I
recently embarked on my 50th tax filing season. I have been a paid preparer of 1040s since
February of 1972.
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!"
On
my first day on the job, never having prepared a tax return before, not even my
own, my boss took me to a desk and gave me a copy of a client’s previous year’s
tax return and a briefcase full of papers that constituted the current year’s
tax “stuff”. He told me to “jump in and
swim”. I learned how to prepare income
tax returns the very best way possible – by manually preparing income tax
returns.
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 –
·
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 – 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.
In
my opinion some 1971 tax law is better than 2020 tax law and some 2020 tax law
is better than 1971 tax law. But that is
a topic for another post.
TAFN
