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Form 1040: Changes from 1974 to 2001
It is now tax season 1 in America. Some taxpayers will complete their own returns on paper, while other will use software such as TurboTax® or file electronically with the Internal Revenue Service (I.R.S.). Other taxpayers will depend on certified public accountants (C.P.A.'s) or tax attorneys to prepare their income tax returns. Whether you file yourself or hire a professional, you are responsible for the correct assessment of your tax 2 and, if so required, pay any penalty or interest charge. You see this law on the bottom of the 2001 Form 1040, just above your signature: "Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct and complete."
During the last 25 years, Congress and the I.R.S. have revised the forms, making several changes that politicians call "tax simplification." Please review both the 1974 and 2001 versions of Form 1040 and Schedule A and then decide: Are the tax forms simpler today than they were in 1974?
Click here to view the 1974 Form 1040 (page 1) in a separate window.
Then click here for the 1974 Form 1040 (page 2).
Click here to view the 2001 Form 1040.
Basic Tax Formula
1974
2001
Total Income Lines 9-13, page 1; Lines 28-38, page 2. Line 7-22, page 1.
Minus "Above the Line Deductions" Line 14, page 1; Lines 39-43, page 2. Lines 23-33, page 1.
Adjusted Gross Income "The Line" Line 15, page 1. Line 33, page 1.
Minus "Below the Line Deductions"
The greater of a Standard Deduction or total itemized deductions (Schedule A) Line 45 (a) and (b) Line 36
Personal and Dependency Exemptions Line 47 Line 38
Taxable Income Line 48 Line 39
1974 Form 1040 Part II, line 39: Adjustments to derive adjusted gross income or an “above the line” deduction
The first “above the line” deduction or adjustment to derive adjusted gross income in 1974 was the “Sick Pay Exclusion.” This exclusion allowed the taxpayer to exclude from taxation those wages earned “while away from work because of injury or sickness.” 3 For information on how to figure the exclusion the taxpayer was directed to “Form 2440 and Publication 522, Adjustments to Income for Sick Pay.” 4
Moving Expenses on Form 3903 were in 1974 an “above the line” adjustment to derive adjusted gross income and again in 2001 are similarly placed on the Form 1040.
Employee Business Expenses on Form 2106 were an “above the line” deduction in 1974, whereas in 2001 they have been changed to a “below the line” deduction available to those who qualify to itemize on Schedule A.
The fourth and final category of “above the line” 1974 deductions was “payments as a self-employed person to a retirement plan.” 5 This is a reference to Keogh (H.R. 10) 6 plans for sole proprietors. For the year 2001, the Keogh (H.R. 10) plan deductions have been expanded to include IRA deductions as well as SEP, SIMPLE and qualified plans allowing employee participation together with the self-employed.
2001 Form 1040 “above the line” Adjustments to derive “Adjusted Gross Income”
A quarter-century of changes in how the income tax is assessed have lead to Congressional enactments not available in the 1974 law. These include the IRA deduction, a deduction for student loan interest, the Archer MSA deduction, one-half of the self-employment tax and one-half of the self-employed individual’s health insurance deduction.
What is the significance of "Adjusted Gross Income"?
Federal adjusted gross income has become the starting point for most state governments to assess income tax. Therefore to the extent the federal law is accepted by the state legislatures, “above the line” tax deductions reduce not only federal taxes but state income taxes as well.
Social Security payments are another example which can illustrate the distinction between economic total income and total income for tax purposes. In 1974, Social Security payments received were not considered income subject to federal taxation. They were regarded as transfer payments, a form of welfare to support those over age 65 who had retired from employment. Now in year 2001, 7 some if not all social security payments received will be reclassified as income and included in the total income subject to federal tax. Unemployment compensation is another example of a once-untaxed welfare payment which has slipped into the category of taxable income. 8
As one reads through Schedule A - Itemized Deductions, one gains a further understanding of the significance of adjusted gross income.
Itemized Deductions on Schedule A “below the line” deductions
Click here to view the 1974 Schedule A.
Then click here to view the current Schedule A.
Comparing the 1974 and 2001 Schedule A, we have the story of the disappearing deductions. Itemized deductions are divided into six categories; medical, taxes, interest expense, contributions, casualty or theft loss and miscellaneous.
Medical
In 1974 unreimbursed medical expenses in excess of 3% of adjusted gross income were allowed as an itemized deduction. On the 2001 Schedule A, unreimbursed medical expenses must exceed 7 ½% of adjusted gross income before an itemized deduction is allowed. In 1974, health insurance was separately stated and subject to a 1% of adjusted gross income exclusion with the excess being considered in the computation of the excess unreimbursed medical subject to the 3% computation. In 2001, there is no separate limitation on health insurance premiums.
Taxes
Gone from the 2001 category are two taxes which Americans must still pay but were available as a deduction on the 1974 Schedule A: the state and local gasoline tax and the general sales tax. Taxpayers had a choice of using the amount provided on an I.R.S. table or if one could document by saved receipts a higher amount.
Click here to view the 1974 State Sales Tax table.
Then click here for the 1974 Gas Tax table.
Interest expense
Gone from the 2001 category are interest and finance charges paid on credit cards. Home mortgage interest and investment interest expense remain deductible.
Casualty and Theft Loss
The big change which took place here in the years between 1974 and 2001 is that for 2001 any unreimbursed casualty or theft loss must be reduced by $100 plus 10% of adjusted gross income before any deduction is allowed.
Miscellaneous Expenses In 1974, alimony paid was a miscellaneous deduction whereas on the 2001 1040 it is an “above the line” deduction to derive adjusted gross income. Also, in 1974 expenses for child and dependent care (Form 2441) were a miscellaneous deduction whereas on the 2001 Form 1040 these expenses are the basis of a credit against the tax itself. The big change in this area is the subjecting of all miscellaneous expenses to a 2% of adjusted gross income floor calculated as in the 7 ½% medical expense limitation.
Whereas in 1974 the total itemized deductions were a subtraction to determine taxable income, in 2001 if your adjusted gross income exceeds $132,950 married filing jointly, your deductions may be further limited by an overall 3% limitation on itemized deductions. This is illustrated in I.R.S. Publication 17, p. 145.
Standard deduction
In lieu of itemizing one’s deductions on Schedule A, a taxpayer may elect to take a standard deduction. Generally, it is wise to take the standard deduction if it is higher than one’s itemized deduction or if one would not be able to prove the validity of one’s itemized deduction. The standard deduction is based on one’s marital status under state law for the state of the taxpayer’s residence. For 2001, the standard deduction for a single person is $4,550; a head-of-household, $6650; a married filing jointly or a qualifying widow (er) is $7600 and a married filing separately is $3800. A head-of-household as well as a qualifying widow(er) is a special category of a single person whereas a married filing separately is a special category for married persons. Look to Line 45 (b), Part III, page 2 of Form 1040 and note the phraseology. “If you do not itemize deductions, check here _ and enter 15% of line 44, but not more than $2,000 (or $1,000 if line 3 checked).”
15% of Line 44 was in 1974 15% of “adjusted gross income” provided it did not exceed $2,000 or $1,000 if your filing status was “married filing separately.” Compare the aforementioned statement to the box on the leftside on page 2 Form 1040 for tax year 2001 where the standard deduction is stated as a fixed amount; $4550 for a single taxpayer, $6650 for a head-of-household, $7600 for married persons filing jointly or qualifying widows (ers) and $3800 married filing separately.
Click here to view the 1974 tax rate schedule.
Standard Deduction/Personal and Dependency Exemptions = Poverty Level for a family of 4
Standard Deduction Married Filing Jointly $7,600
Personal Exemptions 2 x $2900 in 2001 $5,800
Dependency Exemptions 2 x $2900 in 2001 $5,800
Total $19,200
$19,200 is the poverty level for a family of 4, thus a family of four may earn up to $19,200 without incurring any Federal income tax.
Tax Policy Question: Is it desirable to create a device to protect a basic amount of income from erosion by the income tax or should the cost of government be considered as the cost of food, shelter and housing? Phased another way should low-income citizens have their income tax reduced or should they pay their fair share of the income tax and receive protection through various social welfare programs?
Tax Policy Question: Are there additional deductions not currently allowed in the computation of an individual’s income tax liability which should be considered? For example, if someone sells inventory, he would be permitted the cost of the inventory as a deduction from gross income. Is the cost of commuting from one’s residence to one’s place of employment similar or parallel with the cost of inventory sold? Should one be allowed to deduct the cost of commuting in determining one’s adjusted gross income?
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1 Tax Season in America is defined as January through April 15th, the filing deadline for individual tax returns.
2 Your assessment of your tax on your income is based on a voluntary compliance system.
3 Package X, 1964, page 46, page 8 of general instructions to Form 1040 written by the Bureau of Internal Revenue, Department of the Treasury and published by the Superintendent of Documents of the United States of America.
4 Ibid.
5 Ibid.
6 named for Congressman Eugene Keogh (D-NY).
7 This is not new in 2001 but as been a part of the law since 1984.
8 Unemployment compensation has been taxable since 1979.
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