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Practical Questions and Answers
RETURNS AND PAYMENT OF Tax
Q. Who must file a return?
A. Unmarried individuals and married individuals not living with wife (or husband) whose net income for the taxable year is $1,000 or more; married individuals living with wife (or husband) whose net income, together with that of wife (or husband) amounts to $2,500 or more; and all individuals whose gross income is $5,000 or more, regardless of net income, must report.
If husband and wife, living together, have separate net incomes which, added together, total $2,500 or more, or an aggregate gross income of $5,000 or more, each must make a separate return unless they include both incomes in a single joint return. In a joint return the tax is computed on the aggregate income.
Whether an individual is the head of a family or has dependents is immaterial in determining his liability to make an income tax return. Returns of income on a calendar year
be filed any time after January 1, but not later than March 15. If the return is based on a fiscal year, it must be filed by the 15th day of the third month following the close of that year.
Q. When is it advisable for husband and wife, living together, to make separate returns?
A. To obtain full benefit of the split normal and surtaxes and separate credits for "earned income," it is usually better to file separate returns where the wife has a separate income and where the joint net income exceeds $5,000. If, however, the deductions or losses of either husband or wife are greater than his or her gross income, a joint return may be advisable. The best way to insure against paying more tax than legally is due, is to compute the tax both singly and jointly. To illustrate:
Return Net income of husband (earned)... $7,500 Net income of wife (unearned)..
Joint Return $7,500 4,000
Total net income...
Net income subject to normal tax.. $5,000
Total normal tax.... Surtax on total net income.
$80 $315 Earned income credit..
30 Total tax due....
$90 $60 $285 In this example, by filing separate returns the normal tax is reduced by $100, the surtax eliminated, and the earned income credit increased $20.
Q. My wife and I filed a joint return for 1923. Must we file a joint return for 1924, or may we file separate returns?
A. The Commissioner of Internal Revenue has ruled that husband and wife may file a joint return one year and separate returns the next, regardless of whether the change benefits them or the Government.
PERSONAL EXEMPTIONS AND CREDITS
A. In computing the net income subject to normal tax, a single person or a married person not living with wife (or husband) is allowed a personal exemption of $1,000; the head of a family or a married person living with wife (or husband), $2,500. A husband and wife living together receive only one personal exemption of $2,500 against their aggregate net income; if they make separate returns, this exemption may be taken by either or divided in any way they see fit.
A further exemption of $400 is allowed for each person (other than husband or wife) receiving his chief support from the taxpayer, if such a person is less than eighteen years old or is mentally or physically unable to earn his own living. The credit for dependents must be claimed by the one contributing the chief support; it may not be divided between husband and wife, as the $2,500 personal exemption may be.
Q. How do I determine the amount of personal exemption to which I am entitled?
A. Your status on the last day of your taxable year ordinarily determines the exemption you may claim for the entire year. If your status changes during the year from single to married or to head of a family, or vice versa, your exemption will be that part of $1,000 which the number of months when you were single bears to twelve months, plus that part of $2,500 which the number of months you were married, or were the head of a family, bears to twelve months. More than half a month is considered a full month; less than half a month is dropped. For example:
John Smith and Mary Jones were married March 18, 1924. They file a joint return: Personal exemption of John Smith for
period before marriage.. ..3/12 X $1,000 $250 Personal exemption of Mary Jones for
period before marriage.. 3/12 x $1,000 = $250 Personal exemption of John Smith and wife..
. 9/12 X $2,500 $1,875
Total personal exemption.
Where an individual dies, the personal exemption and credit for dependents is determined by his status on the day of his death. The surviving spouse, if any, is entitled to full credits according to his or her status at the close of the year.
Q. What other credits are allowed against net income?
A. In addition to the personal exemption and credit for dependents, individual taxpayers are entitled to reduce net income in computing the amount subject to normal tax by the following items:
(a) Dividends, regardless of amount, from a domestic corporation other than a China Trade Act corporation or one entitled to the benefits of Section 262 of the Tax Law. (See pages 89 and 90.)
(b) Dividends, regardless of amount, from a foreign corporation, when it is shown to the satisfaction of the Commissioner that more than 50 per cent of the gross income of the corporation for the three years ending with the close of its taxable year before the dividends were declared, was derived from sources within the United States.
(c) Interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income because subject to surtax.
RATES AND COMPUTATION OF TAXES Q. What are the tax rates on 1924 income?
A. Two taxes, called the normal tax and the surtax, apply to incomes of individuals. The normal tax on citizens or residents is 2 per cent of the first $4,000 of net income, 4 per cent of the next $4,000, and 6 per cent of all net income above that amount. Non-resident alien individuals, unless they are residents of Canada or Mexico, must pay 6 per cent on the entire amount of net income subject to normal tax. Non-resident alien individuals who are residents of Canada or Mexico, pay a normal tax of 2 per cent on the first $4,000 and 4 per cent on the next $4,000 of net income attributable to compensation for labor or personal services performed in the United States in excess of the credits allowed by Section 216 (d) and (e) of the Law. (See page 69.) All net income above the amounts taxed at 2 per cent and 4 per cent is taxed at the rate of 6 per cent.
The surtax is imposed, in addition to the normal tax, upon net incomes of more than $10,000. Starting at i per cent, the surtax rates increase on successive amounts as the net income grows larger, to a maximum rate of 40 per cent on incomes over $500,
Personal exemptions and credits do not enter into computation of net income subject to surtax.
Q. What effect has earned net income on my total tax ?
A. You are permitted to reduce the amount of tax computed in your return by 25 per cent of the tax which would be payable if your earned net income constituted your total income. This credit is limited to 25 per cent of your normal tax computed without regard to "earned income." To illustrate: Salary..
Total net income (subject to surtax).. $10,500
In arriving at the earned income credit, it is necessary to make two computations:
(1) Since your total net income ($10,500) is in 'excess of $5,000, but the actual amount of your earned income ($4,500) is less than $5,000, it is assumed that at least $5,000 of your income is earned, as provided in Section 209 (a) (3) of the Law (see page 62). The tax on this minimum amount would be:
Amount of income considered to be
$2,500 @ 2% $50 25% of this amount is..
$12.50 (2) We now apply the limitation on the amount of the earned income credit provided for in Section 209 (b) (page 62). This is 25 per cent of the tax on your net income subject to normal tax. Your net income subject to normal tax, we find, is $2,000, which, at 2 per cent, equals $40; 25 per cent of $40 is $10. This amount, being less than 25 per cent of the tax as computed in the preceding paragraph, is the amount of your earned income credit.