On the Mark, Get Set, Calculate

Income tax time is not merely rolling around again this year. It is crashing into the consciousness of roughly 85 million U.S. taxpayers, who have four weeks to meet the April 15 filing deadline. Form 1040 is more complicated than ever, asks more seemingly unanswerable questions, and requires more aspirin and mental ability to complete. Even Form 1040A, the short version for taxpayers who do not itemize deductions, is trickier than before. Beams Harry Friedenberg, owner of H & R Tax Service in Los Angeles: "Congress in its infinite wisdom simplified the tax form so much that people are calling us and screaming 'Help!' We're delighted. We get $60 an hour for filling out short forms."

The cause of all the confusion is Public Law 94-455, otherwise known as the Tax Reform Act of 1976, passed by Congress last September. The act has earned the nickname "Attorneys' and Tax Accountants' Relief Act of 1976." Few will disagree if they wade through the act's 413 pages, 21 titles, 190 sections, 104 pages of supplementary tables and index. The new act affects nearly every taxpayer. It takes a little from almost everyone, gives a little back to everyone except the very rich and on balance is expected to net the U.S. Treasury about $1.6 billion in additional revenues during the current fiscal year, which ends next Sept. 30.

Rather than imposing massive reform, the act tinkers and fine-tunes. It narrows some long-abused loopholes, widens others; it tidies up some of the messiest corners of the tax code and introduces new complexities into others. To cope with it, taxpayers must attempt to comprehend subtle variations in meaning and vague, ambiguous words and phrases. Among other things, the law will be forcing many more taxpayers than ever to learn the distinction between a deduction and a tax credit (a deduction is subtracted from the income subject to tax: a credit is subtracted directly from the amount of tax owed). Says Johnny Carpenter, an Anniston. Ala., laborer: "I did all right until I tried to figure my earned income credit. I didn't even know what that was.* I read the instructions, which said to turn to another page for further instructions. When I turned and read it, it said to turn back to the page I was on without telling me for sure what to do."

One major problem is that the Internal Revenue Service no longer provides people using the short form with handy tables telling them exactly how much tax is due on a given gross income. All filers this year must calculate their own net taxable incomes.

They must also compute for themselves the general tax credit --$35 for each taxpayer and dependent, or 2% of the first $9,000 of taxable income, whichever is greater. Says IRS Spokesman Larry Batdorf: "A lot of people are confused over that." For that and other reasons, more taxpayers are turning to consultants, and paying a fee to get their forms filled out. H&R Block, Inc., the nation's largest such service, expects a big increase in business this year over last. The U.S. Tax Court will also be kept busy for years interpreting the 1976 law's provisions. Here, for dismay or delight, are some of the major changes, beginning with those likely to affect the most people:

SICK PAY loses its role as "the workingman's tax shelter." Previously, a worker owed no tax on as much as $100 a week--$5,200 a year--of money that he received while he was absent from the job because of injury or illness. Now, such pay is taxed as heavily as the income a worker earns when he is healthy. The only exception is payments to people under 65 who are totally and permanently disabled--and in some cases even they may not qualify. Making matters worse, many employers did not withhold tax from paychecks mailed to sick workers during most of 1976, because the law making such income taxable was not passed until late last year. Workers must now come up with the extra tax in cash, a total of $380 million.

Most seriously affected are partly disabled people who collect pension payments from a former employer while holding down a part-time or less demanding job. A typical example is a policeman with a heart ailment who leaves the force and takes on lighter duties as a department store guard. Last year he could deduct $5,200 of his police pension income. This year he cannot deduct any of it, since he is not totally disabled, and he now owes a big tax bill. One Colorado couple's tax liability jumped from $172 to $1,071.

CHILD CARE provisions are broadened, allowing many more working parents to offset baby-sitting costs. Through last year, a parent or couple could deduct up to $4,800 a year in child-care expenses; now they get a maximum tax credit of $400 a child (limit: $800). The credit can be taken by parents no matter how rich; the old deduction dwindled for people with incomes of $35,000 or more, and stopped altogether at $44,600. The credit is available to people who could not claim the deduction: for example, couples consisting of one worker and one student or those who pay grandmothers or other relatives to do the baby-sitting--provided that the grandma does not live in the home, is actually paid for her services, and has Social Security taxes paid by her employer. These changes in total will save taxpayers $384 million a year. But some people in middle-income brackets will pay more. For them, the $4,800 deduction saved more than the $400 or $800 credit will.

RETIREMENT INCOME is taxed less, a break for the lower-income elderly. They may now take a tax credit of 15% on the first $2,500 of any income that they receive as a supplement to Social Security benefits; last year the 15% credit applied to only $1,524 of supplemental income, and then only if the money came from such sources as private pensions--not wages earned in a part-time job. Gain to taxpayers: nearly $1 billion. Married couples get the credit on income up to $3,750. The credit does not go to people with relatively high Social Security benefits.

THE HOME OFFICE is apparently knocked out as a source of deductions for many teachers, salespeople, freelance writers, photographers and artists. No longer can, say, a teacher who grades tests and homework at home deduct part of his expenses for maintaining the dwelling. By and large, such deductions are now available only if the home office is a room that is used exclusively as an office--not just a desk or drafting table in the den--and is the taxpayer's "principal place of business." Loss to taxpayers: $207 million.

While that seems unequivocal, some C.P.A.s think they discern a loophole. Under their interpretation, a worker who in effect uses a home office to moonlight--a writer, say, who works by day for a publication and by night writes freelance articles at home--can still take the deduction because his home office is indeed his "principal place of business" as a freelance. Kenan Heise, a Chicago Tribune reporter who freelances for Chicago magazine from his home, will take deductions for the room where he maintains a reference library. Says he: "I'll claim it as normal and let the IRS tell me if it's not."

VACATION HOUSES are closed off as a loophole. They used to be a deduction bonanza. A taxpayer could rent out the house for several months and take write-offs for mortgage interest and property taxes as well as the "business expenses" of maintenance and depreciation. Often the tax savings were so large that the owner in effect got the use of the retreat free. No more--and taxpayers will lose $207 million.

Mortgage interest and property taxes are still deductible for such dwellings, but other deductions are limited if the house is rented for more than 14 days a year and the owner uses it a lot for his own pleasure.

STOCK OPTIONS, already out of favor in many large companies because so many stocks are selling cheap, are all but killed by the new law. An executive who got an option to buy his company's stock at a cheaper-than-market price under programs begun after last May 20 must pay full income taxes on the value of that option. If a company granted an option at $30 and the stock was selling for $50, the executive owes 1976 taxes on the $20 difference. Formerly he could exclude half of the profit on such a "qualified" option, or $10, as a capital gain. Moreover, he now has to pay the tax even if he has not yet bought the stock, and even if the stock sank below $30 after the option was granted. Companies are rushing to compensate highly valued executives in other ways,.such as deferred-pay plans or cash bonuses. As a result, the change will net the Government little: a mere $1 million in additional revenue.

TAX SHELTERS are sharply restricted, a move justified by a long history of abuse. Gain to the Government: $411 million. The new law eliminates many of the benefits of investing / in farming, moviemaking, sports franchises, equipment leasing, and oil and gas operations.

Tax shelters generally allowed taxpayers, mainly rich ones, to take tax write-offs vastly exceeding the amount of money they put up. A $5,000 investment in a movie that did not do well at the box office could be nurtured into $8,000 or $9,000 in paper "losses," and the investor could then shield that much of his regular income from tax. But under a new "at risk" rule, only the amount actually invested can be deducted. The rule does not apply to real estate tax shelters, but even the benefits of real estate shelters cannot be collected as rapidly as they once could.

THE MINIMUM TAX law on the highest incomes has been greatly tightened. It applies to income of the rich that would otherwise escape through loopholes--the excluded half of capital gains, for instance. Cost to taxpayers: $900 million. The tax itself has been raised to 15% from 10% and applied to many more kinds of earnings. One example: an investor who last year lowered his taxes by writing off a share of an oil and gas venture's "intangible drilling costs" may now have to pay 15% on part of the formerly shielded income.

Taxpayers will have many more --though generally more pleasant--changes to cope with next year under the new law. Divorced people filing returns now can deduct alimony payments only if they itemize deductions; next year they will be able to deduct alimony from gross income and then take the standard deduction.

Workers who relocate this year will be allowed to deduct up to $3,000 in expenses that they pay themselves--like the cost of finding a home in a new city--v. $2,500 on those returns being filed now. Even these changes will not be the last, or the loudest, word on tax reform: President Carter has promised far more fundamental proposals by this September.

Meanwhile, any taxpayer who is befuddled by this year's forms has an out. If all the do-it-yourselfing with a calculator fails, or if an appointment cannot be made in time with an accountant, the taxpayer can apply to the IRS for a two-month extension of the April 15 deadline. It will be granted without question, allowing 60 more days of fun with Form 1040, its shorter brother and all its related schedules. One catch: a check for the approximate amount of tax due must accompany the extension request. Better advice: get cracking.

* This credit reduces the tax liability of many lower-income families and offsets rising Social Security payroll taxes.

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