SUMMER RERUN - MY FIRST 1040

The first Form 1040 that I did as a paid preparer was the 1971 model (I can actually tell you the name of the taxpayer on the very first 1040 I worked on). There have been tons of changes to the 1040 over the years.

On Page 1 of the 1971 Form 1040 one would indicate name, address and Social Security numbers of the filer(s). In the case of a return for a married couple the names were listed as “Richard and Mary Taxpayer” on one line instead of a separate line for the name of each spouse. The filing status was checked and exemptions were claimed. The taxpayer and spouse could each claim an additional exemption for being 65 or over and blind. The names, but not Social Security numbers, of dependent children were listed, with no indication of whether they “lived with you” or “did not live with you”. The names, but again not Social Security numbers, of “other” dependents were listed on Page 2 of the 1040.

Income was reported on Lines 12 through 18 on Page 1, with lines for wages, dividends (no designation of “qualified”), interest (taxable only – no reporting of tax-exempt interest), and “income other than wages, dividends and interest”, the sub-total, total “adjustments to income” and Adjusted Gross Income. The Line for dividends include (a) for gross dividends and (b) for an exclusion amount. If gross dividends and/or total interest exceeded $100 one would have to complete and attach Schedule B

The net tax liability was reported on Lines 19 through 23. Federal Income Tax withheld, Estimated Tax Payments, and “Other payments” were deducted and a balance due or refund was indicated.

Line 31 of the Form 1040, and not Schedule B, was where the taxpayer was asked about foreign accounts.

Page 2 of the Form 1040 consisted of Part I where other dependents were listed, along with relationship, months live in taxpayer’s home, did dependent have income of $675 or more, amount taxpayer furnished toward support, and amount furnished by all others, including the dependent, but not the dependent(s)’ Social Security number(s).

Specific items of income, adjustments to income, credits, other taxes, other payments, and the actual Tax Computation were reported on Lines 34 through 64 in Parts II through VII.

Social Security, Railroad Retirement, and Unemployment benefits were totally exempt from federal income tax. One could use the “3-year” rule for recovering employee contributions to determine the taxable portion of pensions and annuities. This was calculated on Part I of Schedule E.

Adjustments to income included –

* “sick pay”,

* Moving expense,

* Employee business expense, and

* Payments as a self-employed person to a retirement plan, etc.

The only credits indicated on the 1040 were –

* Retirement income credit,

* Investment credit, and

* Foreign tax credit.

The personal exemption amount was $675. Tax could be calculated by “using Tax Rate Schedule X, Y or Z, or if applicable, the alternative tax from Schedule D, income averaging from Schedule G, or maximum tax from Form 4726”. Other taxes included a line for “Minimum tax”, not yet alternative.

On Schedule A –

* medical and dental expenses were reduced by 3% of Adjusted Gross Income (this was the only item on the Form 1040 that was reduced based on AGI),

* taxes included state and local gasoline tax (from gas tax tables), general sales tax (from sales tax tables) and (not or) state and local income tax, with an additional deduction allowed for sales tax paid on “major purchases”,

* contributions were deductible pretty much as they are now, except there was no strict requirement for documentation,

* interest expense included not only home mortgage interest (fully deductible – no principle restrictions) but also interest on installment purchases and credit cards, and

* miscellaneous deductions were not reduced by a % of AGI; certain employee business expense, as mentioned earlier, were deductible as an “above-the-line” adjustment to income.

Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in AGI. So if net long-term capital gain (or net combined long-term and short-term gain if smaller) was $10,000, only $5,000 was reported as income on Page 2 of Form 1040. The maximum net capital loss deduction was $1,000.

The starting tax rate was 14% and the top was 70%, although the rate for “earned income” such as wages was capped at 50% - hence the “Maximum Tax” calculated on Form 4726.

The 1971 standard deduction was $1,050 for both a single person and a married couple. The standard deduction was originally 10% of AGI up to a maximum of $1,000. It wasn’t until 1975 that the standard deduction for married was more than that for single. Click here for a chart of historical standard deduction amounts for single persons and married couples.

Obviously the 1971 tax returns were prepared by hand. We didn’t even have photocopies back then (at least where I worked). The returns were written, or sometimes typed, on 3-copy carbonized forms purchased from Accountants Supply House in Valley Stream, New York State.

So tax rates were higher back then – but there were a lot more deductions allowed. And one could also use either Income Averaging or 10-Year Averaging to cut thousands off a large tax bill.

How do I remember all this? My memory is good – but not that good. I have a client, originally a client of my mentor Jim Gill, for whom I have a copy of every single Form 1040 filed since 1970 in the file.

So do you think the Tax Code is better now, or was it “more better” back then?

TTFN