I recently completed my 50th tax filing season. I have been a paid preparer of 1040s since February of 1972.
This is the first in a series of looking back over my 50 tax seasons as a tax preparer.
Most people remember their first love. I remember with fondness the first Form 1040 I prepared – which for me is really the same thing.
My first 1040 was the 1971 model (I can actually tell you the name of the taxpayer). This was back when a deduction was really worth something and everyone itemized. As we used to tell clients, "Uncle Sam will reimburse you for up to half of our fee!"
Back then -
* a savvy tax preparer could "pull a rabbit out of a hat" and save a client literally thousands of dollars in federal income tax with "Income Averaging" or "10-Year Averaging" (and in doing so be assured a client for life),
* credit card interest, auto loan interest and personal loan interest, as well as our tax preparation fees, were fully deductible,
* "Employee Business Expenses" were allowed as an adjustment to income,
*there was no such thing as an Adjusted Gross Income exclusion or threshold or the "phase-out" of a deduction or credit,
* we had never heard of a PIG, PAL, ACRS, MACRS, or MAGI, at least in the context of tax returns,
* and one-half of long-term capital gain just disappeared from the tax return.
For 1971 the starting tax rate was 14% and the top rate was 70%. There was a "Minimum Tax", not yet alternative, and a "Maximum Tax" (the maximum tax on "earned income" was 50%). While we did prepare a few maximum tax forms, I do not recall ever preparing a minimum tax form. The Alternative Minimum Tax did not begin to affect my clients until the 2nd half of the 1990s. And there was the previously mentioned Income Averaging and 10-Year Averaging.
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 included (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.
Part I of Page 2 of the 1040 was 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.
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 –
* 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 –
* 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 – not limited to interest on “acquisition debt” and no principle restrictions) but also interest on installment purchases, credit cards, and other “personal” interest.
* 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 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.
There were no computers in those days. During my first few years we did not even have a copy machine in the office. Returns were prepared by hand on 3-page carbonized forms purchased from Accountant's Supply House. As most of you know, I still prepare all of my federal income tax returns manually.
As I started out in the tax preparation business the matching of 1099s to 1040s had just begun. I remember a client who came into the office during my first or second year with a humungous print-out from the IRS listing by source all the interest and dividends that he had failed to report on his previous year's 1040.
During my early years you were not required to list the Social Security number for dependents claimed on your return. One year a married client, let's call him John and his wife Mary, left his "stuff" off at the office, which included a handwritten sheet listing, among other deductions, "dependents" John, Mary, Paul and George. The college student who prepared the return that year (not me) listed 4 dependents - John, Mary, Paul and George. The client received the refund requested on the return without question.
The next year John came in and stayed while I prepared the return. I asked if he was still claiming his four kids, John, Mary, Paul and George, and he told me that he only had two children - Paul and George! The John and Mary he had listed on the sheet the previous year was apparently he and his wife. It appears that the student who had prepared the earlier return had forgotten our first, and most important, rule of tax preparation - always review the prior year's return when preparing the current 1040.
At the IRS Tax Forum several years back, it was reported that in the first year you were required to list a Social Security number for all of your dependents about 5 Million dependents mysteriously disappeared from tax returns.
Of course, in the "good old days" we never filed an extension. We finished all the returns on April 15th - even if we had to stay in the office until the wee hours of the morning, with the client present, to do so! I often made an 11:30 PM run to the Jersey City main Post Office on April 15th
So, you can see there have been a lot of changes to tax law, and tax preparation, since my first 1040. And there will be more changes going forward. It appears the only constant in tax law is change. Today’s tax law is certainly much more complicated and convoluted than the 1917 US Tax Code.
One thing has not changed. The basic challenge for the tax professional is still the same today as it was in 1971– getting all the necessary information from the client to properly prepare the return.