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Q. Arthur Graham, in making up his tax report for the calendar year 1924, finds that he had ordinary net income from salary of $7,500 and interest of $500; a profit of $108,000 from the sale of an office building which he had bought in 1919; and a loss of $6,000 from the sale of some securities which he had acquired in 1917. His personal exemption is $2,500. What tax does he pay?

A. Mr. Graham may add the net profit from the sale of his office building and securities to his ordinary net income of $8,000, and compute the tax in the usual way at the regular normal and surtax rates; or he may figure a tax of 1272 per cent on the net gain from the sale of the capital assets (i.e., property held by a taxpayer for more than two years), and add to it the tax on his ordinary net income of $8,000 computed in the regular way, whichever is to his advantage. To illustrate:

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Tax on ordinary net income.
Tax on capital net gain (12/2% of $102,000)

$140 12,750

Total tax...

Less earned income credit.



Total tax due by Option II..


By electing to segregate the net profit from the sale of his capital assets (see Section 208 (b), page 61), as illustrated by Option II, Mr. Graham saves $14,040 in the amount of his tax. The options illustrated are granted only where a taxpayer has a capital net gain. If he has a capital net loss, as indicated in the following question and answer, the law permits him to claim only 1272 per cent of the loss.

Q. During 1924 Paul Smith received a salary of $20,000, interest $8,000, and dividends $40,000, a total of $68,000. He suffered a net loss of $50,000 from the sale of securities purchased in 1921. How much tax does he pay? A. The amount of tax due is computed as follows:

Tax on ordinary net income of $68,000. $8,515
Reduction for capital net loss (1272% of $50,000) 6,250

Tax payable...

$2,265 If it were not for the restriction of Section 208 (c) of the Law jage 62), which permits a taxpayer to deduct only 12, per int of a capital net loss, Mr. Smith's tax would be $140. (Orinary net income of $68,000 less $50,000, loss on the sale of curities, or $18,000. The sum of Mr. Smith's personal exempn of $2,500 and dividends of $40,000 being in excess of his ; income, leaves no net income subject to normal tax. The :tax on $18,000 is $140.)



Q. What income is exempt from tax?

A. Section 213 (b) of the Act, which may be found on page 65, enumerates certain items of income that are entirely or in part free from tax. These items essentially are the same as under the Revenue Act of 1921. It should be noted, however, that the new Law requires a taxpayer who owns (a) obligations of a State, Territory or political subdivision thereof, or the District of Columbia; (b) securities issued under the Federal Farm Loan Act, or (c) obligations of the United States or its possessions, to submit with his income return a statement showing the number and amount of these obligations and securities and the income from them, in such form and with such information as the Commissioner may require.

Q. The life insurance company in which I am insured pays a dividend annually on my policy which has not matured. Is this dividend taxable income?

A. Dividends on life insurance policies that have not matured, whether drawn in cash or applied to the payment of the annual premium, are not taxable income. Dividends on paid-up insurance policies are considered income for surtax purposes, just as other corporate dividends are.

Q. Is alimony taxable income?

A. Neither alimony nor an allowance based on a separation agreement is taxable income to the recipient. The payor, on the other hand, cannot claim either as a deduction.

Q. I am a notary public commissioned by the State of New York. Are the fees I receive taxable?

A. Fees received by notaries public commissioned by States, or by persons serving on the jury of a State, County or Municipal Court, and commissions of receivers appointed by State Courts are not taxable income.

Q. What is the maximum amount of Liberty Bonds an individual may hold exempt from tax?

A. Interest on all Liberty Bonds, including the Treasury Bonds of 1947-52 issued October 16, 1922, Victory Notes, War Savings Certificates and Treasury Certificates of Indebtedness, is entirely exempt from normal income tax.

In addition, interest on Liberty 3/2's is exempt from individual surtaxes for the life of the obligation, and Liberty 4's and 4/4's of the Second, Third and Fourth loans, Treasury Bonds of 1947-52, Certificates of Indebtedness and War Savings Certificates are exempt from individual surtaxes in the amounts specified for the following periods, regardless of whether they were originally subscribed for or subsequently purchased: Period

Holdings For life of obligation.

Aggregate holdings of $5,000

par value of Liberty 4's and 4/4's, including Treasury Bonds of 1947-52; Certificates of Indebtedness, and War Savings Certificates;

plus From July 3, 1923, to July 2, Aggregate holdings of $50,000 1926.

par value of any Liberty 4's and 4/4's.

Q. I am a public school teacher employed by the City of New York. Is my salary taxable?

A. No. Compensation paid its officers and employees by a State or politicəl subdivision thereof is not taxable.


Q. What items must I report as gross income?

A. Gross income includes everything you received during the taxable year in gains or profits or as compensation for services performed (except as specifically exempted by Section 213 (b) of the Act, page 65). This includes salaries, wages, professional fees and commissions, profits from business operations or the sale of property, income from stocks and other securities, interest on notes, mortgages and bank accounts, rents, royalties, etc.

Q. I have bonds with coupons maturing in 1924 still attached, as I have neglected to clip them. If I cash the coupons in 1925, shall I consider the interest as income in my return for 1924 or my return for 1925?

A. Interest coupons are taxable for the year in which they mature and are collectible even though not cashed in that year. Q. I received Liberty Bonds in part payment of my salary. Are the bonds taxable as income?

A. Yes. Where services are paid for with something other than money, the market value of the medium of payment on the day it is received is to be included as income. If the services were given for a stipulated price, this price, in the absence of evidence to the contrary, will be presumed to be the fair market value of the compensation received.

Q. What part of the proceeds of an endowment policy is taxable when the insured is paid at the end of the endowment period?

A. The taxable income is either (a) the difference between the amount received in settlement and the total premium paid on the policy less any dividends; or (b) the difference between the amount received and the combined sum of the cash surrender value of the policy on March 1, 1913, plus the sum of premiums paid, less dividends received, since March 1, 1913, whichever is to your benefit.


The NET INCOME referred to in the first column of the table on the opposite page is computed as in the following example: Gross Income

Deductions Salary and commissions. $15,000 Business expenses..

$ 550 Profits from sale of securities..

Interest paid..

100 Rent...

Taxes paid..

250 Partnership profits—your share.. 3,300 Losses...

400 Interest on bank account, mortgages, cor

Bad debts.

50 poration bonds, etc. 500 Depreciation..

650 Gifts to charities.

800 Total Income.

$20,500 Total Deductions.. 2,800 Total Deductions....


Net Income....


Let us assume that you are married, have no other dependents, and received the above income for 1924. The total tax for 1924 is found from the table on the opposite page by adding to $595 (the amount in column G opposite $16,000), a normal tax of $102 (6 per cent of $1,700), and a surtax of $51 (3 per cent of $1,700). This gives a total tax of $748. ADDITIONS TO THE ABOVE TAX:

If you are single and without any dependents, as described in the Act, your exemption from income subject to normal tax is only $1,000, instead of $2,500, as shown in the table on the following page. This results in an increase of your normal tax by an amount not exceeding $90.

DEDUCTIONS FROM ABOVE TAX:-(a) If you have dependents, as described in the Act, your exemption from income subject to normal tax is increased by $400 for each dependent, resulting in a reduction of your normal tax as computed in the table by an amount not exceeding $24 for each dependent.

(b) If your income includes dividends, interest from United States Treasury Notes, or other income subject only to surtax, your normal tax, as computed above, will be reduced by not more than 6 per cent

of the amount of such income.

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