) not sufficient for theA.cquisition or change of domicile. The Supreme Court Decision noted in Henry A. Huchins, 8 T.C.M. 809 (1949) 10 above is the most important decision to date in the attemptto define (2) Itis essential that the intention to establishadomicile. domicile of choice relates to the present and not to the Two examples of military situationsconnected with future. Richard M. Gooding, 270F.2d 765 (D.C. Cir. 1957) community property laws are illustratedas follows: (1) The fact that a young man born and raisedin An infinite variety of factual criteria havebeen used Maryland spends his young adult life by the courts in determining domicile. roaming through Some of thesethe United States, working at odd .jobs untilhe arrives cases are enumerated below: in San Francisco, California, where he immediately (1) Original residence, home, businessinterests, chil-joins the Navy and ships out to foreign parts would dren's school, clubs, attendance, bank not, accounts, chargein itself. qualify him for thecommunity property rights accounts and ration books in St. Louis prevailedover of California; business quarters home registry for draft,clubs and (2) A serviceman born and raised in membership inbusiness organizations a community inCalifornia. property State joins the military asa career man. He Francis E. Fowler. Jr.. 4 T.C.M. 520(1945) (2) Residence marries a nonresident alien from a country which isnot for8 months, employmentfor8 a community property country. Upon retirement from months and oral testimony ofintention to remain in the military he decides to remain in the Texas was insufficient against foreign country, no home, absence of vot-raise his family, establisha permanent home there, and ing, no taxes paidor investments made, parents in devote the remainder of his days to livingin such coun- Indiana, single income tax return, andno return to tryFor tax purposes he has abandoned his Texas thereafter Paul Grafe. 5 81 (1946) domicile in a community property State by shifting his doimcileto a (3) Birth, original house, voting. polltax payment.new place Therefore, he would not be entitled registry for draft to any hank,account. stock brokerage split income prat Psi0115.-4-COMITItifittyproperty-la count, marriage, and central branch of father'sexport If the taxpayer is domiciledin a community property business in Texas prevailedover the conduct of domes-state and marries a nonresident alien. the tic tax savings is business, auto license, country club membership,substantial However, the question ofdomicile, as and continued residence in North Carolina can with wife. beseen from this brief study, must be decided bynot Pietro Crespi, 44 BTA 670 (1941) only the taxpayer's words but also his actions. .(4) Mere absence from abode, howeverlong, without intent to change domicile, does not effecta change ofdomicile.Sampsonv.U.S, 63F.Supp. 624Information To Be Filed WithReturns (D.C.N.D. Cal. 1945) When a United States citizen, domiciled ina commu- (5) Residence for 9 months chile buildinga ship- nity property State,is married to a nonresident alien', yard, visits from family after school andletters indicat- wife and theyv, ish to file Forms 1040 and 1040NR ing the possibility of permanent abodein Texas were respectively,the returns of both husband and wife insufficient against failure to establish a house, his de-should contain a similar statementsetting forth names parture on completing of the joli and his livingout of aand addresses-of both spouses, employers, suitcase while in Texas. George C. Westervelt, periods of 8 T.C. employ ment in foreign countries,wages earned by both 1248 (1947) spouses during such periods. total wages from employ- (6) The time of change of domicilewas found to he ment within the United States, details ofincome tax the date that certain financial arrangements fora reorg- withheld. the date of marriage, the placewhere the anized corporation were concluded, it having beenthe husband filed his income tax returns, thedeductions that taxpayer's intention to change his domicileto California the husband has taken, factsconcerning his domicile in when the arrangements were concluded. Northropv. a community property State, and facts relatingto the Comm., 49-2 U.S.T.C. 9406 (CA 9th, 1949) wife being a nonresident alien. (7) Original domicile, renting of home, polltax payment, voting, safe deposit box, visits to church,mem- Summary bership, ownership of real estate, interest ina printing partnership in Texas and residencein Michigan in ho- Returns Fileci,by Aliens tels or furnished apartments prevailed over an originally Resident Mien brief period of employment in Michigan which,during the taxable period involved, had been extendedto five (1) When stay exceeds one yearrebuttablepre- years. Eddy R. McDuff, 3 T.C.M. 882 (1944) sumption arises that taxpayer isa resident alien (8) A domicile once acquired is presumedto con- (2) Taxable on income fromallsources tinue until it is shown to be changed. Mitchellv. U,S., (3) Files Form 1040 88 U.S. 350 (1874) (4) If both spouses are residentsor U.S. citizens for (9) However, residence elsewhere rebuts thepre- entire year they can file a joint return, sumption, and casts upon him who denies itto be a domicile of choice, the burden of disprovingt.it.-Ennisv. Nonresident Alien Smith, 55 U.S. 400 (1852) (1) One who is neither U.S. citizennor resident of (10)Residence in fact, coupled with the purpo'seto U.S.A. make the place of residence one's home, are- the essen- (2) Taxable onU.S. sourcedincome only. 60 6 ,i (3) Files 1040NR. (I) She would report one half of the withholding (4) May not file joint return. on her husband's pay and claim refund of such amount. Notes: Alien Members on Active Duty (1) Both taxpayers must submit statements establish- ing domiciles, residence status of wife, where the in- Enlistees are usually considered resident aliens. come is earned, etc. (2) If wife has U.S. sourced income through com- Military Personnel Married to Aliens munity property law she must reportit on 1040NR (1) Married to resident alien Treat like U.S. citi-(i.e., dividends, interest, etc.). zens (joint return, etc. if alien spouse resident forentire year). (2) Married to nonresident alien(Very important) (a) He files 1040 return. (b) May claim wife's exemption only if she has noQuiz for Chapter 7 U.S. sourced income andis not the dependent of another. QuestionAnswer Quiz (c) Is limited toa $1,300 percentage standard deduction or S950 low income allowance for 1975. 1. The' following questions are asked by a Navy (d) May check Unmarried Head of Household officer, a resident of New York, who is on duty status on return if he maintains a household for a de- inJapan. His taxable incomeforthetaxable pendent (not his spouse because she is an exemption year is $7,500. His wife, to whom he has been isJapanese and has but never a dependent). - marriedfor threeyears, (e) The wife need not file a return provided she never visited the United States. She earned$1,500 has no U.S. sourced income. If she does, she will likely from employment in Tokyo, Japan during the le a0 'an taxableyear. claiming her exemption. a.Is he required to file a U.S. income tax return? (3) Husband Domiciledin Community Property b.Is his wife required tosfile a U.S. income tax StateMarried to Nonresident Alien(Very impor- return? t tant). c.If they had returned to Yonkers, N.Y., and (a) He files 1040. became residents of that city on 1 Nvember of (b) Reports all his salary before marriage and half the taxable year, how should they file? Sepa- his salary after marriage, plus half of her earnings after rately, joiritly, etc.? marriage. 2.Capt. George Wilson, a United States citizen, dom- (c) Reports all his withholding before marriage iciled in Maryland, was stationed in Tokyo, Japan. and one half his withholding after marriage. On 12 Feb., he married a nonresident alien and he (d) May claim a foreign tax credit if taxes paid to and his wife remained in Japan for the remainder foreign government on half of wife's earnings reported of the year. Hjs income was $8,900.00. His wife on his return. had a $3,000.00 salary earned in. a Tokyo beauty (e) Reports all income from assets acquired before shop. She was not..the dependent of another and marriage whether such income is earned before or after had no U.S. sourced income. The couple had no marriage. children or dependents. (f) Reports one half income from assets acquired a. What reftirn would Capt. Wilson file? after marriage. b.Could he and his wife file a joint return? (g) May claim Wife's exemption if she has rio U.S. c. What-tax table would Capt. Wilson computehis sourced income other than interest from true bank ac- tax under? count. However, one half of the dividend income or d. How many exemptions would he claim? capital gain on assets acquired after marriage even e. Would Mrs. Wilson file a federalincome tax though in husband's name would be her U.S. sourced return, and, if so, which form? income; therefore no exemption for the wife. 3.Sgt. Smith, from California, marries Miss Kim on (h) Limited to a $1,300 percentage standard de- 1 June. From 1January to 31 May, Sgt. Smith duction or $950 low income allowance for 1975. earned $3,000. From 1June to 31 December, (i) He may check Unmarried Head,of Household while married, Smith earned $5,000. Miss Kim's on return and claim such status if hemaintains house- earnings were $1,000 before marriage and $1,500 hold for a dependent (not his spouse). after Sgt. Smith was in Korea the entire year. (j) Nonresident alien wife files a Form 1040NR if a. Can Sgt. Smith file a joint return withMrs. she has U.S. sourced income. Smith? (k) If the spouses are living outside the U.S.A. the b. What income does Sgt. Smith report on Form wife's share of the husbands' salary is sourced outside 1040? the U.S. and therefore not reportable by her (source of c. ,Does Sgt. Smith have a choice of a standard salary is where it is earned). deduction or itemized deduction?

61 Chapter 8. Section 911Exclusion of Earned IncomeFrom Sources Without the UnitedStates

. Income from personal services 'rendered abroadby becomes a bona fide resident immediately U.S. citizens up to stipulated maximum upon so doing. amounts isEven though this person may haveidintentionto return exempt.from U.S. tax. However, U.S. citizens, whoare to the United States at some indefinite time in thefuture, U.S. Government Employees or members ofthe U.S.a person can still be a bona fide foreign resident. On the Armed Forces are not entitled to exclude compensationother hand, one who goes to received from such government employment a foreign country for a or from definite purpose that can be promptly accomplishedis a any of its agencies or instrumentalities. For these other transient. U.S. citizens to qualify for exemption, theymust meet There is no all-inclusive test either of the following circumstances: or definition of bona fide: foreign residence. In considering this issue in the (1) A bona fide resident of a foreign country, who many litigated cases, the courts have given much weightto the has-been such for an uninterrupted periodthat includespurpose of the trip abroad, intended and actual length an entire taxable year, is exempt from taxon the first of stay, whether the family accompanied the individual, $20,000 of wages earned abroad fora full tax year. Iftype of quarters occupied, and participation in local an individual has been a bona fide resident of a foreign social organizations. Once bona fide residence ina for- country for an uninterrupted period of 3 consecutiveeign country has been established,temporary visits to years, this individual is allowed an exclusion of $25,000 the United States or elsewhere on vacationor business with respect to that portion ofa taxable year occurringtrips will not interrupt the period of bona fide foreign after the expiration of the threeyear period. residence. Abandonment of a foreign residence (2) An individual who has been physically present in simulta- neously with a trip to the UnitedStates preliminary to u tdays (approxi-transfer to another foreign post may terminatea period mately 17 months) out of 18 consecutive monthsis of bona fide foreign residence. exempt from tax on the first 520,000 ofwages earned An individual will not be considered to be abroad for a full tax year. This limitation remains a bona fide at resident of a foreign country if he (1) makesa state- $20,000 regardless of the length of time theindividualment to the authorities of that country that he isnot a may be physically present in a foreign country. resident thereof, (2)' has earned income froma source These exemptions apply only to compensationre- within such country, and (3) the officialsthere hold ceived for personal services rendered abroad.They dohim not subject to income taxas a resident of that not apply to investment income, capital gains,or com-country. pensation received for personal services rendered inthe United States on a trip there; all suchamounts are taxable. Physical Presence Abroad The general rules pertaining to the exemptionof The other means of excluding from earned income, under either of thetwo provisions gross income above, are: dompensation for personal services rendered abroad is for a U.S. citizen to be physically present inone or (1) Compensation for services performed outsidethe more foreign countries for at least 510 full days, ap- United States qualifies even if payment is received inthe United States. proximately 17 months, during any period of 18consec- utive months. The rule is simple but (2) To compute the applicable ceiling, the very exacting: to compensa- qualify, an individual must be on foreign soil for the tion received must be related to theyear in which therequisite time His intentions of 5tay;ng services were performed, even thoughon the cash basis or returning, or the nature and purpose of the stay abroadare imma- compensation is reportable or taxable only whenre- ceived. terial. Any 18 consecutive monthsmay be considered to acquire 510 qualifying full days of physicalpresence (3) No amount received mare thanone year afterin foreign countries. " the encrof the year in which the serviceswere rendered is exempt. A qualifying day means a period of 24consecutive hours beginning at midnight and ending thefollowing (4) Amounts paid by the United Statesor anymidnight. In computing the minimum, of 510 agency thereof are not exempt; thus, the pay received full days of presence in foreign countries, alseparate periods of by a member of the armed services serving abroadis not excludable. such presence during the period of 18consecutive months are to be totaled. If an individual travelsfroni (5) Business expenses allocable to exemptdarned income are not deductible. one place in a foreign country to another place in the same or in another foreign country over a routea .portion of 'which is not within any country, and ifthe Bona Fide Residence travel not within any country is less than 24 hours,the individual is considered withina foreign country during A bona fide resident of a foreign country is one whothe period of that travel, Any day during whicha in fact has established a residence there for ad indefinite person travels in or over the United States or itsposses- period. If a person goes to a foreign countryto worksions may not be counted as a day of physical for an indefinite period and sets up permanent presence quarters in a foreign country. The 510 full days neednot be there for himself and his family, this person probablyconsecutive, but may be interrupted by periods during 82 6. which the citizen is not present in a foreign country.Center, Philadelphia, "Pa., or the local Revenue Service Time spent in a foreign country in the employ of the Representative or other Revenue Service employee. He United States Government will count toward satisfac-must file Form -21106efore the date for filing his re- tion of the 510 full-days requirement, even though turn. If he files on a calendar year basis this would be !amounts paid by such Government are not excludable.June 15. An extension granted will be to a date after IAny period of 18 consecutive months during whichthe time requirements are satisfied. an individual satisfies the 5,10 full days requirement, If he Appliesfor an extension on Form 2350, he even though such period constitutes d part of a longer should not file his income tax return with that form. period of presence in a foreign country or countries, is This is because taxpayers who apply for an extension on permitted. Any period qualifies, commencing with the Form 2350 ordinarily expect to pay no tax because they beginning of any day of a calendar month and terminat- will qualify for exemption after they satisfy the require- ing with the close of the day which precedes that day inments of the bona fide residence .or physical presence the eighteenth succeeding calendar month numerically tests. If he Obtains an extension of time by use of such corresponding to the day of the period's beginning. If form, and because of unforeseen events he finds it im- there is no such corresponding day, the qualifying pe-possible to satisfy the requirements of the above tests, riod closes with the last day of the eighteenth succeed- he should file his income tax return as soon as possible, ing month. Such period need not commence with thebecause interest must be paid on any tax due after the day of arrival in a foreign country nor terminate withregular due date of the return (even though an exten- the day of departure. In no event may the 510 fullidayssion was granted). requirement be reduced by being prorated over a period Notes: A of fess than 18 consecutive months. (1) If the taxpayer will have tax to pay with his Because of the preciseness of the physical-presence return (even after qualifying for the exclusion)it may rule, a careful record of dates and times of travel, withbe advisable for him to,file by the due date of his return _....appropriate documentary support, is important. or 2 months later if he is abroad on the due date. The reason for this is that interest at the rate of 9 percent first Year in a Foreign Country per annum is charged on the unpaid tax from the regu- - Before a taxpayer can exclude personal service in-lar due date of the return to the date his tax is paid. come-on the grounds that he is a'bona fide resident of a (2) In procedure (2) the taxpayer should attach his loreign country for an entire taxable year, or that he Form 2350 to his Form 1040 and submit it to the same has been physically present in a foreign country for 510 internal revenue office where he sent his original Form full days out of an 18 month Fonsecutive period, the42350. taxable year or 18 month period must elapse. A calendar year basis taxpayer arriving in a foreign country onPersonal Service Earnings From 30 September 1975 must file his income tax return for 1975 on or before 15 lime 1976 (assuming he is outsideAppropriated or Nonappropriated Funds the United States on 15 April 1976). However, on 15 June 1976 he is not in the position to state that he has The exclusion from tax does not cover compensatidn been a bona fide resident of such foreign country for anreceived by U.S. citizens from either appropriated or entire taxable year (1 January -1976 h 31 Decem- nonappropriatedfundorganizations(U.S.Armed ber 1976) nor that he has been phys ent in a Forces exchanges, commissioned and noncommissioned foreign country 510 full days out of an consecuti''z oiliccishmesses, armed forces motion picture services, month period (I October 1975 throughI March 1977 andotterorganizations similarly organized and oper- if the taxpayer did not leave such coun for the full ated under U.S. Army, Navy, or Air Force regulations) 18 months). In such a situation, the tpar can follow in connection with the rendition of personal services one of two procedures. abroad for such organizations. Appropriated or nonap- (I) Include such personal seice income earnedpropriated fund Organizations are considered as integral abroad on his 1975 Form 1040 anyubject it to Federal parts of the armed forces, agencies, or instrumentalities income tax. After 31 December 1 or 31 March 1977 of the U.S. Thus, compensation received. from such depending on his qualifying excludable status, he wouldorganizations constitutes amounts paid by the U.S. or file a claim for refund, of the tax paid on such foreign any of its agencies or instrumentalities. In view of this, sourced income, and submit a completed Form 2555 U.S. recipients of such amounts may not exclude them with his claim. He would be entitled to receive interest from U.S. income taxation. on his ref upd. A Form 1040X or 843 may be used in A detailed discussion of personal service income that filing the claim for refund. Use of the Form 1040X is is excludable because of a taxpayer's bona fide residence preferred. or physical presence in a, foreign country has not been (2) He should obtain an extension of time for filingpresented. Publication 54, Tax Guide for U.S. Citizens his income tax return. He may oblhr an extension by Abroad, should be consultedif a situation arisesin applying on Form 2350 to the Internal Revenue Service which a taxpayer has such income.

63 (s r. Appendix An Quiz Solutions 1-74

Solutions for Chapter, 1 QuestionAnewer Solutions 1.a. Yes blNo c. Yes 'YesNo Solutions 2.a. No b. Yes. By filing h return Form 1040or Form A. No / F. Yes 1040A, showing the overpayment and request- B. Yes \ G. No ing the refund. C. Yes H. Yes 3.a. Internal Revenue Service Center D. Yes , 4. No 1160 West 1200 South,,,St. E No k Ogden, Utah84201 lo17 Internal Revenue/Service Center 4800 Buford Highway TrueFalse Solutions Chamblee, Georgia 30006 c. Internal Revenue Service Center I.FSee chart for filing requirements. 11601 Roosevelt Boulevard 2. FIf the gross income of a single taxpayer under Philadelphia, Pennsylvania19155 4.a. No 65 is $2,350 or more, he is required .to filea b. No tax return. If the gross income of a single taxpayer over 65 is $3,100 or more he is required to file a tax return. . Solutions for Chapter 2 3. F Gross income is FMV of $1,350 in thiscase (less than $2,350 requirgd for filing). QuestionAnswer Solutions 4. T . For joint rfturn purposes they are marriedas of the last day of the taxable year. 1. a. Personal exemption $750 for thetaxpayer and, 5. T Sue earned less than $750. if he files a separate return. $750 for hisspouse pro- 6. F Since Jim is remarried he cannot file jointly vided she had no income and was nota dependent of with Sue. another taxpayer. Additional $750 if thespouse is 65 , 7. F He must file since hwhad unearned income. or over and $750 if the spouse is blind. For each othet 8. T qualified dependent $750. 9. F Automatic extension is 2 months to 15 June for b. Personal exemption of $1500 ($750 each). Addi- calendar year taxpayers. tional $750 is allowable if wife is 65or over and/or ,10. F15 April 1976 (3 years from filing or due date $750 if wife is blind. For each other qualifieddependent which ever is later). $750., 2. If not totally' blind, attach to return a certificate c. from a physician skilled in the diseases of theeye or a Multiple Choice Solutions registered optometrist, showing central visualacuity does not exceed 20/200 inthe better eye with corrective I.A. Gross income. -See detailed outline in summary lenses or that widest diameter of the visual field subtends an angle no greater than 20 degrees. for filing requirements. ti 2.D. Over 65 with gross income of less, than $3,100. 3. Support testthe taxpayer is requiredto have contributed more than 50% of the support of the dependent All others must file because they meet the gross income test. for the calendar year. 3.C. If a husband and wife have separate gross in- Gross income testgenerally, a taxpayer isnot en- comes, they may file separate returns or a jointtitled to an exemption for a dependent who received return. If a joint return is filed, al) income ofgross income of $750 or more for the calendar year. each spouse must be included thereineven Member-of-household or relationship test anexemp- though the income of one is less than $750tion may be cOmed for a dependent relatedto the and he would not otherwise be required to file taxpayer, or is a member of the taxpayer's household a separate return. Under no circumstances mayand lives,with the taxpayer for the entireyear. one BO a separate return to receiv,e a refund of Citizenship testgenerally,a dependent must be a tax withheld on wages add then file a jointcitizcn,or national or resident of the United States,or a, return with the other spouse. resident of Canada, Mexico, the Canal Zoneor the 4.B. By remarrying before the end of the year,-.she Republic of Panama. cannot file jointly with the deceased wife but Joint-return tifgenerally, ifa joint return is made can so file with present* wife. None of the others by the taxpayer and his spouse,no other personis are permissible. allowed an exemption for such spouse eventhough the 5. B. It would ordinarily be to their advantage to fileother person would have been entitled to claim an'ex- sepirate returns. A smaller adjusted grosi in-*emption for such spouse as a dependent if sichjoint come allows a 'greater medical deduction. return had not been made. '6.D. False. 15 April (due date is later than filing 4.a. Yes date). b. If a dependent otherwise qualifies, hemay have .14

. gross income of $750 or more and still be a dependentThe daughter was under 19 years of age, a student for if heis the taxpayers' child and (a)is a full-timeover five months, and did not have gross incomeof student, or (b) has not reached the age of 19 by the 5750 or more. close of the taxable year. 12. a. Yes. The requirements have been satisfied in that( I) no one person contributed over half of the 5. Yes, if a legally adoptcd child was a member of con- the citizen taxpayer's household, there is an exception to support, (2) Colonel Howard, Bettsy, and Andrew the rule requiring that a dependent must be a United tributed more than 50% of the parents' support, (3) the Colonel contributed more than 10% off' the total, Statescitizen,national or aresidentofthe United States, Canal Zone, Panama or a country contiguous to (4) Bettsy and Andrew signed a written agreement that the United States. The exception applies to a citizenthey would not claim the dependency exemptions. taxpayer's legally adopted child whose principal place b. Colonel Howard, Bettsy or Andrew (multiple sup- of abode is the home of the taxpayer and is a memberport agreement necessary). of that household during the entire taxable year. The 13. a. Yes. Although a citizen of the United States exception applies if the alien child is a member of the whose spouse is a nonresident alien may not file a joint household for the entire year even though the child isreturn with such spouse, he may, provided' she has no adopted during the taxable year. That is. the child must gross income subject to Federal income tax and was not be a member of the household for the entire year but a dependent of another taxpayer, claim an exemption the parent -child relationship need only exist at the endfor her on his separate return, regardless of her nation- ality or place of residence. of the year. Where the dependent child is a resident of the United b. Yes. Mrs. Thompson's' income was not from States, it is immaterial that the child was not a membersources within the United States. of taxpayer's household during the entire taxable year. c. Na. No joint return shall be made if either the If legally adopted and not a resident of the Unitedhusband or wife at any time during the taxable year is States the dependent child and taxpayer must occupy a nonresident, alien. 14. a.Either WJO Jones, his sister, or the widow same household for entire taxable year. may claim an exemption for the mother providing each 6. The term "support" includes expenditures for food,.other persorin the group files a written declaration that shelter, clothing, medical and dental care, education,he or she will not claim the individual as a dependent and the like. for any taxable year beginning in such calendar year. 7. Yes. The Government contribution is ,nontaxable b. Yes.The written declaration required may be "basic allowance for quarters." made on Form 2120. Any declaration made other than 8. No. A taxpayer's spouse does not meet the rela-on Form 2120 shall conform to the substance of Form tionship test. Yet a $750 exemption is available to the 2120. taxpayer if he files a separate return'and his spouse has c. Each other person in the group not claiming the no gross income and is not the dependent ofanother taxpayer. There is no requirement that the spouse be a exemption. resident or citizen of the United States nor that she resides with the taxpayer as a member of his household.Support Test Problem 9. a. No. Mrs. Briggs' sister was neither a citizen nor a resident of the United States nor a-residentof Canada, 1. Mother Mexico, the Canal Zone or Panama at any time during 2. Father the taxable year. 3. Mother b. Same as in "a". Must be a resident Of theCalla! Zone, Panama, Mexico or Canada. Tax Computation Problems 10.a. No. Since Jane filed a joint returnwith her husband, 'her father may not claim her as a dependent Tax ' for that year even though he met all the other require- a. $ 682 ments for claiming he'r as a dependent. b: $ 790 b. No. On a separate return, you may claim an ex- c. 607 emption for your wife only if she had no gross income d. $ 486- and was not the dependent of another taxpayer. e. $ 395. 11. Major Albeer may claim a dependency exemption f. $ 900 for each of his children. The son qualifies as a depend- $1,791 ent inasmuch as he was a student for over five months. h. $2,187

65 Short Form 1040A Name i f Joint return, stye first names and Initials of both) U.S. Individual Income Tax Return Last name Your social security number InternalDepartment Revenue of he Service Treasury For Privacy Act Notification, -1975 A5 Present home ad :;7121 ess (Number_ and street, Including apartment number. or rural route) see page 2 of Instructions. Z /0S e Spouse's.x5,4 IA./ social : secunty no. ±' 3,$) . For IRS use: only 1 1 City. town or post office. State and ZIP cod. 5--"/----/cee.7-. 1 CensusRequested Bureau by1 eR0E20R.,, /11(9/A/ 6 4-1,/.//e A In what city, town, village,etc., do you live? iti , limitsDo.you of the live city, within town,,/,,, the etc.? legal , 9 /1) d 09 0 (,,,-0 CountyC In what county and State do you live? pafionOccu' Spouse'sYours PI' lix. a -5- /9R/fly State Dyou live (See page 5.) In what township do ri Sharingfor Revenue 1 / Yes 0 No Don't know $ /110/vTG,) 75' =ex 3 02 Married filing separately.IN If Singlespouse is also filing give Mar(ied filing joint return (even if only one had income) RP C- Kl// // e, (check only ONE box) ig o . 6a Regularb First names 9f your dependentlived with you children who Yourself in e a Spouse Enter ncrecbkaterdo;0. i Mc/ Toe-Ksid/ / v. .cV) w 4 0 Unmarried Head of Household (See page 4 of Instructions) namespouse'sand here enter social Ix. full security number in designated space above :11 Eeao2 c Number of other dependents (from line 22) numberEnter. . lo- 0. it 5 El qualifying widow(er) with dependent child (YearIP- 1.1.1 x ed AgeTotal §5 (add or over lines 6a, b,Blind and C) . . . . 0 Yourself 0 Spbuse Yourself 0 Spouse ocheckesinurir,teesEnter 0... / spouse died II. 19 ). See page'4 of Instructions. 7 Total (add lines 6d and e) . a fa- 8 Presidential ElectionCampaign Fund , Do Ifyou joint wish return, to designate does your $1 spouse of you wish taxes to fordesignate this fund? $1? s . . Yes .1 A I No I Note' If r" checkyour box(*s)the tax Yor es"reduce your refund. it will net increase / 115... 10a Dividends9 Wages, (lions at topsalaries, tips, and other employee tt over $400, see Instruc '1. 4. compensation able.(Attach se* rottps pate 6bl-2 of Instructions) . , It unavett . . 9 . irof of pap 3) $ lbb Less exclusion $ . . . Balance . 10c .1 11 TotalInterest (add incomelines 9 10c(if over and $400, 11) (Adjusted see Instructions Gross Income) at top of . 4, g page 3) Ifulgiontshaonn $4020.Liselencirnt a:1Y; . a . . . . -. 11 6,/b-3 ,..6 L,.- _ -- .ilfIs81 If lineItIf youline 12 want12 is $15,000is IRSunder to or$15,000,figure more, your,tax,see figutpfind tax your in page Taxtax using Tables6 of Instructions. the (on Tax 9, pages 8-18) and enter on line 13a, on the back. Computatflan Worksheet on page 18 of Instructions. . 12 i4 *` 7 ,e. -- Form 1040A (1975) Tax Tables (pages 8-18) 1 OR U Tax Computation Worksheet (page 18) 13a Page 2 14a13a BalanceTax, check (subtract if from: lineb Creditb 13bCredit frorri for for personal line contributions 13a). exemptions If less to than candidates zero,(multiply enter for line publiczero. 6d byoffice $30) (see page 7 of Instructions) 1514a b 7f/ L 16a15 Total Federal incomeb tax Excess withheld FICA, RRTA,(attach or FormsFICA/RRTAIncome W-2 taxtax to withheld(subtract front) line 14b from line 14a). If less than zero, enter zero. th"see pillenrOr ina;tPluctionsi 16a S.?, -- Pay amount on line 18 in full ; F v, c 1975d Earned estimated income tax payments credit (include amount allowed as credit from 1974 return) . . . i . / with this return, Write socialjsecuritySAIVOceablemoney number order on andBieck make or pay to Internal Revenue ; 17 Total (add lines 16a, b, c, and d) Da- 1718 a. /Z7 --- 1918 If line 1715 isis'larger larger thanthan lineline 15, 17, enter enter amount BALANCE OVERPAID DUE IRS . 4 ...... 19 4,.... 1 - Itto- 20 ..-,47,,,,..2, . 20 Amount of line 19 to be REFUNDED TO YOU onOP- ,,; ////,;,,,,,,,;,,,,,-,-/,;/ 11 all of overpayment .,/,:// .../ ,, ,;,/,,,/ .4, .,,,, (line 19) ,,,,..," , , ,./ is to be .-, 7 21 Amount of line 19 to be credited . " I I refunded (line 20) make no entry on line 71 .. ,/,' ///, 7,2/.//4; i, 1976 estimated tax (a) NAME (b) Relationship 21 duringhome.(C) Months year. livedwrite inB youror 0 it born or died 17 4 /4/, `//'/// pendentorincome(d) more? have of $750 Did de //&'/ // pendent'sfurnished(e)It Amount 100% support forwrite YOU de- ALL. ///'///by(I) AmountOTHERSdependent including furnished ... . . I Underand penalties complete. of Declarationperjury. i declare of prepafe that I (otherhave examined tha this return, including accompanying schedules22 andTotal statements, number and of to dependents the best of my knowledge listed in column (a). Enter here and on line 6c xpaye?) iy based on all information of which prepare has any knowledge and belief it is true.. correct hereSign rf Spouse's signature Id filing jointly. ISOIM must sign even it only one hadr income) 'nature L,,,t75)647eCV?C) x3Y 1/111' Prapirar s signature (other than taxpayer) Address (and ZIP Code) Date Solutions for Chapter 3 3. B. Thirty-first day of absence. 4. E. None of the above. Multiple- Choice Solutions 5. C. Military retirement, based on length of service. I.D. Unrealized increase in value of property. AllQuestion-Answer Solutions items are included in gross income. 2. E. S5,875. All of the above items are includiblein I Yes He can exclude an entire month's pay forevery gross income. month during a part of which he spends in hospital. He 3. E. S1,700. All of the items are includible in grosscannot claim an extension for filing his return based income. upon service in a combat zone, followed by hospitaliza- 4. A. $800. 4 x $2 x 100 shares. The assignment tion as the result of such service if the hospitalization is of income does not relieve the assignor of thein the United States. He would have to file on orb) 15 federal tax thereon. April. 5. A. $150.00 in 1974 and $304,50 in 1975. Interest 2No. Compensation for personal injury is not includi- is included in gross income in the year itis ble in gross income. credited to his account. 3.a. Reimbursement $175 6. D. $500. Only Car Motor Co. dividends of $400 Less actual expense 150 and U.S. Talk Co. dividends of 5100 qualifyas Includible in income --$ 25 dividends. b. 'Reimbursement --$560 7. D. Cash dividendspaid by a mutual insurancecom- Expenses pany. 650 8. C. $2,400. $3,300 less $900 specified for child Excess over reimbursement...... sup- Not deductible (maid) port. The $500 received for medical bills is not 20 includible because it was not required under the Deductible $130 decree. c. Reimbursement of $380 isincludiblein gross income. Movement of dependents is a qualifying True-False Solutions moving expense and $275 is therefore deductible as a moving expense. 1 2 4.At least 71 miles. (a)-C (a)-F 5.Generally, at least 39 weeks in the 12-month period (b)-C (b)-T following his arrival. (c)-N,C. (c)-F (d)-C (d)-T (e)-N.C. 3-T Solutions for Chapter 5 (f)-N.C. 4-F (g)_c 5-F True-False Solutions (h)-N.C. 1.T (i)--C 2.D (j)-N.C. 3.N.D. (k)-N.C. 4.D (1)-N.C. 5.N.D. 6.N.D. 7.D Solutions for Chapter4 8.T

True-False Solutions Multiple Choice Solutions 1. T I.e. 2. F '2.e. All personal nondeductible expenses. 3. T 3. 4. T c. $240 Property taxes on residence...... $105 5. a. F State income tax 110 5. (cont.) el State gasoline tax b. T.4. f. T 25 C. r g. F Total allowable $240 d. F h. T 4.e. None. Mislaid or lost property is not a theft and e. T i.T. 6. T therefore not deductible. 5.c. None. Termite damage is not sudden enough to qualify as a casualty loss. Multiple Choice Solutions 6.b. Not a recognized charitable organization.

I. B. The value of property acquiredin exchange forQuestion-Answer Solutions services performed. I.a. For 105, the use of the standard deduction is 2. E. All of the above. limited as follows:

68 16% of adjusted gross income up to S2,300 in the 5.a. Nondeductible. caste, of single persons and S2.600 in the case of mar- b. Nondeductible. ried individuals. The limitationis S1,300 in the case c. Deductible. .s of married persons-filing separate returns. d. Deductible. b. No. If the standard deduction is taken, tax credit e. Nondeductible. creditkfor taxes of foreign countries shall not be allowed. f.Deductible. c. No. The deduction of the spouse who itemizes is controlling. The other spouse must also itemize deductions, even though they amount to less than the standard deductions. Solutions for Chapter 7 2.a. None.Itis a donation to an organization not created in the U.S. or any state therein. b. S550, the fair market value of the stock at the date of gift. QuestionAnswer Solutions c. None. Same as 2(a) above. d. None. This is a contribution of a service to a I.a. Yes. private individual. b. No. e. $52. This is considered a gift to an arm of the c. Separately.Underthose conditionsthewife U.S. exclusively for public purposes. would have become a resident alien on 1 November. f. S22.40 t 7c per mile, x 320 miles). Unreimbursed She must be a resident alien for the entire year before expenditure for the use of the car for the benefit of a a joint return may be filed. qualified organization is deductible. 2.a. Form 1040. 3.a. Not deductible. b No. b. Deductible. c. Married filing separate. c. Deductible. d. Two. d. Not deductible. e. No. e. Not deductible. 3.a. No. b. $6,250.Allof his earnings beforemarriage 1. Deductible (S5). w 4,. a. No. Taxes are deductible only ,b)the person (S3,000) and one-half of his earnings after marriage upon whom they are Imposed. They are thus deductible (S2,500) plus one-h'alf of his wife's earnings after mar- by the owner of the property, not the holder of the riage ($750.00). mortgage. c. Yes.

...

, Solution to Continuing Problem (Chapters3, 5 and 5)

Department of the TreasuryInternal Revenue Service 1040 RD Individual Income Tax Return 11775 For the year January 1-December 31 1975 or other taxable year beginning 1975. ending 19 Came r If)mist 't retain pot liFst names and insiais el both, S. Last name ' Your social security number I For Privacy Act Notification, .TORN htof 3crr y /II.", Jr ccr , ($3 43-3 k 7 see page 2 of Instructions. Pitsent home address (Num* and Umincluding apartment number, Of rural route) it Spouse's social security no. For IRS use only 1 ,t ,.. 3 GreeeitthAvernte_ Alp 1.? 3478 , City, tone w post eke. SUN and ZIP node I r7 Oalli Yours 1.4,-Cli.e c* 0,y(en Raj 11')err% iw,voi .1.. 00 Patton 74 x / _ spouse's -0.-4- e a 'entry Requestedby A In what city town, liege, B Do you live within the legal C Inwhat county and State do you live? 0 In what township do CensusBureau etc do you live' limits of the city, town, etc ? County forRevenue State you live? (See page 4 ) Sharing Oxon/ iiaL :Yes Ho El Don't knowfeAlce G e.,,,,e1,s/n,71. 1--1Single (check only ONE box) 6aRegulartg Yourselfig,K of Spouse Cbootatranc== 2X' Married filing joint return (even if onlyone had income) to bFirst namesof your dependent children who ...= 3 II Married filing separately. If spouseis also filing 'give 2 to lived withyours ex spouse's social security number In designatedspace above .o Enter N and enter full numberau. !eb0 name here Pu. ii. c E Number of other dependents (from line 27) . let. .:: 4 Unmarried Head of Household (See page 5 of Instructions) K' dTotal (add lines 6a. b, and c) . . iZ . . . let. 3 so. w eAge 65 or over . . YourselfDSpouse nEunt,e1;. 5 0 Qualifying wiitow(er) with dependent child (Year Blind . . , .0Yourself 0 Spouse oc hh ebctids spouse died 1.19 ) See Page 5 of Instructions 7 Total (add lines 6d and a) . 1-5 8 Presidential Election' Do you wish to designate $1 ofyour taxes for this fund? . . . Yes No Cite:IIyou Chit! the "Yes- Campaign Fund. . If joint return, does your spouse wish to designate $1?. . boa(el) it mill not increase your . X Yes No tax ei reduce your refund. 9 Wages, salaries, tips, and other employee compensationiAttach Forms V4-2Ifunwed able, see NH 3 of InsUuctionta ) 9 /3-?y8'00 nee Mies7 ant \ _ 10a Dividends t ,tef 1,siructons/ ) VC/. 10b less exclusion $ ,"t". ,Balance 10c 7.4t 00 4) (If gross dividends and other distributions are over ;400, liston Part I of Schedule B.) E 0 11Interest income. [If $400 or less, enter total without listing in Schedule B U If over $400, enter total and list in Part II of Schedule B ] 11 "A 0 to 00 12Income other than wages. dividends, and interest (from line 36) 12 / 7 5-0 13 Total (add lines 9, 10c, 11, and 12) 13 1.' ( SO 14 jr, V/ Adjustments to income (such as "sick pay,- moving expenses, etc from line 42). 14 15 Subtract line 14 from tine 13 (Adjusted Gross Income) 'xit!L;r7,..xhion Slirirtx7necoptgsCII at in 15 5-1 -CV If you do not itemize deductions and line 15 is under $15,000, findtax in Tables and enter on line 16a. If you itemize deductions or line 15 is $15,000 or more, go to line 43to figure tax. CAUTION If you ha.e unearned Income and can be claimed as a dependent onyour parent s return, check here f7 and see page 7 of Instructions 16a Tax, check if from Tax Tables X Tax Rate Schedule X Y or Z Schedule D 'Schedule G OR El Form 4726 16a g 3 b Credit for personal exemptions (multiply I:ne 6d by $30) b PO 00 c Balance (subtract line 16b from line 16a) C 37 17Credits (from line 54) . . 17 18 Balance (subtract line 17 from line 16c) 18 k 17 19Other taxes (from line 63) . . . . . 19 ...... 20Total (add lines 18 and 19) ...... 20 1/ 9 I of iattach forms W-2 or 21a Total Federal income tax withheld w-ze to 21a 92. ,include amount allowed as 00 b 1975 estimated tax payments Pay amount on line 23 n crtdit from 1974 return) full with this return. Wrl e c Earned income credit uncial Security number in chock or money order and O d Amount pad ,,nth Form 4868 . , make payable to Internal 2 Revenue Service. 0 e Other payments (from line 67) 22Total (add Imes 'la through e) 22 j, 9 9), X00 1 I 23if line 20 is larger than line 22, enter BALANCE DUE IRS u a.c izi . . . . P. 23 A 0 c , Cr. .k nein w 0 f form 2710 Run, 22101, or statement is attached See one t al InsiaiMens ) u c , 2 to.-24If line 22 is larger than line 20. enter amount OVERPAID lit. 24 / 6 7 43 % cu CC i25 Amount of line 24 to be REFUNDED TO YOU X=°, . . Ite- 25 / 4 -, -1.-3 to o 26Arno wt of line 24 to be cred. z.,./ ,; , ^ . 9///.7./ z / , i 03 ,, if all of overpayment (Iona 24) is to be %, itod Fs 1976 estimated tax % 0.. le' 1 26 refunded (line 251, make no entry on line 26 0 ,nom await es of vs lug I I ,,,, ,, &slit. IASI Nays eximined this Morn, IncluChnt iccompinyon ahedut a and statements, and to the best of toy knomegse and beat it ,,1,,,eio,,,,, and cv,,,,eteDtclarat on of isPaiel tolls.,t an !mays° is based on all Sign in emotion of which answer has any knmaleilge here V i 74 s ate OPreparer'S signature (ether than taxpayer) Date , !1C SOMiSirS aiSnat 111- ismtly BOTH mutt min even if only en. had Income) Affins land /IP Coils)

70 Solution to Continuing Problem (Cont. 1)

rag. 2 Form 1040 (1575) (e), Amount YOU (I) Amount fur. (a) NAME 00 Relationship (c) Months lived In your (d) Oid de- home. Ifborn ordied pendent have furnished for de. rushed by OTHERS during yeas. write B or 0 Income of pendenes SUP. Includingdepend. $750 or more? port.If 100% enL write ALL. $

27 Total number of dependis listed in column (a)Enter hers and on line 6c Part I Income other than Wages, Dividends, and Interest 28 28Business income or (loss) (attach Schedule C) 29a Net gain or (loss) from sale or exchange of capital assets (attach Schedule D) 29a P S7 29b 50% of capital gain distributions (not reported on Schedule Dsee page 9 of Instructrons) 29b 30 30Net gain or (loss) from Supplemental Schedule of Gains and Losses (attach Form 4797) . OQ 31a Pensions. annuities, rents, royalties, partnerships, estates or trusts, etc. (attach Schedule E) . 31a Sy- 3 0 31b Fully taxable pensions and ar6iuities (not repdrted on Schedule Esee page 9 of Instructions) 31b 32 32 ,Farm income or (loss) (attach Schedule F) rgiewl;ncohf you took ) 33 33State income tax refunds (azepjyuciligefunc:hIsforsz,eeepr1,7:,,5,1^4 34 34Alimony received 35Other (state nature and sourceSee page 9 of Instructions) 35 36 36Total (add lines 28 through 35) Enter here and on line 12 / 4 V, sa KM= Adjustments to Income 37 37"Sick pay." (attach Form 2440 or other required statement) 38 38Moving expense (attach Form 3903) 39 39Employee business expense (attach Form 2106 or statement) ... 40a Payments to a Keogh (H.R. 10) retirement plan 40a 40b Payments to an individual retirement arrangeMent from attached Form 5329, Part III . 40b 41 41 Forfeited interest penalty for premature withdrawal see page 10 of Instructions . . 42Total (add lines 37 through 41) Enter here and on line 14 IP. 42 111=1111 Tax Computation (Do not use this part if you use the Tax Tables to find your tax.) 43 sv 43Adjusted gross income (from line 15) is-y5.4 44 (a)If you itemize deductions, check hereIr. and enter total from Schedule A, Iona 41 and attach Schedule A (b)If you do not itemize deductions and line 15 is $15,000 or more, check here lo D and: 44 f'63 00 If box on line 2 or 5 is checked, enter 1,6% of line 15 but not more than $2.600, if box on line 1 or 4 is checked, enter $2,300; if box on line 3 is checked, enter$1,300 . . 45 45Subtract line 44 from line 43 33 46 2,' 7, so e/0 46Multiply total number of exemptions claiMed on line 7, by $750 .. ... 474 Taxable income. Subtract line 46 from lirl*45 47 /0/i 3 e 3 (Figure your tax on the amount on line 47 by using Tax Rate Schedule X, V, or Z, or If applicable, the alternative tax from Schedule 0, income averaging from Schedule G, or maximum tax fromForm 4726.) Enter tax on line 16a. 448 Retirement income credit (attach Schedule R) 48 T49 Investment credit (attach Forfff 3468) 49 ... 50 C.) 50 Foreign tax credit (attach Form 1116) 51 Contributions to candidates for public office creditsee page 10 of Instructions . - . . 51 52 52 Work Incentive (WIN) credit (attach Form 4874) . . 53 53 Purchase of new principal residence credit (attach Form 5405) ...... a54 Total (add lines 48 through 53) Enter here and on line 17` . . lo . 54 vi55 Tax from recomputing prior year investment credit (attach Form 4255) ...... 55 xK . . . . 56 63 56 Tax from recomputing prioryear Work Incentive (WIN) credit (attach Schedule) I-57 Minimum tax Check here iv- [3, if Form 4625 is attached 57 ... v . . . .c58 Tax on premature distributions from attached Form 5329, Part V . . 58 659 Self employment tax (attach Schedule SE) 59 60 Social security tax on tip income not reported to employer (attach, Form 4137) . . . . 80 61 Uncollected employee social security tax on tips (from Forms W-2) 61 t 62 if,62 Excess contribution tax from attached Form 5329, Part IV . 63 Total (add lines 55 through 62) Enter here and on line 19 . lo 63 . ..er Paym 64 64 Excess FICA. RRTA, or FICA/RATA tax withheld (two or more employerssee page 10 ofInstructions) 65 65 Credit for Federal tax on special fuels, nonhighway gasoline and lubricating oil(attach Form 4136) 66 66 Credit from a Regulated investment Company (attach Form 2439) 67 Total (add lines 64 through 66) Enter here and on fine 21e 40. 67

71 Solution to Continuing Problem (Cont. 2)

Schedules A&BItemized Deductions AND (Form 1040) Dividend and Interest Income Depeitment el the Treasury 1 luternal Revenue Sem* Attach to Form 1040. See Instructions for Schedules A and ff (Form 1040) 15 Name(s) as shown on Form 1040 Your socia security number Tort wi9. 4e7-r7thainker. 1Zi? 36 5-3k7 Schedu? AItemized Deductions (Schedule Bon back) Medical and Dental Expenses (not compensated by insurance Contributions (See page 12 of Instructions for examples ) or otherwise) (See page 11 of Instructions.) 21 a Cash contributions for which you have 1 One half (but not more than ;150) of in. surance premiums for medical care. (Be receipts,cancelledchecks or other sure to include in line 10 below) . written evidence 1, SO 00 2 Medicine and drugs b Other CaSh contributions. List donees

3 Enter 1% of line 15, Form 1040 and amounts. 10. 4 Subtract line 3 from line 2. Enter differ. (-Af: 4.4.e Chaps./ '10 00 ence (if less than zero, enter zero) . 5 Enter balance of insurance premiums for medical care not entered on line 1 . 6 Enter other medical and dental expenses: a Doctors, dentists, nurses, etc. 22 Other than cash (see page 12 of instruc- b Hospitals tions for required statement) . . . .

c Other (itemizeinclude hearing aids, 23 Carryover from prior years . dentures, eyeglasses,transportation, 24 Total contributions (add lines 21a through

23). Enter here and on lint 38 . etc.) - . x'010000 ..... - Casualty or Theft Loss(es) (See page 13 of Instructions) Note: if you had more than one loss, omit lines 25 through28 and see page 13 of Instructions for guidance. 25 Loss before insurance reimbursement /, 3 00 100 26 Insurance reimbursement .5100 00 27 Subtract line 26 from line 25. Enter difference (if less than zero, enter zero) . 800 00 7 Total (add lines 4 through 6c) 28 Enter $100 or amount on line 27, which 8 Enter 3% of line 15. Form 1040. . ever is smaller 00 ao 9' Subtract line 8 from line 7 (if less than 29 Casualty or theft loss (subtract line 28 zero, enter zero) from line 27). Enter here and on line 39 IN. 700 00 10 Total (add lines 1 and 9). Enter here and Miscellaneous Deductions (See page 13 of Instructions )

on line 35 . 30 Alimony paid . 6 00 00 Taxes (See page 11 of Instructions ) 31 Union dues . . 11 State and local income goo 00 32 Expenses for child and dependent care 12 Real estate services (attach Form 2441) . . . AO 00 13 State and local gasoline (see gas tax tables) 31 04033 Other (itemize) 14 General sales (see sales tax tables) . SS 00 XxoSijeviot;42,"11./1)foam 00 15 Personal property 16 Other (itemize)

17 Total (add lines 11 through 16). Enter 9,4 34 Total (add lines 30 through 33). Enter here and on line 36 00 here and on line 40 1/132oo Interest Expense (See page 12 of Instructions.) Summary of Itemized Deductions 18 Home mortgage CI 19 Other (itemize) 10. 35 Total medical and dentalline 10 lir. it1,11113oo 0036 Total taxesline 17 X56 Co ,,,Te (NTS'Ter 7 0037 Total interestline 20 00

38 Total contributionsline 24 . . . 00

39 Casualty or theft loss(es)line 29. 700 00 40 Total miscellaneousline 34 . . . 1/132 00 41 Total deductions (add lines 35 through 20 Total (add lines 18 and 19). Enter here 40). Enter here and on Form 1040, line and on line 37 CC 00 . 00 44 . . . . 2,1863

72 7 ; Solution to Continuing Problem (Cont. 3)

Page 2 SchedulesASA(Form 1040) 1975 Schedule BDividend and Interest Income Name(s) as shown on Form 1040 (Do not enter name and social security number it shown on other side) I. Your socialWing,/number

Part I Dividend Income Part II Interest Income capital gain distributions) and Note: If interest is $400 or less, donot complete this part INA Not*: If gross dividends (including Form 1040, line 11 other distributions on stockare $400 or less, do not complete this enter amount of interest received on part. But enter gross dividendsless the sum of capital gain el's 7 interest includes earnings from savings and loan associations, tributions and non-taxabledistributions, if any, on Form 1040, mutual savings banks, cooperative banks, and credit unions line 10a (see note below) as well as interest on bank deposits, bonds, tax refunds, etc. 1 Gross dividends (including capital gain distributions) and other Interest also includes original issue discount on bonds and distributions on stock. (List payers and amountswrite (H), other evidences of indebtedness (see page 14 of Instructions) (W), (J), for stock held by husband, wife, or jointly) (List payers and amounts) , X Cor 14 /so00 ; FL4,... r 1 3300 si 300 11. . -. ID U.S. Talk / co00

...

oo 2 Total of line 1 q>4 3 Capital gain distributions(see page 14of , Instructions Enter here andon Schedule0, ,/,., z, hne 7), See note below j 5oo 4,,0, 4 Nontaxable clistribu a"Z;4", 7/4 bons (see page 14 of Instructions) --- . . 5 Total (add lines 3 and4) / 5-00 6 Dividends before exclusion(subtractline 5 from line 2). Enter hereand on Form 114 1008 Total interest income. Enter here and on 1040. brie 10a -Form 1040. line 11 Note: If you received capital gain distributions and do not need Schedule CI to report any other gains or losses or to compute the alternative tax, do not lile that schedule Instead, enter 50 percent of capital gain distributions on Form 1040, line 29b

73 Solution to Continuing Problem (Cont. 4)

SCHEDULE D Capital Gains and Losses(Examples of property to be reported on this (Form 1040) Schedule are gains and lassos on stocks, bonds; and similar Investments,and gains (but not Dottrtniont of the Treli4HY losses) on personal assets such as a home or Jewelry.) Internal Itortnuo Servo Attach to Form 1040. 10, See Instructions for Schedule D (Form 1040). flt75 Name(s) u shown on Form 1040 Social security number r\s' 414A, 4.4.7 Aft34i.57.?k 7 Part I Short-termCapital Gains and LossesAssets Held Not More Than 6Months D

b. Date c. Otto I.Cost or other basis, 2iniglo.f, tlintireasndadT'i°g:.3 acquirer' tall d. Oren nits Nit. as +dilated (sae I. Dam or Otss) (Mc, lay, yr.) (Mon, lay, yr ) instruction F) and *atom of tale o iass si

2 Enter your share of not short-term gain or (loss) from partnerships and fiduciaries . . . 2 3 Esau net gain or (loss), combine lines 1 and 2 3 4(a) Short-term capital loss component carryover from years beginningbefore 1970 (see Instruction I) 4(a)( (b)Short-term capital loss carryover attributable to years beginning I. after 1969 (see Instruction I). (b)( 5 ) Net short-term am or loss), combine lines 3, 4 a) and b) 5 Part II Longterm Capital Gains and LossesAssets Held More Than6 Months 6100Skt. c__Y____Cyze SIP:DA 0 SP6/75- .0.44a ///00, oe /, cio 040

7 Capital gain distributions 7 /S 00 8 Enter gain, if applicable, from Form 4797, tins 4(a)(1) (see InstruCtionA) 9 Enter your share of net long-term gain or (loss) from partnershipsand fiduciaries 9 10 Enter your share of net long-term gain from small business corporations (Subchapter S) . . 10 11 Net gain or (loss), combine lines 6 through 10 , 11 ois- 00 12(a) Long-term capital loss component carryover from years beginning before 1970 (see Instruction I). 12(1)( ) (b) Long-term capital loss carryover attributable to years beginning after 1969 (see Instruction I). (b) ( ) 13 Not Ionterm :ain or losscombine lines 11, 12 a and b .... . 13 s 71 S" Part Ill Summary of Parts I and II 00 14 Combine the amounts shown on linos 5 and 13, and enter the net gain or (loss) here . . 14 15 If tins 14 shows a gain /r 7 / 00 (a) Enter 50% of tins 13 or 50% of line 14, whichever is smaller(see Part VI for computation of alternative tax). Enter zero if there is a loss orno entry on line 13 15(a) PC) ra ( )Subtractline 15(a)f) from line 14. Enter here and on Form 1040,line 29a (b) 16 Iflbine14shows a loss 'SS? So If losses are shown on BOTH lines 12(a) and 13, omit lines 16(a) (see Instruction J). and (b) and go to Part IV Otherwise, (a) Enter one of the following amounts; (i)If amount on tins 5 is zero or a net gain, enter 50% ofamount on line 14; (H)If amount on line 13 is zero or a net gain, enter amounton line 14; or, (hi)If amounts on line 5 and line 13 are not losses, enteramount on line 5 added to 50% of amount on line 13 16(a) (b) Enter hors and enter as a (loss) on Form 1040, line 29a,the smallest of: (i)The amount on line 16(a); Op 51,000 ($500 if married and filing a separate returnifa loss is shown on line 4(a) or 12(a), see instruction N for a higher limit not toexceed 51,000); or, (11) Taxable income, as adlusted (see Instruction M) (b)

74 Solution to Continuing Problem (Cont, 5)

Schedules E &R Supplemental Income Schedule AND (Form 1040) Retirement Income Credit Computation @75 Department of the Treasury (From pensions and annuities, rents and royalties, Partnerships, estates and trusts, etc.) Internal Revenue Service Attach to Form 1040. See Instructions for Schedules E and R (Form 1040). Name(s) as shown on Form W4 0 Your soc al security number 7011,v H, ee-try "1"o (1-&-t S3 P7 Schedule ESupplemental idcome Schedule (Complete Schedule R on back if eligible for retirement incomecredit)

Part I Pension and Annuity Income. If fully taxable, do not complete this part Enter amount on Form 1040, line 31b For one pension or annuity not fully taxable, complete this part. If you have more than one pension orannuity that is not fully taxable, attach a schedule and enter combined total of taxable portrons on line 5. 1 Name of payer Yes No 2 Did your employer contribute part of the cost' . . . fl If "Yes," is your contribution recoverable within 3 years of the annuity starting date? . .71 Yes No If "Yes," show: Your contribution $ , Contribution recovered in prior years $ 3 Amount received this year 4 Amount excludable this year 5 Taxable portion (subtract fine 4 from line 3) Part II Rent and Royalty Income, If you need more space, you may use Form 4831. Note: If you are reporting farm rental income here, see Schedule E Instructions to determine if you should also file Form 4835If at least two thirds of your gross income is from farming or fishing, check this box Li.

(e) Depreciation (explain It) Other expenses (a) Rind and location of priMertY (0) Total amount (c)Total amount below) or depletion (Repair,etc II residential. Mu mite "R" of rents of royalties (attach computation) explain below) 1-Y009/ 4.-,;44Nocae. 1/oo.00 5-00.00 /107o. oo M*/^!47.77' . ( ,'"7-stxqs eno. oO 2 Totals '2,4400. 00 ,r00. 00 2 Net income or (loss) from rents and royalties (column (b) plus column (c) less columns (d) and (e)) fr 00 Part III Income or Losses from Partnerships, Estates or Trusts, Small Business Corporations. Note:II any of the partnership, estate or trust income reported below is from farming or fishing, see Schedule E Instructions to determine if you should also file Form 4835 If at least two-thirds of your gross income is from farming or fishing, check this box 0. P for PartnershipE for Is Enter in column(ly) (e) Additional 1st year tate or Trust, or S for Small Business Corporation (c) Employer inentificabon number (d) Income or (loss) depreciation (applicable only to partnerships) (a) Name (b)

1 Totals 2 Income or (loss)Total of column (d) less total of column (el

TOTAL OF PARTS I, 11, AND III (Enter here and on Form 1040, line 31a) o00 Nam Amount Item Amount Explanation of Column (e) Part II ____ Item Amount IN-Tt rA.s"1" Soo. oce AkAlE....e1W're T...)c 1/00. 00 SO OG ff..,$4,-..,.c..e.. . ReArne Ff t. / A04 0000 Schedule for Depreciation Claimed in Part II Above. if you need mole space of you cumputed depieciation under the Class Life (A0R) System or Guideline Class Life System, use Form 4562. (d) Dopreciatron le) Method of (c) cost or Computing IllLife or Iii (a1 Description of property I (b) Data allowed or allowable (Or year acquired other Oasis in prior years depreciation rate 1 Total additional first-year depreciation (do not include in items below) 000.00 scat). 00

2 Totals e:;1 0 00 ,ol 5-00,00

75 Solution to Continuing Problem (Cont. 6)

Amended U.S. Individual r 0.144togrmezearg BOXIncome Tax Return Internal Pavane* florvIcit (Rev August 1975) Please answer all question, fill In applicable Nees, and explain champs onpage 2. Name and initial (If joint return, give first names and middle initials of both) Last name Your social security number 7<,,.A.4- 6erry /Pamk air ),9. 3'4S3F 7 Present home address (Number and streetlincluding apartment number, or rural route) Spouse's social security no. 7,7, Gee tA hill A Verl If we- zle ;,-/x ,36)8 City, town or post office. State, and 111; code eikOai /4% a,/nary 14 NJ a.oeA En er below name and address usid on original return (If same as above, write -Same")If changing from separate to loud 'return, enter names and ad dresses used on engine' returns. (Rohm You cannel thong* from joint to separate returnsatter the du* date has passed for filing separate returns.) a. This return is for calendar year 19 75- . If not for calendar year, give ending date of fiscal year , 19 b. Office where onginal return was filed? c. Has the Internal Revenue Service advised you that your onginal returnis being or will be Str.vIc t e -r.. examined? 0 Yes y74 No. If "Yes," identify office d. Filing status claimed: On anginal return. o Singlety4 Married filing jointly 0 Married filing separate)/ Unmarried Head of Household 0 Qualifying Widow(er) On this return. . go. 0 Single 5' Married filing jointly 0 Married filing separately0 Unmarried Head of Household 0 Qualifying Widow(er) A. As engin/11y IL Net cheap Income and Deductions reported v is (Increase v C. Correct mOusterl (So* Decreeseexplaia amount Sink Instructions) en page Z) 1 Total income (adjusted gross income): 197219731974 1975 Form 1040, line . . 17 15 15 15I Form 1040A, line. . /Sit./9G,50 /S i/9 4 ...5-0 14 12 12 121 A 2Deductions. See instructions and explain any changes onpage 2 aj e-43.00 yap 00 3A6 3.ov Tax Liability 3a Tax: 19721973 19741975 Form 1040. line. 18 16 16 16a 1 90,/,/) . . 9,fro iiP/4.3 7 Form 1040A, line . . . .19 17 17 13a) It" f

3b Credit for personal exemptions: 1975

Form 1040 and 1040A, $30 x line. . . . 6d 90ob 70.00 3e Total tax (including selfemployment tax, tax from recomputingprior year investment credit, work incentive credit, and minimum tax, etc.): 19721973 1974 1975 Form 1040, line. . . . 22 20 20 20t / ?Pi. 37 lie'") 7 16.37 Form 1040A. line . .21 19 19 15) /,, , (Attach Schedule SE (Form 1040) of Self employment tax is changed Payments and Credits 4Federal income tax withheld and eftax /qi2. °a 5Credits for Fede 0 /ffqz.oc els, nonhighwa g 4; r bncating I / tax, sainted 1v any cre 6a Este,ated tax 19721973 1974 1975 For 1040, li 24 21b 21b 21b Form 1040A, line . ..06. 20c 20c 16c (Intle amount paid as balance due with Form 1040C.) 6b Earne income credit: e-f, Form 040, line ,...-11riTI.,..1--4/75 . . . .1 tg.7 . 1.-.'"or ('".'-'. 21c Form040A, 13.bleCI ;.; 7Amouni, paid th Form 48 : - n for automatic ext ;nsion of time to file) . . 8 . . Amountpatd.wrtfrtfarrialturn, plus additional tax paid after it was filed . . . 9Total of lines 4 through 8 column C . . . /t Pa. 00 Refund or Balance Due 10 Overpayment, if any, as shown on original return: 197219731974 1975 Form 1040, line ...... 29 24 24 24 1 / C ). G3 Form 1040A, line . . 24 23 23 19j 11 Subtract line 10 from line 9, and enter result. . . . . i/ 8 1 V.37 12 If line 3c. column C is more than line 11. enter BALANCEDUE. Please pay in full with this return 13 If line 3c, column C is less than line 11, enter REFUND . . e. to be received er. Under pena bee of penury 54. 04' I declare thatIhare bled an engine! return and that I two examined this seeded lest of my knowledge end belief this unaided return is true. KW Kt, end complete Distention el pepater (ether thanMini, taxpayer) including Is aftempanying bawl schehtles and statements, and isthe ern kneeled,' en all informationf which the paperer has . 5774 op. Sign Yourgltoro Date Preparers uplifter, (*thin than taxpayers) here 7.) Date Spouse's signs filing Jointly. DOTS must sign own if into one had Interne) Address land Zip red.) BE SURE TO COMPLETE PAGE 2

76 81 Solution to Continuing Problem(Cont. 7)

Pat*2 Form 1040X(Rev II-75) Part I Exemptions (See Form 1040 Instructions) If exemptions do not change or decrease do notcomplete lines 4 and 5. r,,,, ,/,',%WO;;,/,,,,i,7 1 Exemptions claimed on this return Enter number of boxes checked to .2` ,,,./4. '/':'4,7; a Regular . 0 YourselfxSpouse s I lived with you ,,,,/4/,/,,,:/// ,,/ b Number of your dependent children who //3/1.,4,:.7/,' c Number of other dependents 3,/*/ d Total (add lines a, b, and e) Age 65 or over f-1 Yourself 0 Spouse Enter number of boxes checkedP.' i/ // 1 Blind , Yourself 0 Spouse . 3 fTotal exemptions claimed (add lines d and e) 7, ,x, Exemptions claimed on original return, / 2 Enter number of boxes checked 0. 2.... '0//,, a Regular rgYourself71 Spouse ' i / ,,,/'/////1-.1,, b Number of your dependent children who lived with you : /1 c Number of other dependents 7 d Total (add lines a. b. and e) . / e Age 65 or over 2 Yourself 0 Spouse 1 Enter number of boxes checkedii. -7/ / /, . 0 Yourself p Spouse Blind 3 fTotal exemptions claimed (add lines d and e) . lb. 3 Difference,if any . ' 4 Enter first names of your dependentchildre; who lived with you, but were not claimed on original return Enter number ''// , , 5 Other dependents not claimed onoriginal return' .. (c) Months (d) OM depend- (e) Amount YOU (1) Amount , twat on your ent hays 111 furnished for furnished by / (a)NAME Is.Enter figure 1in home If born come of $750 dependent's OT HERS the. last column to nght for (b) Relatoon;POO or died during or more in ufor3ortif including / ,/, each name listed (of more space year wrote 1972 1973. 100 wrote dependent 1 //,,X, is needed, attach Schedule) 8"or"0" 1974, or19751 $ $.. ler ...... I. and Credits Part II Explanalion of Changes to Income, Deductions Shal computations in detail. Attach applicable schedules. t lc" e.", .s Z n err j"G.7: cot" se"'''°6 'Aire, err "Nr 11)s eitoicter.s01. Gn "TA OPrlir..../ ors4Lite.A /30,Y 1. TittNerio. u'qscbt/efteor -roe. -rke /044.110. oh%O,.corat. e esA,../ er-p. yrim c "voxA`l:swe eteA4tte an."s" / O o, olo- r 0.0 041 9 Apr. )3-- 100. 00 75- 100,00 oct, g0"a pROOF

L (subsle-L

Presidential Election CampaignFundD Part III Campaign Fund will not increase your tax or reduce yourrefund. Participation in the Presidential Election Check here Si 0 if you did not designate$1 of your taxes but now wish to do so $1 o taxes but now wishes to do so Check here If mint return and if spouse did not designate

77 r. . ofDepartment the .4 TreasuryServiceRevAnueInternal,-

MapsFOrEdition1976 1975 Form 1040 ' 679(Rev.PublicitiOn 10-75) - 1040 Roadmap Department of the TreasuryInternal Revenue Service taxpayerIdentificationUse the return sent by the Internal For the year January I-Decent b., 31, 1973, Apr other aaaaa 1. RD year begosnong . Revenue Service. 11040youOn form file PleaseMacelabel lies. NewMew (IIaggress pun Monk (hulaben sive leeIra sheet egledleg apanainn weber, ea mai YAM sad maul/ el WS/ Individual Income Tax Return I Last name mid Spouse'sYour socialsocial securitysecurity numberow. . 1,73. ending sewFee pageMac, 2Att of NstiScitlen,Instruction. For IRS use only 975 packagebottomPeel off front the and bluecover place label of It thein affixed the Form address to 1040 the area Mon labelchangesYak. all City. Sown or pint etlee,State mg ZIP tole Place label here YoursAt bi. - I Verifyof your each return Item on the label for accuracy, forCensusRequested Revenue Bureau by etc, Indo what you city,live' town, village, B Do you live within the legallimits of the city, town, elEI CountyC In what county and State do you live/ WI"fig. SDOUSe's Da. I State youD In live,what (So township pate 4.)do fl followPackage,Note:and these make If you directionsorcorrections didif the not label receive to if completeis not a 'Formavailable, the 1040 necessary. Sharing I 0 Yes, 0 No 0 Don't know address.'Entermiddlehusband'staxpayer your initials name identification and of (ifwife's both) joint first return,andportion names present enter of theand home form. filing status (lines 1-5) 2 0 1Married J Single tiling joint return (even of only one had (check only ONE box) income) .wifeoccupation. ifEnter joint yourreturn (Enter social ) Also, for Security bothfill in husband thenumber and in be 43 LiD Unmarried Married filingHead ofseparately. Household (See II.59nd enter full namespouses here social le secunly number an designated space Acre spouse is also Wane save status.UseBureau.inforination the diagramSee required Instruction to determine by theBook, Census page 4. your filing 5 0 Qualifying wadow(er) with dependent\ child spouse died )9 ) See page 5 of Instructions page 5 of Instructions) (Year All whareferencesreturn.packageBook have are previously towhichto thethe FormFederalis mailed.tofiled 1040 anIncome incomeInstruction all taxpayersTax tax Forms Are you marned? in theDid past your 3 spouse years? die F. Yes on IfSeeline you 5Form qualifyof Form 1040 as 1040. Instructiona widow(er) If youdo Book, check not qualify. the box page 5. , Yes I F ° °÷1 Did you have 1 or more No ee. ewer homedidyourrelatives foryou home your maintain living parents? with a separate you in or 40 4 Yes emeemermerimumem+ SeeIMINIIMMI11.1111111111111111111114 Form 1040 Gohold.IfIt on you check to qualitydoExemption thenot boxqualify,as unmarried on Section. line check 4 of headline Form of 1040.house- Instruction Book, page 5 1Single. haveDid your separate spouse" income? No Checkloin( return the boxor on line 2married, filing - Yes I separately.join)Check return the Go boxGo on ontoon Exemption to line Exemption 2married, Section. Section. filing Willfile your a separate spouse return? Yes t Checklinespouse'sseparatelynumber 3,the and box full enterinIf namespouseondesignated linespouse's in 3married, isspace also space Social filing,provided filing Security write on exemptions (lines 6-7) 6a Regular 1 Yourself SPouse E ^i` number or GoasmarriedSee "singleon instructions to taxpayers Exemption or who page Section may 5 for be certainable to file b Firstc Number names of ofother your dependents dependentlived with (from you children line who nuE nter 27) mbe fo. 7 ed AteTotal 65 (addor over WindTotal (add lines 6d and e) Imesbertr.''''Shd c) i ] Yourself u Spouse ::ebQualifiesenter(fromnumberpf as antheline exemption total 27).other Addon dependents line line$Enter 6d, 6a. Gothe b on and toline cStep and6c 4. ..7 A 1 (HusbandAnswerStepnumber the and of following exemptions wife must questions be you considered may to determineothe claim individually.) on line 6e 4. Are you or your spouse age 65 or olds' ? iscorrectivevisionAre no you greater in blindbetter lenses than or eye legally 20or does widestdegrees blind? not diameter exceed ) (Legally 20/200of blindvisual with field if , 6d on line+Leave 7 Go line on to6e Presidentialblank Enter Electiontotal from line Yes r Yes CheckCampaign the Fundblind box(es) Enter the number Are you or'yoi; spousepind or legally blind? Yes PresidentialandFormmentof boxes &tend on1040 blindness checkedElection enterInstruction total Campaignoppositenecessary onBook line line AddFund. See7 6eGo lines page State-on 6dto 6. )CheckFund. the7Addnumber Goon 65 lines or toof over 6d Presidentialboxes and box(es) checked6e and Enter Election enter opposite the total Campaign lineon line6e. )Check the Enter65 or theover number and blind of boxesboxes. checked ElectionenterInstructionnecessary.opposite Campaigntotal onBook line Seeline 6e. Fund.Add page7 StatementGo lines 6.on Form 6dto Presidential andfor 1040 blindness e and presidential election campaign8 Presidential ElectionCampaign Fund . . 11Do jointyou return.wish to does designate your spouse $1 of your wish taxes to designate for this fund' $1, fund (line 8) YesYes 11 tI No no. s. . reduce it ., *Al not tncsooyou conkyour me N MI Infant. checkPresidentialIt youmarried wishthe appropriate filing$1 Election of Jointly)your Campaign taxbox(es) to liability go toon Fund,the ($2line it8. MIN andYouIf consistsyourMay incomeHave only IRS onof wages,Computeline 15 salaryis $20,000Your and Tax. tips,or less income (lines 9-15) 9 Wain. SAUK'S, bps, and other employee compensation 'Ar"" I". 4. 1414 et Ont.. NOIn " 9 dividends,insteadand you ofinterest, choose itemizing, thepensions standardyou may and havededuction annuities. the 11(II10a gross Do:ndends dividends (r.r.t.-.....Id.1): and other distributions are over $400. list in Part { If $ae() or less. enter total without listing in Schedule B , 10b less exclusion $ 1 of Schedule e ) Balance a- 10c 11 1.TheService Fill Service in figurelines will 1you through compute tax for 15, you.your lines tax 17, if you19 .Eo 1312 IncomeTotalInterest other(add income tinesthan wage?,9. 10s. 11, dividends, and 12) and interest (from line 36) If over $400, enter total and list in Part II of Schedule B ...... i . . -- 12 2. Skip lines 16a, b. and c, 18.21a. 20line 21b,and 27. 2221c and 21e. if applicable, and 1415 AdjustmentsSubtract line to Income14 from (suchhoe 13 as (Adtusted "sick pay. Gross moving lAorne) expenses, etc :L1171: Itia,..d Tenc:nrCle'd".e from line 42) I. . 113 1514 ,, 3. If you are filing a joint return,through show 26. CAUTION.IfIt you itemizedo Ifnot you demue deductionshave unearned deductions or income line 15 and is can $15,000linet15 be clamed is or under more, as a dependent $15.000, go to line on find 43your totax parent in Tabless return; checkand here figure tax enter on line 16a. i and see Pate 7 of Instructions 4. File your return on or beforespacehusband's inApril the for 15,1976.space line and 15. wife'sto the incomeleft of the separately entry TheyourNote:anyand Service amount refundtax, If you thewill any youelect Servicethen overpaymentowe. to compute have will also IRS your orfigurecompute bill tax youyour for Step 1. Did you have income from wages, salaries, tips, bonuses. .R andBquestionretirement enterandEnter fill RIC youronin income ononly Schedule total line lines income17credit 2 ofR andForm forif fromyou columns5 of1040 answerall Schedule Forms A theand W-2 commissions. fees and gratuities? No Yes OtherIfyou(of you statements)income put didhad on not other linetinter receive 9on income, onGo line line ona 9.Form to13 goIf Stepyou theon W-2 toamount had5. Stepfrom no 2. I anyincomeattachmissingeach tax employer, a withheldand W-2s.statement explaining If contactyoufor reporting which cannot how your you youget allemployer claim yourthem,computed. credit. for Step 2. Did you have dividend income? GoGo on onto Stepto Step 2 3. Yes 1 IN= No totalforSee incomereporting Formon line 1040from 10c dividend dividends,Instructionif you incomehad youmoreBook, Entermust thanpage alsothe $400 6, fill Stepgoout ofIfon Schedule you5.lines to Stephad 9 and no3.B If other10c you on income,had line other 13 enter Go income, on the to total Step 3. Did you have income 1.Was State. the interestcounty, oncity any or schoolof the following?bonds from infarkst? No1 3.2. DebtsBonds owedfinanced by a (sold) port authority,by the District toll road of Columbia commission, No I or a U. S. possessioar or utility authonTy Yes .'s+ You do not have to pay taxes on this income,StepInterest,income. 4. If leave you If this had line is additional11 your blank, only andinterest income go on from to Go on to Step 4. 1.Did Bank you haveaccount, interest loan, on or any note of the following? 4. Credit union account "" 4. 3. Building2. Tax refund and loan or savingsand loan account 5 U S. Savings Bonds Yes 11+ ti Gointerest,youThisinterest on had is toreportable moreyouStep income must 4.than income.alsoon $400 line fill income 11 outEnter of Schedule Form yourfrom 1040.total B. If Step 4. 2.Did Sale1. you Businest, orhave exchange income profession, of or property lass or from farm any of these? 7.6.5. PrizesAlimonyShare ofor orestateawards separate or trust maintenance income Yes Determine your income or loss figure and 4.3. Pension,Rents or royaltiesannuity, or endowment No 8. Strike benefits theseenterFormInstruction(B, itsourcesC, on 1040D, the E. Book, properonEnteror F)line provided andyour supporting12. Part total in1 incomeFormon Schedules page 1040 from 2 of .... 3. Workmen's4.2.Did Gifts,Veterans1. you Social havebequests, compensationsecuritydisability income or benefits benefitsanfrom inheritance any of the following/ 8.7.6. InsuranceDeathRailroad5. Dividends proceeds retirement compensation on veteransfrom benefits life forinsurancedue excess to a casualty living expenses E.-- --- Yes 11114 income,You do notand have it does to paynot havetaxes to on be this. reported. Step S. No .Add lineson 9, line 10c, 13. 11, Go and to Step12 Enter 5. the total 4 forfeitedexpenses,Did you receive interest or make sick penalty payments pay, foror havepremature to a moving self-employment withdrawal? expenses, retirementemployee businessplan or Yes 4111) See Form 1040 Instruction Book, page 9. inEnter Part the II on total page amount 2 of Form of your 1040 adjustments and on I Enter the total from line 13 on line 15. Leave line 14 blank andline enter 14. theThen difference subtract online line 14 15.from line 13, tax, payments and credits 16a Tax, check it from Tax Tables (lines 1642) Tax Rate S iedula X. V. or Z itit cb BalanceCredit for (subtract personal lineexemptions 16b from (multiply line 16a) line 6id by $30) Schedule D U Schedule G I OR Form 4726 I6a17 b 171918 CreditsOtherBalance (from taxes (subtract line (from 54) line 63)17 from line 16c) . 201916 21a20 Total Federal incompcb Earnedtax1975 withheld estimated income w it credit 1tax henU paymentsTotal (add lines 18 and 19) t6iViidti...lini4ailetti " iglus toms W-3 Si 21a b socialr...r,47,*Z4':,,',1,:techeck security Sr money number order 21 on n and 22 ed OtherAmount payments paid with- (from Form lineTotal 4868 67) (add lines 21a through e) . V2,6 22 Revenuemak. payliii Service le Internal 4111) OnfigureUse line Part your 16b III, tax. onenter pageEnter credit 2 the of for Formtax personal on 1040. line 16a to C) It is probably to your advantage to itemize yourStepsubtractexemption 2.deductions line (multiply 16a Youfrom line should line 6d 16bby consider $30) Go toand Step 1. is the amount you entered on line 15 $15,000 or more? aretaxes,amountsuninsureditemizing paying own ofdeductions casualty interest yourstate. own county, andloss; ifhome youtaxes, paid or hadon other largeor which a made major. local you FE Yes creditthe2alimony of1040 amountForm for paymentsInstruction personal 1040 on Ik.to figure Use OnexemptionBook, line Schedule your and 16b tax.Part(multiply enter A.Enter III Form on page 2.enteredDuring Contributions3.1. TaxesMedical the on taxline or year. 15 dental for did the billsyou following? spend 16% or more of the amount you 6.5. ChildCasualty care or and theft dependent loss care expenses Yes lineexemptionsUseline 6d1040 16b,bytax $30) tables InstructionGo claimedandon (depending to subtract Step Book on 2.line toline on find7) 16atotal in your your from tax 4. Interest Nolte 7. Other miscellaneous deductions Checklinecreditamount 16b.6dbox for by on for Gopersonal $30) line"Tax on and16a.to Tables" Step exemption subtract On 2. line and 16bline enter(multiply 16aenter the from Didthe you box check on either the box line 2, 4. or 5? In line 1 (the"single" box). or did you check No Yes methodspouse1040exemptionsUse tax Instruction istablesof also claiming claimed filing,(depending Book deductions bothon to line findmust on 7) yourtotal in useCheck your taxsame Ifbox t7.d you check-the box on line 3? Yes for Go$30)personalline"Tax on 16a andTables" to On Stepexemptionsubtract line and2. 16b lineenter (Multiplyenter 16a the fromcredit amount line line for6d 16bon by Step 2. companytaxDid credityou have credit(line retirement 17). (line gasoline 17) orincome did credit you credit. ormake regulated investment estimated investment credit,tax payments foreign Yes You should not attempt to complete your in 1975 (line 21b)? Nollt Fel earnedassistance.TaxpayerreturnIn addition, using income Service this if credit youRoad Representative are (see Map eligible Instructions, See foran for theIRS balanceewithheldOnLeave lines due 21a 18(fromlines and and 17.forms or20, 22, 19, enter refundenter W-2).21b theand the Go amount 21d totalon to(linesblank. Federal Balance from lineincome Due23-26) 16. of tax Refund. s RepresentativeRevenuepage 8) you Service should for Taxpayer assistance. also see Service an Internal 2423 If line(CIalkIf line 22 twitis20 larger is larger than than line line 20, 22, enter enter amount BALANCE OVERPAID DUE IRS :1 ism 2210 F.ern 22)01. Italoatant .2 attach*/ 5.. NI. i of 142ln/dams 7 . is 2423 26 Amount25 of line 24 to be cred- itedAmount on 1976 of hne estimated 24 to be REFUNDEDtax. D. TO YOU I 26 I I% refunded Ome 2S) malt. no entryII all .6n of boeoverfOsymont 26 (lone 24) is to Da 25 , zz/), / Is the amount on line 20 larger than the amount on line 22? No Fis Yes > Subtract line 22 yourorderthedifference tax Form for you this 1040.on owe. amountline Enclose 23. whenThis check is you the mailor amount money in of from line 20. and write the Is the amount on line 22 larger than the amount on line 20? No Fel yes imeemwoe=wmNss40 a.ofdifferenceSubtract the tax.credit line on 20 line orfrom 24 refund Thisline 22.youis Ifthe and youwill amount receive.writewish tothe have the amount on line taxesEnter you zeros owe onfor lines1975. 25 Go and on 26. to lastYou section. have already paid all of the 4, line24b.write If24refunded 25.you thatcredited wish amount to to to you, haveyour on write line the1976 26thatamount estimated amount on line tax,on completing your return WWIis Malt.,.toy tract M andprivry. templets I Ilerdue usal I Mn sass e.4 trot Mum. 4.1.1.ng ucons.anpn al MipNO. (OW MAR iispast) is bast/ en allaolemitIoaana*1 0110 pepataftisallantaallyaalibaaltrealu.41.11 4,4 h.b." ll BothMakereturn. husband sure you and sign wife and must date signyour areturn. joint Sign 10. You have now completed your 1975 income here 'Seen Yew ugn ttttt s fignalues (If Ming ps...991. 10109 meat VP 0+0..9 *MY Ma 19.4 /111'..,./41. s NSW.. WM/ %ea lazier.) Ad4ress (41'.1 ZIP UN) taxarefigurescheck return. completed, your arePlease correct,return andtake to that amake few all minutes necessarysure your to lines forms addressedyouandAfter oweschedulesenclosing checking tax, envelope mail aandare check your attachedsigning provided orreturn money your inin return,the order Form if the pre- envelopeInstructionavailableof1040 Internal Instruction is noton Revenue Book. pageavailable, Book 4 ofService theIf a the complete Form pre-addressedCenters 1040 list is

0 t. I Appendix C: Dependency Exemption Charts

How To Use Charts

Dependency Exemption Charts1, 2, and 3 are something like road maps. They are really flow charts to help you quickly find an answer to the taxpayer's question.

We use several symbols on thecharts. The symbols and their meanings are given below. (Note differingdarkness of blocks.) -c).-

Beginning point or first question on chart rawmmotwAnta..a Iola Min..= 1 Question block IPartial outcome block t s i s L. - Sol r 1 tInstruction to see chart notes for Outcome block i 1 additional information i i 1 L J

There are notes for each chart. The notes contain additional technical information and references.

0 A

91 \ 0 ChartI

Test for Dependents

Member of household and/or relationshiptest See chapter 2 (Claiming dependency exemption and deducting medical expenses )

Is the person a qualifying relative as defined below - No-PI Is it your husbandor wife' Yeso-L See text, chapter 2_j (1) Your child, step child, adopted child 0 No foster child 0 grandchild or other direct descendant (2)Brother, sister, half- or Has the person lived with Is the person a cousin who stepbrother or sister you for the entire year .Noa-has rece,,ed institutional (3)Father, mother, except for temporary care within the year step mother or step father absences' 0 (4)Grandparent, or other direct ancestor Yes No (5)Nephew, niece aunt, Yes uncle 0 (6)An in law father, mother, brother, sister son or - daughter - ISee 151

Yes [Doesnot qualifyI IMeets member of household I See Q if and/or relationship test L_

Citizenship test

Was the person a foreign 1 Was'the person a citizen or No Yes --,JSee 0 resident of the United States exchange student' 0 L anytime during the year _ No

Yes LNo Were you living abroad'-No.4 Does not qualify Was he or, she a resident of .1 Mexico, Canada, Panama Yes YeS Canal Zone, Republic of Panama or American Samoa Was he or she adopted?No at anytime during the year No Was your home his or her Meets citizenship test 1. Yes principal residence for the entire year'

Support test 1 Is heor she a child of Did You and other relatives No divorced parents? -No-0-supply more than 50% of the total support' Yes i Did you supply more than No 50% of his or her su ort? r-1 See,chart 3 Yes irs J Does not qualify )s he or she a child of,preis divorced parents' _ IMeets support test Concernsmultiple support Jel No 4

92 .. . . NotesI

Test for Dependents

1 0 0 Adopted childA child who has been (a) legally adopted Foreign exchange 'students generally may not be claimed by you, or (b) has been placed in your home for adop as dependentsFor possible deduction under Cntribu Lionby a placement agency recognized by your State bons, see Publication 17, ch 23 and been a Member of your household since the place ment. A child placed for adoption does not have to be a member of your household for thee entire year to meet the member of household relationship test 0 Principal residence means the same thing as'lived with -you for the entire year except for temporary' absences". See Publication 17, ch 4 We use both terms because you will encounter both of them in your work 0 /k If a foster child has lived with you for the entire year except for temporary absences, he or she shall be treated 0 as your natural child. Items considered support food. shelter. clothing. lodging (at fair market value), ucation, medical and dental care. recreationtranspoat on, and similar necessities 0 If you are married andtilinga separate return, you cannot claim your spouse's nephew. niece, aunt or uncle unless they are membes of your household Items not considered support Income tax (Federal, State and local), social security tax,life insurance premiums, See Publication. 17, ch 4 funeral expenses. automobiles boats, and other capital expenditures

o o See Publication 17, ch 4 Absences such as those for vacation, school or sickness are temporary. An unknown length of stay in a nursing home forconstant medical care isalso considered a a temporary absence Divorced or legally separated under a decree of divorce or of separate maintenance or are separated uncle, a 4 written separation agreement o See Publication 17, ch 2 0 C' Provided the relationship is nof in violation of local law the person Aualiftes as a, member of your household 0 See Publication 17, ch 4 hi some cases no one person provides more than half the support of a dependent If,in these instances, two or more persons contribute more than half adependent's 0 support, a multiple support agreement may be reached To meet this test, your cousin musi have been a mem ber of your household before receiving institutional care See Publication 17. ch 4

t 93 9v0 Chart2

Dependency Exemptions °

Gross income test.,Q,, (Use chart 1, Tests for Dependents, plus this chart)

Is gross income $750 or more' No.1Meets gross income test . Yes Is he or she your child step child, adopted child, or No-0-Does not qualify foster child' as exemption

Yes t Was he under 19 at the end of the year'

Was he or she a full-time student at least some part of any five months of the No calendar year' Yes

Was the school attended a high school, college, or university, vocational high No school, or full time on farm training course?

Yes

Gross income test --does not apply

Joint return test (If the person you wish to claim is married, complete this test)

Has he or she filed a joint In all likelihood, he or she return with husband or -Yes --Pi does not meet the joint return wife' test, but see 0 No

1 Meets joint return test 1

94 ob Notes2

Dependency Exemptions

0 To claim a $750 exemption for a dependent, the dependent must meet the two tests on this chart, plus the three tests on Chart 1. However, for dependency purposes. if a taxpayer's child is less than 19 years of age or is a full time student, regardless of age, the'gross income test does notapply.(Thischart appliesto calendar year taxpayers only.) 0 This includes a child who is a member of your household placed with you by an authorized placement agency for legal adoption 0 A full time student is one who is enrolled for the number of hours or courses considered fulltime attendance by the school attended See Publication 17, ch. 4. 0 Exception to the joint return test.

An exemption may be claimed for a married dependent ifneither the dependent nor the spouse is required to file a return but they file a joint return to claim a refund of tax withheld

o 95 3 Chart

Support Test for Childof Divorced Parents _ Is the child the subject of a MultipleI Multiple supportrt 0, multiple support agreement'1Yes--b.-(Liles are applicable L J No

Was the child in the custody r- of either or both parents for I General rule for support rj more than one-half of the No applicable (over one-half calendar year support), Return to chart 1 - -- ___, Yes A

Did the combined support r I Nether parent meets the furnished by the parents amount to more than one-half support test (However, it is of the child's support for theNd 4'1 possible that the multiple calendar year I support rules may qualify I Lone of the parents) Yes _

Which parent had custody of the child for the greater Neither 1Father portion of the calendar Mother year" Did theMother Did the father (1) Provide at least $600 (1) Provide at least $600 toward the child's support toward the child's support AND AND Yes (2) Did the decree or written (2) Did the decree or written Yes The father meets the 0 agreempnt between the agreement between the support test for the child parents provide that the parents provide that the mother is entitled to any father is entitled to any exemption allowable for exemption allowable for the the child? . child"

No No

Did the mother contribute $1.200 or more of child The parent 00 support (regardless of the number of children)' Yes...contributing $1,200 or more I I support for the child shall be Did the father contribute treated as having provided $1,200 or more of child ryessupport (regardless of the No ' I more than half the support of number of chi drenr thrtteichild, regardless of any ' writtenagreement,ennt s No theparent custody furnishednished definite proof of his own to show that his The mother meets the 0

The father meets the 0 I contributions were greater I support test for the child support test for the child Lthan $1,200_

$ Notesa

Support Test for Child of Divorced Parents 0 Narrative description of rules See Publication 17, ch. 4. 0 ..**1 Return to Chart ?and compute support from the items listed in note 9. 0 If the divorced parent having custody remarries, support provided by the new spouse will be treated as furnished by the divorced parent having custody. 0 Each parent is entitled to an itemized statement of the expenditures upon which the other parent's claimof support furnished is based.

If a parent intends to claim a child as a dependent and has either made a request of or received a request from theother parentregarding the child'sexpensesor exemption and does not know the other parent's inten tion by filing time, the parent must attach an itemized statement to the return, and if available, the other par ent's statement.

The itemized statement should include the following information (which applies to either a child or children):

1) the name of the child (or children) being claimed, names of both parents, and, if known, the addresses and social security numbers of each parent;

2) the number of months each parent had custody of the child, the amount of income of the child, and the total amount of support for the ch d, inc ing amounts provided by other than the parent ;

3) an itemized listing of the amounts spent during the year by the parent making the statement, for medical and dental care, food, shelter, recreation and transportation, clothing and education;

4) amounts actually paid by the parent making the state ment, pursuant to a divorce decree or written separation agreement; and

5) other amounts paid during the year for support of the child, by the person making the statement. 0 If member of .household and citizenship tests have already been rhet,go back to Chart 2. If not, go to Chart 1., 97 103 Appendix D: Major Applicable Tax Forms

Fo U.S. Nonresident Allen Income Tax Return 9,1040NR For the year January 1 December 31, 1975. or other taxable year beginning artment of the Trawl Intput Revenue Service 11075 .. . 1975, and ending , 19 First name and Initial Last name

Present home address (Number and street. including apartment numberor rural route) Identifying number

City, town. or post office, State and ZIP code Check whether Occupation In the U.S 0 Individual 0 Fiduciary Of what country were you a citizen or national dunng the taxable year? .. 1 - Give address to which you want any refund check matted Give address in the country when you are a permanent resident

. - Note: Was 100% of your income received from U S. sources not "effectively connected" with U.S trade or business? 0Yes I: No If "Yes," answer the questions on page 3 complete appropnate items on page 4 then complete appropriate items on Itnes 21hroughnon pager Filing Status and Exemptions for Individuals Regular tater FiliCtatus (check only one box) , Yourself Utile Total -1 Single resident of American Samoa, Canada, or Mexico V// i .w 2 C Other single nonresident alien. , /4 3 $ Married resident of Amensan Samoff, Canada, or Mexico . . . i Personal 'exemptionforfr , 4 Married resident of Japan (spouse must live in the U.S.). . . J irog: 'Ise rilini,. tni"wrili 1 , .' 5 Other married nonresident % / % %%4 6 E'j Qualifying widow(er) with dependeyt child (Year spouse died* 19 ). (See instrudon N) . . . . 7-171,4 7 Exemptions for your children and other dependents from page 2, line 31.i

8 Total (add lines 1 through 7) . Jt 9 skge 65 or over 0 Yourself 0 Spouse.' Applicable to residents of American i Nut...rearA Blind Yourself 0 SpouseSamoa, Canada, or Mexico only 1 checked b..

10 Total exemptions claimed (add lines 8 and 9) . , . , LL ...... 11Wages, saline . ployee compen 11 12a Drat:ids (6 instruct im fNOF12b Less OPY isant. 12e ; 13Interesti come . . iL1 13 MI14 income o er than wages, dividend", and interest (from line 41) . . . . 14 w 15Total (ad. lines 11, 12c, 13, and 14) 15 5,_1 16 Achustma s to income (such as "sick pay," moving . en . ,,,Ire4 . . 16 17 I Ad usted e. oss In ore We Ii. f 4, ne b tuffitill . line 17

18a Tax on income - 11.1/ Ili!linh . trade or business (Check if frm:is Rate Schell:61e, : It Iorm 47261. . . 18a A b Credit for p ions (multiply line 8 by $30) b 1 e Balance (subtract line 18b from line 18a) e ° 19 Total edits (from lino 58) 19 0c 20 Income tax after credits (subtract line 19 from line 18c) . . . 20 in 21 Total other taxes from line 64 (includes tax on Income not effectively..... connected with U S. trade orbusiness) ...... 21 4c 22Total tax (add lines 20 and 21) 22 w 2.3a Total Federal income tax withheld (attach Forms W- or W-2P) , 23a E a, b 1975 estimated tax payments (include amount allowed 7 riyamount on Ilne 25 to In full with this return. a. Write 2 as credit from 1974 return) ...... b socialsecurity number oncheckor eZ c Earned income credit (See Instruction Fe) . . c to money order and make . . payable O I d Amount paid with Form 4868 . . . d to internal Revenue Service. e Other payments (from line 68) e %///// / / / / / / / / / / / / / / / / / / / / / / // // / 24Total (add lines 23a through e) , /// 2 . . 24 25If line 22 is larger than line 24, enter BALANCE DUE IRS 25 0a)0%..0c26If line 24 is larger than line 22, enter amount OVERPAID b. 26 12C R ..727Amount of line 26 to be REFUNDED TOYOU 27 t.3 re.-. 028Amount of line 26 to be credited on co 0 cr 1 l'4 ira/ll(...",/cri/iontTneV slo //4 1976 estimated tax. 281 refunded/Tn., 3c:), mete n/c/i/entl,c/ii,lins 8

Undes penalties of oeriury,I Ware thatI belief It is true, correct, and complete have examined this return, Including 'compassing schedules end itatemanta, end to the hest ofmyknowledge and Declaration of Inspirer (Mg then texpayer) Is based en all information of which prepare hasany luinvledge p i g n 'here 1111PKotivers signature (ether than tamer) Date

00our signature Address lend ZIP code)

98 101 Pate2 Form 1040NR (1575) Japanese children must live with parent in U S 29 List first names of dependent-children of residents of American Samoa, Canada, Mexico, and Japan Enter numberlb. relationship, and months lived with you 30 Other dependents (applies to residents of Amencan Samoa, Canada, and Mexico) Give full name, Enter number

and on line 7 11. 31Total exemptions for your children and other dependents (add lines 29 and 30) Enter here PART I.Income Other Than Wages, Dividends, and Interest EffectivelyConnected with U.S. Trade orusiness 32 32 Business income or (loss) (attach Schedule C (Form 1040)) ..... 33a 33a Net pin or (loss) from sale or exchange of capital assets (attach ScheduleD (Form 1040)) b b 50% of capital gain distributions (not reported on Schedule D (Form 1040)) . 34 34Net gain or (loss) from Supplemental Schedule of Gains and Losses (attach Form4797) 35 35Rents and royalties, partnerships, estates, or trusts, etc. (attach ScheduleE (form 1040)) 36 38 Farm income or (loss) (attach Schedule F (Form 1040)) 37 37Scholarships'and fellowships (attach explanation) . . 38 38State income tax refunds (see instructions) 39 39Awards and pnzes 40 40Other (state nature and source) 41 41Total (add lines 32 through 40) Enter here and on line'14 PART ILAdjustments to Income 42 42"Sick pay" (attach Form 2440 or other required statement) 43 43Moving expense (attach Form 3903) 44Employee business expense (attach Form 2106 or other statement) 45Scholarships and fellowships excluded (attach explanation) 46Forfeited interest penalty for premature withdrawal (see instructions) 47Total (add lines 42 through 46) Enter here and on line 16 PART III.Tax Computation for Income Effe rusiness 48 48Adjusted gross income 49 49Total deductions rom line 50 50Subtract line 49 frm line 48

51Exemption: e a Individualsmultip$750 by the number of exemptions on line 10 . . . 51 b Estates and trust_(see instructions) 52 52Taxable income (subact line 51 f t t° schedule in the Instructions for Form 1040NR, or (Compute the tax on theamo g the appro , or the maximum tax on Form 4726) Enter the tax on line 18a. if applicable, the alternate to n Schedule D PART IV.Credits 53 53Investment credit (attach Form 3468) 54 Foreign tax credit (attach Form 1116) 54 55 55Contributions to candidates for public office credit (see instructions) 56 56 Work incentive (4,119) credit (attach Form 4874) 57 57Purchase of new principal residence credit (attach Form 5405) . . 58 58Total (add lines 53 through 57) Enter here and on Ilse 19 PART -V.Other Taxes Form 4255) 59 59Tax from recomputing prior:year investment credit (attach 60 Tax from recomputing priorlear work incentive (WIN) credit(attach schedule) 60 61 61 Minimum tax. Check here [J, if Form 4625 is attached . . , . business (from page 4, line 13) 62 62Tax on income ''not effectively connected" with U.S trade or 63a I 1 63a Social security tax on tip income not reported to employer(attach Form 4137) b Uncollected employee social security tax on tips(from forms W-2) 63c c Total (add lines 63a and b) 64 64Total (add lines 59 through 63c) Enter here and on line 21 PART VI. Other Payments 65 65 Excess FICA, RRTA, or FICA/RRTA tax withheld (two or moreemployerssee instructions) 66 66Credit for Federal tax on special fuels, nonhighway gasoline and lubricatingoil (attach Form 4136) 67Other credits and payments: 67* a Regulated investment company credit . . . b b Credit for amount paid with Form 1040C . c U.S. tax withheld at source (from page 4,line 10) . 4 6 d d Total (add lines 67a through c) 68 68Total (add lines 65 through 67d) Enter here and on line 24e .70.16 1

99 Form 104eNR (1975) Page 3 PART VII.Deductions Enter in this schedule deductions such as char stable contritiutioris, and casualty and theft losses Also enter those deductions, such as state and local income taxes, ',Oral are connected with income effectively connected with the conduct of a trade or 4usiness within the U.S 69a State income taxes 731 Personal casualty or theft loss after

b Local income taxes insurance reimbursement . . , Note: If you had more than one loss, 70Total state and local income taxes omit lines 73a and b and see Enter here and on line 77 page 2 of Instructions. 71 Contributions (Itemize) b Suotract $100 or amount on line 73a, ./hichever is smaller 74Casualty or theft loss. Enter here and on line 79 0 % 75Other deductions (Itemize)

76Total other deductions. Enter here and on line 80 77 Taxes (from line 70)

78Contributions (from line 72) . 79Casualty or theft loss (from line 74)

80Other deductions (from line 76) . . 72Total contributions. Enter here and on 81Total deductions. here and on line 78 swerAll

A What country issued yours passport? u luded fro gross income in ROOF this return any amount,her than foreign B Were you ever a U S calm ? . . 0 Yes 0 No source income not effeLively connected C Give the purpose of your viit to the U S. with a U.S. trade or bus' s? . . . . 0 Yes 0 No 1 If"Y;AitaV)tateent showing amount, nature, and de of income and the reason it was .....ri414;" 417' excluded from e. D Type of entry visa and visa nr,bssubiect u claim the benefits of a U.S. income tax convention with a foreign country, furnish the following information:

...... -.._ . Country E Did you abandon your permanent residence Type and amount of income claimed to be exempt under as an immigrant in the U.S this year' . . 0 Yes 0 No the applicable tax treaty: F Dates you entered and left the U.S. during the year. (Resi- in current year dents of Canada or Mexico entering and leaving the U.S. at c ..

frequent intervals, give name of country only ) ____ in prior years

. .

.. ._. Were you subject to tax in that country G Nonresident aliens from tax treaty countries Give number of on any of the income you claim is entitled days during the taxable year (including vacation and non to the convention benefits' . . . . 0 Yes 0 No work days) you wpre physically present in the U.S . Did you have a permanent establish H Residents of American Samoa, Canada, Mexico, or Japan. Did ment (as defined by the tax convention your spouse contribute to the support of any children claimed and section 894(b) of the Code) in the on Form 1040NR, line 29? 0 Yes 0 No U.Sat any brae during the year? . . 0 Yes 0 No If "Yes," state amount $ HIf you are filing this return for a nonresident alien spouse to I Did you file a U S. income tax return for any report community income, give spouse's name, address, year before 1975? . . . 0 Yes 0 No and social security number and Internal Revenue office If "Yes," give the latest year and form number where filed ...... _ To which Internal Revenue office was it sent?

N Did you file Form 1040C or Form 2063 dur J To which Internal Revenue office did you pay any an' .r,,, .rit; iile taxable year? . . . . . 0 Yes 0 No claimed, on Form 1040NR, lines 23b, 23d, and 67b If "Yes" state Internal Revenue office where you filed

Date filed10.

100 100L Form 1040NR (1975) (Provide the name and address of withholding Computationagent(s) and/or ofpayer(s) Tax on Income Not Effectively Connected Enter amount of income under the appropnate rate of tax of income on an attachment to thiswith return.) U.S. Trade or Business Page 4 1 Dividends paid by: Nature of Income at source (a) 2% (b) 5 (c) 10% (d) 14% (E) 15*/. _ (0 27% 1/2 P(a) 30% 2 Interest. b Foreigna U.S. corporations . . _ , . b Paidca OthersMortgage by foreign corporations . . 43 CopyrightsIndustrial65 RealNatural property royalties resources income . . . 7 Pensions8 Capital and annuitiesgains from line 14 be- gains (enter 1111 10 Total'9 Other tax withheld(specify) at low)source. Enter here and 11 Total income (add lines 67con Form 1040NR, line 1 through 9 for each , _ .41k 1312 TotalTax on tax income on income (multiply not effectivelycolumn) connectedrate of tax) (combine all totals on ine 12). Enter here income on line 11 by 1 and' n Form 1040NR, lin sa- changelosses from of property the sale that or areex-Enter only the gains and Kind of property (if necessary, attach "Gains and Losses Data of s or Exchanges of Property Deprec.abon allowed mintsCost (if of notor sutisequent other purchased basis, employs cost ' Gain et loss (column plus column (s) exceptdescribedconnected"ness.U.S.from 1.) andsources(Include inwith instructionnot a U.S.all within amounts busi- .1, the "effectively statement of descriptive details net shown behrw) (a) acquisitionDate of (b) salt(C) Gross sales pose (d) (or allowable) since acquisition (e) attachand explanation). expense of sal* (f) $ lest column 'I (g) and/orScheduleWitharechanges "effectively Form ofD. property4797. (Form connected" 1040) thatReport a U.S. sales business on or ex- . 14 Net gain triter on line 8 above ro.2350 Application for Extension of Time tRev Oct19751 for Filing U.S. Income Tax Return De *ailment el the I/usury Intermit Revenue Service, (For U S Citizens Abroad Whyi Expect to qyalify For Exempt Earned Income) File in duplicate on or before the due date for filing your return. See instructionson reverse Name of taxpayer Your social secunt)r number Please Print Number and street. or rural route Spouse's social ucurity number or Typo City or town. State. and ZIP code or country

1. I request an extension of time until to file my income tax return for the year ended because I expect to qualify for exemption on my income earned in foreign countries during that year for the reason stated below (Check one) (a) Bona fide residence in .a foreign country or countries for uninterruptedperiod which includes an entire taxable year (b)- Physical presence in a foreign country or countries for 510 full days ofany 18 consecutive month period. 2. Has an extension of time to file been previously granted for this taxable year' Yes O No 3. (a) Date of first arrivalin foreign country (b) Date qualifying period begins ends (c) Your address of residence in this foreign country

(d) Date of expected return to United States .. 4. Last permanent address in United States 5. Office where you filed your last return (city and State) 6. Occupation (if self-employed, describe,,, fully) 7. (a) Name and United States address of employer

(b) Foreign address of employer

CAUTIONARY NOTE: A Election to have the Inte4tal Reven opute the income tax is not availabletohe taxpayer with, or without, an extension, if the return isfed after t gular due date. B lAterest accrues on any taxue from the regular due date of the return until paid F e of ihterest and amount of penalty due to late payment of tax, seeequirements for Fling in the instructions. Litltre tie Ve If Prepare by Taxpayer Under penalties of perjury, ecIa(StVolaestof my k And belief, the statements made herein are true and correct Signature of taxpayer - Uate

111 Spouse's signature Date If Prepared by Someone Other Than Taxpayer Under penalties of perjury,I declare that to the best of my knowledge and belief, the statements madeherein are true, -correct, and complete, that I am authorized by the taxpayer to prepare this application,and that I am: O A member in good standing of the bar of the highest court of (specify jurisdiction) O A certified public accountant duly qualified to practicein (specify jurisdiction) O A person enrolled to practice before the Internal RevenueService. A duly authorized agent holding a power of attorney (Thepower of attorney need not be submitted unless requested ) El A person standing in close personal or business relationshipto the taxpayer who is unable to sign this application because of ill ness, absence, or other good cause My relattonShip to the taxpayer and thereasons why the taxpayer is unable to sign this application are Imm

Signature of preparer other than taxpayer Date The Internal Rev Service will indicate below whether the extension is grantedor denied and return the original. Notice to ApplicantTo Be Completed By the InternalRevenue Service 0 The application IS approved. (Please attach thisform to the return.) The application IS tiRT approved. $ Careful consideration has been given to thereasons stated in your application and it has been determined that the extension is not warranted.

0 The application cannot be considered since itwas filed after the due date of the return. 0 Other

Date Director

102 S 105 address other then that shown on page 1, orto an If the original copy of this applicationis to be returned to the taxpayer at an please complete the section below: . ,agent acting for the taxpayer,

Name Pleas. Print Number and street or Type City or town, State, and ZIP cods

this application or filing your UnitedStates If possible, read Publication 54, TaxGuide for U.S. Citizens Abroad, before completing and offices of District Directors of InternalRevenue, from most United States embassies income tax return. You can get copies from Pennsylvania 19155, U.S.A. consulates, or by writing to the Internal RevenueService Center, 11601 Roosevelt Boulevard, Philadelphia, Instructions subject to the special rules setfOrth below, Requirements for Flling.If you are a three consecutive years is $25,000. There earned in- are certain conditions under which you may exclude up to $20,000 of your United States citizen (or a resident alien come for each taxable yearif the earned from a country whose Income tax treaty not consider earned income as exempt, performed outside regardless of your bona fide foreign resi- income is for services with the United States qualifies you to the the United States and is attributableto the dence status. Instructions under Special benefits of section 911(a)(2) of the Code 18month period. to the same extent as a United States rules applicable to bona fide residence and physical presence cover these restnc- (b) Determination of 18-monthPeriod citizen) and you received earned income and Applickeon of 510day Rule.In corm for personal services rendered in a foreign tions. (b) Determinationof Residence.No outing the minimum of 510 full days pres- country or countries, you may obtain an ence in any foreign country orcountries, extension of time to file your United States specific rule can. be stated for determining dur- granted an whether a United States citizen is a bona all separate periods of such presence income tax return. You may be ing the 18month period are tobe totaled. extension to 30 days beyond the date upon fide resident of a foreign country, since the determination involves your intentions re-The 510 full days need not beconsecutive, which you can reasortably expect to qualify dunng if garding the length and nature of yourstay.%but may be interrupted by periods for thexemption of this earned income which you are traveling overinternational you are either a bona fide residentof a Your Intention to establish a bona fide retl- present in a dance in a foreign country may be evi- waters or are otherwise nbt foreign country or physically present in the n country. foreign country for an 18month period. An denced by words and acts, but where they extension of time for filing is a privilege conflict, more emphasis will be pl al Rules Applicable to BonaFide If S which will not be granted if yourapplies the acts than on the wor Res nceand Physical Presence. tion is incomplete. you go,to a fore ntry purpose, et o e ° (a) Rule of Attribution.For purposes An extension of time to file a return, un- but to earned in fter you v lished of det mining the exemption, less it specifies otherwise, doesnot exte na fide raw- come hether received before, during, or u are not taxable year in which the services the time for payment of the tax sign country. However, if an after th imposes a .penalty for the lapayment the amounts are attributable are eand Indefinite stay is necessary to Mile received in the tax (other than estimated toof onh and toAis orm ) is considered or you to accomplish the purpose, r in which the services towhich percent a month or part of a month, u - that end you make your ho in eAprl:31Pec ble y less you can show reasonablcause for the amoisareattributableare per ;40 country, you may be a is rule applies, only indetermin- failure to pay on time. Curren y, interestdent of the ederal accrues at the rate of 9 percen year on ing the amount of theexemptiOn and does posWihe 430 reportingarty any tax due from ,the regi,:or d e dateof Mon of not affect thd time of include amounts which are not exemptfrom tax. the return until paymera is mad The States°t provides for periodic adjustmenof 411. In no case will amounts beattributed to interest rate, which may be cha ged ant of Nonresidence.If you any year in which theservices performed earned Income from a foreign country early as February 1, 1976. are insubstantial in nature. and you have indicated to the authorities of (b) Requirement as toTime ofRe- When to Flie.Complete in duplicatethat country that you are not a resident ceiptTo be exempt, earned income must and file this application with either there and so have not been subject to that of the taxable country's income tax, you may not be be received before the close of The Internal Revenue Service Cen- year following the taxable yearin which ter,11601 RooseveltBoulevard, treated as a bona fide resident of that for- the services to which theamounts are Philadelphia, Pennsylvania 19155, eign country. If you have made this statement and, as of any date a determination attributable are performed. or fc)' Treatment of Amounts Paidby U.S. Is being made about whether you qualify paid by (b) The local Internal Revenue Service as a bona fide foreign resident, noadverse Government, etc.Earned income Representativeor otherInternal determination has been madeby the-the United States or any of itsagencies Revenue Service Employee. authorities of the foreign country abput or instrumentalities is notexempt from tax your nonresidence status, you willbe con- under the bona fide residence orphysical Definition of Bona Fide Resident (Sae- sidered to have been held not subject to presence tests. 911 (a)(1) of the Internal Revenue Code.) the income tax of that foreign country. Requests for Any Other Reason.To re- (a)General. --If you are a United States quest an extension for any reasonother Definition of those Physically Present in qualify citizen who is a, bona fide resident of a for- Foreign Countries (Sec. 921(a)(2) of the than the fact that you expect to eign country or countries for an uninter- abroad, you Internal Revenue Code). for exempt income earned rupted period which includes an entire tax- should file an application on Form2688. able year you may consider as exempt (a) General.If you are a United States certain amounts of earned income derived citizen (or a resident alien from a country Cautionary Note whose income tax treaty withthe United from personal services rendered abroad. - The Internal RevenueCode provides for For each of the first three consecutive States qualifies you to the benefits of this of estimated section of the Code to the same extentit a penalty for underpayment ybars of bona fide foreign residence, you tax. If you fail to qualify undereither of may exclude no more than $20,000of applies to United States citizens) physically present in a foreign country or countries for the definitions stated above for excluding earned income derived dunng each year. income from your return, you maybe lia- a total of at least 510 full daysduring any The maximum exclusion per year of bona ble for this penalty. (See Publication54) fide foreign residence following the first period of 18 consecutive months you may,

103 Form 2555 Exemption of Income Earned Abroad (Nev. Oct1975) Attach to Form 1040. Department of the Treasury Internal Reston' Service For taxable yaarend.ng This Form is to be Used Only by United States Citizensand Resident Aliens (See Instruction 1.) Name of taxpayer Social security number

Foreign address (including Country) Your occupation

Name of employer Employer's IU S. address Foreign 'Give the latest year for Xich you files' a U S. income tax return la Office where filed110. For an explanation of the provisions under which -earnedincome of citizens abroad is exempt, see instructions. You may ob tam Publication 54, Tax Guide for U S Citizens Abroad, and all forms fromany Internal Revenue office, U.S. Embassy, or Consulate. Check status under which you claim exemp' Bona tide residence. Complete Parts I and Ill tion of earned Incdrne from services abroad Physical presence Complete PartsII and Ill Complete all items in the parts pertaining to your status. Ifan item does not apply, write "DOES NOT APPLY." Failure to submit required Information may result in disallowanceof the claimed exemption. Part 1 To be Completed for Bona Fide Residence Only 1 Foreigh country in which you claim bona fide residence Residence began , ended . (Date) (Date) 2 Kind of living quarters in foreign country Purchased house Rented house or apartment Rented room Quarters furnished by employer 3 Did your family live with you abroad during any part of the taxable year? Yes No If ' Yes," for what period' e 4 (a) Have you made a statement to the authorities of the foreign country you claim bona fideresidence in that you are not a remr dent of that country' ., Yes No (b) Are you required to pay income tax to the country you claim bona fide residence in Yes No If you made a statement to the authorities of the foreign country that you are nota residen coun ry holds you are not subject to its income tax, you do not qualify for this U S exemption (Sea Ins c)) 5 Complete the following for days present in the U.S or its possessions dun xable ye Date Number of Amount earn Date arrived on Nuon rot Amount earned in U.S on on U S do/pared days in U S bus e sideman Data mwo.341,1: from U S on husines in U S days iU S business (Attach statement etyma corn t from U S in bar runs snowing computation )

6 (a) State any contractual terms or other conditions Webto thedeo, tampIZTment abroad. ($ I (b) State the type of visa you entered thegoreign colagaraffer (c) Did your visa contain any Imitations ascrtfillingth of your stay or employment in a foreign country? Yes No If "Yes," attach explanation. (d) List the places where you have resided and the dates of residencesince you left the United States to establish residence abroad.

(e) Did you maintain a home in the United States while residing abroad? Yes No If "Yes," show address of your home, whether axis rented, and thenames and relationships of the occupants.

1112Mal To be Completed for Physical PresenceOnly 7 The 18.month period the exemption for physical presence in a foreign country is base) on is from through . Enter all travel abroad during the 18 month period the exemptionis based on, except travel between foreign countries that did not Involve travel on or over international waters for 24 hours or more If the-last entryis an arrival in a foreign country, insert number of full days to end of 18 month periodIf there was no travel to report during the period, write in schedule that countries during the entire 18.month period. you were physically present in a foreign country or

Name 01 country Data and lima Data and bore Full days Number of Amount earned In U S on (Includini U S ) departed arrived Present in days in U S business (Attach statement country on Dustmen showing computation )

r . . r

9 Enter prior years you claimed exemption for Income earned abroad under section 911 111.

104 I V- Form 2555 (Rev 10-75) Page 2 Part III To be Completed for Both Bona Fide Residence and Physical Presence 10 Enter below your total earned income, including noncash remuneration (See instructions 7 and 8(d) ) Is part of the income (such as bonuses) attributable to services performed in past years or to be performed for yearsother than 0 Yes [2] No this year? . . If "Yes," see Instructions 10(a) and 11 Do not report exempt income on your Form 1040, but enter all taxable income in the app,opi late sectionsof the formIf you received all or part of your income In foreign currency, translate its exchange value into terms ofU S dollars at the rates prevail mg at the time you actually or constructively received the income.

Exchange Amount Earned income (for personal services rendered ineore,gn countries) rates used (In U S dollars)

. . . 11 (a) Total wages, salaries, bonuses, commissions. etc received during this year ------.1 (b) Amount attributable to prior years or future years (See Instruction% 10(a) and II )

(c) Balance attributable to this year. (Subtract fine 11(b) from lire Il(a) ) . . . 12 Pensions and annuities (See instruction 10(d)) 13 Allowable share of income for persona' services rendered (See Instructiori 7 and 10a )

(a)In a Minns (Mcludir g farming) or profession. !Attach Schedule C or F) . (b) In a partnership (Give non: iddress, and nature of income.)

14 Noncash remuneration (Market vows of property or facilities furnished by employer. Attach statement showing hew determined )

(a) Home . . (b) Car (c) Other property facilities

r 15 Other income (Specify ).1 alcuelge) (athiectto 16 Allowances or reimbursements ..------(a) Cost of living . . . -, -- (b) Overseas differential (e) family 1 (d) Education (e) Horne leave (f) Quarters (g) For any other purpose (Specify.)

17 Total earned income from sources outside the U.S 18 Amount exempt,(If exempt status changed during the taxable year, complete schedule below ) 19 Taxable income axle 17 lass line 18 If less than zero enter zero Enter here and report on Form 1040 1 Schedule for Computation of Exemption Claimed in Part III,line 18, above. (The $20,000 and $25,000 exemptions are fo, full taxable years. Prorate them if your exempt status changes during the taxable year. See Instructions 8(a)(10 and 10(c).)

A B $25, 000 20 Applicable exemption $20,000 21 Number of exemption qualifying days In taxable year 22 Total number of days in taxable year % 23 Percentage applicable (Divide the number of days on line 21 by the number of days on line 22 )

24 Allowable exemption (Multiply the amount on line 20 by the percent on line 23) . s c 25 Total allowable exemption (Add amounts on line 24 columns A and B Enter here and on line 18 ) (If more spay Is needed for any schedule, etc , attach statement )

16o 105 Form4868 Application for Automatic Extension of Time Department et the Treasury Internal Revenue Some to File U.S. Individual Income Tax Return 105 NOTE: Prepare this form in duplicate File the original with the Internal Revenue Service Centerwhere you are required to file your income tax return and pay the amount shown on line 6 below. Attach the duplicate to the face ofyour Form 1040. This is not an extension of time for payment of tax The law imposes a penalty for late payment of tax unlessyou show reasonable cause for failure to pay when due. (See Iniruction F.) Name (If joint return, me first names and initials of both) Last name Your social security number Please

Print Preunt home address (Number and strut, including apartment number, or null route) Spouse's social security number or

Type City, turn or post office State and ZIP Cod.

An automatic 2 month extension of time until June 15, 1976, is hereby requestedin which to file Form 1040 for the calendar year 1975 (or if a fiscal year return until , 19 , for the taxable year beginning 1975, and ending 1976).

,1 Total tax'you expect to owe for 1975 (see Form 1040, line 20)

2 Federal income tax withheld .

3 1975 Estimated tax payments (include 1974 overpayment allowed as a credit) .

4 Other payments (see Form 1040. line 68)

5 Total (add lines 2, 3, and 4)

6 BALANCE DUE (subtract line 5'from line 1 Pa ion . . Signature and Verification If Prepared by Taxpayer Under pe declare the tYbestof my knowlede and belief, the statements made herein are true and correct,

Your s.gnatur h'ogttochange) -Spouse's signature filing jointly, BOTHrrius(epUe4 n ad income) Dail) r.

If Prepared by Someone Other Than Taxpayer.Under penalties of perjury, I declare that to the best of my knowledge and belief, the statements made herein are true and correct, that I am authorized by the taxpayer to prepare this application, andthat I am. A member in good standing of the bar of the highest court of (specify Jurisdiction) A certified public accountant duly qualified to practice in (specify jurisdiction) A person enrolled to practice before the Internal Revenue Service A duly authorized agent holding a poWer of attorney with respect to filing an extension of time. (Thepower of attorney need not be submitted unless requested.) A person standing in close personal or business relationship to t he taxpayer who is unable tosign this application because of illness, absence, or other good cause My relationship to the taxpayer and the reasons why the taxpayer is unable tosign this application are

Signature of preparer other than taxpayer bat.-

See instructions on reverse

106 Adjustment Form3903 Moving Expense Deportment of the Troasurt Attch to Form 1040. 9875 Interns) ItIVINNe Service Social security number Name(s) as shown on Form 1040

(a) What is the distance from your former residence to your new (b) What is the distance from your former residence to your miles business location' miles former business location' distance is less than (e) If the distance in (a) is 50 or more miles farther thanthe distance in (b), complete the rest of this form If the 50 miles, you are not entitled to a moving expensededuction. /See instruction A )

1 Transportation expenses in moving household goods and persOnaleffects

2 Travel, meals, and lodging expenses in moving from formerto new residence . 3 Pre move travel, meals, and lodging expenses in searchingfor a new residence after obtaining employment 4 Temporary living expenses in new location or areadunng any 30 consecutive days after obtaining employment

5 Total (Add lines 3 and 4 ) 6 Enter the lesser: Line 5 or $1,000 ($500 ifmarried, filing a separate return, and you resided with your spouse who also started workduring the taxable year) 7 Expenses incident to: (Check one.) (a) 0 sale or exchange of your formerresidence; or, (b) 0 if nonowner, settlement of your unexpired lease onformer residence . 8 Expenses incident to. (Check one.) fa) 0 purchase of a new residence; or, (b) 0 if renting, acquiring a new lease

9 Total (Add Imes 6, 7, and 8 ) 8(a) as part of your moving expense and line 9 exceeds Note: If you use the amounts shown on line 7(a) or resided with your spouse who also started $2,500 ($1.250 if married. filing a separate return, and you Consider the reduc- to work during the taxable year), you mayreduce line 7(a) or 8(a) by the excess. tion a decrease in realized gain on the sale of yourresidence or as an increase in the basis of your new residence, or both. resided with your 10 Enter the lesser: Line 9 or $2,500 ($1,250if married, filing a separate return, and you spouse who also started work during thetaxable year). (See instruction C(2) )

11 Total moving expenses (Add Imes 1, 2, and 10 ) Form W-2) (See 12 Reimbursements and allowances received forthis move (other than amounts included on instruction L.)

13 If line 12 is less than line 11, enter the excess hereand on Form 1040, line 38 ....

here and on Form 1040, line 35, as "Excess moving re- 14 If line 12 is larger than line 11, enter the excess imbursement"

Instructions N. shortest of the more commonly traveled B. The 39 Week/78 Week Test.Disre A. Who May Deduct Moving Expenses. Card the 39 week/78 week test referred to As an employed or a self,employed person, routes between those points.) in instruction A if employmentis termi- you may deduct reasonable moving ex Also, the deduction is allowable only if nated because of death, disability, involun penses paid or incurred during the taxable either (a) during the 12 months immedi- tary separation (other than for willful mis- year in connection with a move you makeately following your arrival in the generalconduct), or transfer for the employer's to a new principal work place location "of your new principal work place benefit. If you have not satisfied the 39 Week/78 The deduction is allowable to you only you are a full time employee during at least week test before time for filing your return if (a) your change in job location has added 39 weeks, or (b) during the 24 months for the taxable year in which you paid or at least 50 miles to the distance from your immediately following such arrival you are incurred the moving expenses, but believe old residence to your work, or (b) if you had a full-time employee or self employed on a you will later satisfy it, you may still deduct no former principal work place, your new full-time bastr-dunng at least 78 weeks,of.-those expenses in the year you paid or in principal work place is at least 50 miles which not less than 39 weeks are during the curred them. from your former residence (The distance (Continued on back) between two points is considered to be the 12 months following your arrival. Form 3903 (1975)

107 16 If, however, you have not satisfied the penses related to your household members This term means only those reasonable ex. 39 week/78 week test at the close of your include only those for members who had penses (such as sales commissions, adver- next taxable year you must include an and have both your former and new rest Using expenses, attorney's and legal fees, amount equal to the deduction for moving dences,respectively,astheirprincipal title fees, escrow fees, and State transfer expenses taken in the prior year, in income abodes(A servant, governess, chauffeur, taxes) incident to (a) the sale or exchange iou report for that next yearunless you nurse, or valet is not generally considered of your former residence (not including ex iie an amended return to eliminate the to be a member of your household ) penses for work performed on the residence deduction for the year you claimed it to assist in its sale) which would be taken "E Household Goods and Personal Ef- C. Deductible Moving Expenses. fects.In your expenses of moving house into account in determining the amount re hold goods and personal effects from your al zed on the sale or exchange. (b) your (1) Expenses Not Subject to a Dollar purchase of a new residence which other Limitation, lines 1 and 2 These are former to your new residence, include the actual cost of transportation or hauling, wise would be included in (i) the adjusted (a) Expensesformovinghousehold packing and crating, in transit storage, and bas s of your new residence, or (u) the cost goods and personal effects from your for- insurance of the loan (but not including payments or -ner to your new residence, and prepayments of interest), (c) the settle. F. Travel Expenses from Former Resi- ment of an unexpired lease on your former (b) Travel expenses (including meals dence to New Residence.These include residence, or(d)your acquisitionofa and lodging) from your former to your new the cost of transportation, meals, and lodg- lease on your new residence (excluding pay- esidence (not to be confused with other ing (including costs for your arrival date) ments or prepayments of rent) travel expenses, explained below) The deduction for travel expenses from (2) Expenses Subject to a Dollar Limita- your former to your new residence is allow- J. NondeductibleExpenses.Moving ion, lines 3, 4, 7, and 8 These are able for only one trip However, itis not expenses do not include, for example, any (a) Travel expenses (including meals necessary that you and all members of your loss incurred on the sale, exchange, or and lodging), after you obtain employment, household travel together and at the same other dispositionof propertymortgage 'rem your former residence to the general time. (To compute the cost of transporta- penalties, cost of refitting rugs or draper- ()cation of your new principal work place tion if you use your own car, see instruction ies, losses due to the disposal of member and return, primarily to find a new resi. G, below ) ships in clubs, tuition or similar items dente G. Travel Expenses (after obtaining em K. Self-employedIndividuals. ---Aself (bMeais and lodging expenses while ployment) From Former Residence to Gen- employed individual is one who performs ;:iccupying terrip,rai y quarters in the general Location of New Principal Work Place personal services as (a) the owner of tne erallocation of yOui new principal work and Return, for Purpose of Searching for a entire interest in an unincorporated trade .,lace during any 3C, consecutive days after New Residence.Travel expenses are de. or business, or (b) a partner in a partner- ou ottain employment, and ductible only if (1) you begin the trip to ship operating a trade or business ic) Qualified expenses attributable to the general location of your new principal To deduct expenses on lines 3 and 4 as ne sale, purchase, or lease of your resi work place after you have obtained employ- a self employed person, you have met the dence ment, (2) you return to your former resi condition of having obtained employment dence after searching for a new residence if you have made substantial arrangements TheseC(2)expenses cannot exceed in the general location of your new principal to commence work. 32.500 overall per move, of which the C(2) work place, and (3) your principal purpose 'a) and (b) expenses cannot exceed $1,000. in traveling to the general location of the L. Reimbursements and Allowances. If you and your spouse both begin work new principal work place is to search for a Include all reimbursements and allowances at new principal work places during the new residence for moving expenses in income In general, taxable year, consider the two events as Your deduction for travel expenses for you will find such reimbursements and alone when assigning the dollar limitations in the principal purpose of looking for a new lowances included on your Form W-2 How- 0(2) if, at the end of the taxable year, you residence is not limited to any number of ever, if there is doubt, check with your ern nave shared the same new residenceIf trips by you and your household members ployer Use line 12 for reporting reimburse ,ou file separate returns, these expenses Moreover, to be deductible, a trip need not ments and allowances if they are not in are limited to S1 250 overall per move for result in a lease or purchase of property cluded elsewhere on Form 1040 or related each of you, and the C(2)(a) and (b) ex If you use your own automobile for this schedules penses cannot exceed ;500 for each of transportation, you may compute the trans- you M. No Double Benefits Allowable. You portation expenses in either of two ways. cannot reduce the amount realized on the However, if you and your spouse hale (1) actual out of pocket expenses (for ex sale of your old residence by any expenses not shared the same new residence nor ample, gasoline, oil, repairs), or (2) at a which become part of your moving expense made specific plans to do so within a de rate of seven cents a mileIf you claim out deduction on line 7 You cannot increase terminable time, consider the events sep of pocket expenses, keep an adequate rec the basis of your 'new residence by the aratelyIf you file separate returns, these ord to verify amounts, if you use the seven amount of any expenses which become part expenses are limited to $2.500 overall per cents a mile method, attach a schedule to of your moving expense deduction on line move, and the C(2)(a) and (b) expenses verify the mileage 8If you include such expenses in income cannot exceed $1,000If you file a joint re H. Meals and Lodging Expenses While because you have not met some condition turn, these expenses are limited to $5,000 Occupying Temporary Quarters.These for the allowance of this`deduction, make overall per move, and the C(2)(a) and (b) are deductible for any 30 consecutive days an 'appropriate adjustment to the selling expenses cannot exceed $2,000 after you have obtained employment in the price or basis D. Reasonable Moving Expenses.The general location of your new Vrincipal work place. N. Publication 521.For additional in- term "moving expenses"includesonly formation, you may obtain Publication 521, those expenses that are reasonable under I.Qualified Expenses Attributable to the Tax Information on Moving Expenses, free the particular move's circumstances. Ex Sale, Purchase, or Lease of a Residence. at Internal Revenue Service offices.

, 108 U S GOVERNMENT PRINTING OFFICE 1975 111