2012 vs. 1982: How Our Taxes Have Changed

With a new year right around the corner, it’s the perfect time to reflect back and compare how taxes are reported today with how they were filed 30 years ago in 1982.

So I pulled up some ancient forms and tax laws and did a study. Ronald Reagan was in the White House and he introduced the 1982 Deficit Reduction Compromise. Under the plan, Reagan agreed to a minor increase in business taxes while pushing through his spending cuts. The major tax code revisions, which have often been cited in the today’s fiscal cliff debate, did not occur until 1986.

Here’s how the major deductions were handled:

Medical

NOW: Being eligible for the medical deduction is tough. To determine if you qualify you have to add up all of your medical expenses then subtract 7.5% of your adjusted gross income. Your deduction is the remainder. Beginning in 2013, the amount you subtract will be 10% unless you are over age 65.

THEN: Back in 1982 you had to subtract only 1% of your adjusted gross income.

Interest

NOW: Today, the IRS only allows mortgage and investment interest as itemized deductions on Schedule A. You might be able to take some vehicle interest under employee business expenses if you used your car in your employment. But that’s about it.

THEN: Back in 1982, you could take an interest deduction for credit card interest, consumer loans and all charge accounts. Those deductions were eliminated with the major revisions to the tax code in 1986.

Contributions

NOW: The IRS is cracking down on its documentation requirements for proof of donations.  IT wasn’t long ago when the agency did not look askance at non- receipted donations that added up to only $100 or so. I’ve been through audits with clients who threw a couple of bucks into the church offering plate every Sunday without getting a receipt and it wasn’t an issue. It was never disallowed. Nowadays, you must have  not only have a cancelled check but an acknowledgment letter from the charity as well. The IRS is disallowing contributions that lack a back-up document. You may think that a check made out to the March of Dimes is obviously a donation, but the IRS’ point of view is that there may have been something received in return and an acknowledgement letter will provide that information. For example, if you donate $100 to NPR and received in return Tina Turner’s Greatest Hits album valued at $40, your donation deduction will be for only $60, the difference between the total given and the value of what was received.

THEN:  In 1982, the only requirements were that you must give the name of the organization if you contributed more than $3,000 to any one organization.

Miscellaneous Itemized Deductions

In 1982, employee business expenses, tax preparation fees, union and professional dues, etc. were not subject to the 2% haircut like they are now. Like medical, you total the deductions then subtract 2% of your adjusted gross income from the total. What remains is what you may write off.

Employee Business Expenses

In 1982, employee business expenses were deductible right off the top as an adjustment to income on the front of the tax return. So it didn’t matter if you itemized or not, you still got the deduction.  This was so much fairer for employees who racked up expenses that employers would not reimburse. Or whose expenses were included on their W2. For example, if you had an automobile expense account that wasn’t an accountable plan it must be reported on the employee’s W2. For example, an employer gave his employee $500 per month in gas money, $6,000 for the year would be added to the W2. Now the employee must report the income but if he can’t itemize deductions he loses the write off.

The tax rates in 1982 ranged from 12% on incomes in excess of $3,400 up to 50% on incomes exceeding $106,000. Today’s rates range from 10% on incomes in excess of $8,700 to 35% on incomes exceeding $388,350.

And that’s one thing that makes the tax code confusing. The IRS gives deductions with one hand then levies heavy rates with the other hand or vice versa, depending on the tax year and the whims of Congress.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.