Ka Wai Ola - Office of Hawaiian Affairs, Volume 5, Number 3, 1 March 1988 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

Tax Changes Demand a Second Look

Editor's Note: Ka Wai Ola 0 OHA is priviIeged to present the first in what is hoped to he a helpful series of tax informationfor our readers as presented by one of Hawaii's top experts on the subject who also happens to he a Hawaiian. With the deadline for filing your state and federal ineome taxes just around the corner, I wanted to share a few points you might want to watch for, especially if you do your own taxes. The Tax Reform Act of 1986 will have a substantial impact on our old habits in filling out that tax return. Let's take a look at the major changes whieh have occurred and whieh are likely to affect the amount that you or I will have to pay. The new federal tax forms look a bit different this year but generally ineome is reported on the front of the 1040 and N-12 and your deductions and how mueh tax you owe is figured on the back. Single taxpayers and heads of households will have to file a return if their total ineome is more than $4,400 while those who file a joint return will have to file a return only if they have a total ineome of more than $7,560. In reporting ineome, taxpayers will find that the "old reliable" exclusion for dividend in'eome of $100/$200 has disappeared and that ali of their capital gains will now have to be reported. In addition, all unemployment eompensation that may have been received during the year will now have to be reported. Those with children in college who are receiving scholarship assistance awarded after August of 1986 must report that amount whieh represents room, board or travel as well as any ineome received by their child for services rendered. The logic behind this new rule is that you would have had to pay for these expenses anyway had your child remained at home. Looking further down the front page of the 1040, taxpayers will find that the 10 percent adjustment for working couples has disappeared as well as the deduction for employee business expenses. The latter adjustment to ineome will now be taken under miscellaneous deductions and will have to exceed 2 percent of adjusted gross ineome. Of course, the most discussed loss is that of the individual retirement account deduction. The deduction for contributions to such accounts will be available only for those without a qualified retirement plan. However, even if you do have a retirement plan, you may be able to make a deductible contribution to an IRA. You single taxpayers with incomes of less than $35,000 and joint returns with less than $50,000 in adjusted gross ineome are able to exclude part, if not all, of a contribution to an IRA. The full deduction of $2,000 will be available to those with less than $25,000/$40,000 while those between will see the amount that ean be deducted

gradually reduced as ineome reaches the maximum ceiling. Among the highlights of the itemized deductions taken on Schedule A, is the increase in the threshold for medical deductions to qualify whieh will go from 5 percent of adjusted gross ineome to 7.5 percent of adjusted gross ineome. In other words, medical expenses must now exceed more than 7.5 percent of AGI before a single dollar will count toward total itemized deductions. Those taxpayers who relied on deductions for state and loeal taxes paid during the year will find that the state's general excise tax (sometimes cailed the sales tax) is no longer deductible. On the other hand, state ineome taxes and county property taxes paid during the year continue to be deductible and taxpayers should remember to list all withheld and estimated ineome tax paid during 1987. Also doing a fading act is the deduction for interest ineome. While interest on home mortgages will remain fully deductible, consumer or "credit card" interest will be phased out over the next few years with only 65 percent of the consumer interest paid in 1987 being deductible. Showing up as an itemized deduction will be any moving expenses that were incurred during the year. These expenses used to be taken as an adjustment to ineome on the front of the 1040 form. A deduction whieh has been subject to a- lot of confusion is the charitable donations deduction. If a taxpayer itemizes on Schedule A, charitable eontributions will continue to be deductible. What Congress took away last year is the deduction for charitabie contributions for non-itemizers. Under the prior law, those taxpayers who did not have sufficient deductions to warrant using Schedule A were able to deduct their charitable contributions right on the 1040 form without using Schedule A. Under the new law, this special provision for the deduction of charitable contributions will no longer be available for non-itemizers. Finally, as it was pointed out earlier, miscellaneous deductions for union dues, uniforms, and employee business expenses will have to exceed 2 percent of adjusted gross ineome before they will be deductible. Under prior law, miscellaneous deductions were not subject to any threshold and therefore were fully deductible. The new law attempts to recognize only "excessive" miscellaneous expenditures as a deduction. These are but a few of the changes that taxpayers will have to eope with on the 1987 federal tax returns. Taxpayers should invest some time this year in familiarizing themselves with these differences onee they receive their tax forms in the mail. It won't be easy this year, so a word to the wise, don't wait until the filing deadline of April 15.