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If the individual were taxed on the dividends received, it would result in a double tax which would be unfair to the stockholder. The dividends received from foreign corporations are exempt from the normal tax only in the event that 50% or more of the gross income was received from sources within the United States.

Taxable Interest on Obligations of United States. The interest received from obligations of the United States, when included in gross income, may be taken as a credit in computing the normal tax. The reason for this is because interest upon all obligations of the United States is free from the normal tax. This has been previously discussed in detail under the title of "gross income" and "exempt income".

Personal Exemption. A single person, regardless of the amount of his net income, is entitled to a personal exemption of $1,000.00. The head of a family or a married person living with husband or wife, regardless of the amount of his net income, is entitled to a personal exemption of $2,500.00. In the event the husband and wife make separate returns, the personal exemption may be taken by either or may be divided between them. It has been previously explained that husband and wife may file separate returns or a single joint return.

A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. An individual need not, therefore, be married to be classified under the Law as the head of a family. When the status of a single individual is such as to entitle him to be legally classified as the head of a family, he is entitled to the same amount of personal exemption as if married, that is, $2,500.00.

Exemption for Dependents. A taxpayer is entitled to a credit of $400.00 for each person who is dependent upon him and receiving his chief support from him, whether related to him or not, and whether living with him or not, provided such dependent is under eighteen years of age or is incapable of selfsupport because of mental or physical defects. The Treasury Department has ruled that the credit is based upon actual financial dependency and not mere legal dependency. A taxpayer need not be the head of a family to be entitled to the credit allowed for dependents. The deciding factor is whether or not the dependent is under eighteen years of age or incapable of self-support because defective and dependent upon the taxpayer for his chief support. On the other hand, a father whose children receive half or more of their support from a trust fund or other separate source is not entitled to the benefit of the credit allowed for dependent children. Their chief support must be from the taxpayer.

The credit allowed individuals on account of dependents is determined by the status of the taxpayer on the last day of his taxable year. Thus, if a taxpayer on the last day of his taxable year has one or more persons who are dependent upon him for their chief support, he is entitled to deduct a credit of $400.00 for each such person. Under the 1921 Revenue Act, the credit allowed on account of the personal exemption was also dependent upon the status of the taxpayer on the last day of his taxable year. However, this provision has been changed in the 1924 Act so that under the present Law, the amount of credit allowed as a personal exemption is determined by the status of the taxpayer during his taxable year. Thus, if a taxpayer is single during one-half of his taxable year and married during the remainder of his taxable year, he is entitled to a personal exemption of $500.00 for the six month's period during which he was single and to an exemption of $1,250.00 for the six month's period during which he was married, or a total personal exemption of $1,750.00. If an individual dies during the taxable year, the credits allowed on account of the personal exemption and dependents are determined by his status at the time of his death.

In addition to the credits outlined above, the taxpayer who is a partner is entitled to an additional credit for his proportionate share of any amounts received by the partnership as dividends and as taxable interest upon obligations of the United States. The reason he is entitled to these additional credits is because the partnership is not permitted to deduct these items in computing each partner's distributive share of its net income. In other words, instead of the partnership taking the credit for these items, the partners are entitled to take the credit on their individual returns.

Credits Allowed Nonresident Aliens. In the case of a nonresident alien individual, the personal exemption shall be only $1,000.00 and he shall not be entitled to any credit for dependents unless he is a resident of a contiguous country, that is, a country adjoining the United States.

Having determined the amount of the credits which the individual is entitled to subtract from his net income before computing the normal tax, the next step in the preparation of a return is the computation of the tax. The following proposition will now be used to illustrate the application of the sections of the Law previously discussed in this treatise to the return of an individual and to illustrate the proper procedure in computing the tax.

Proposition A Louis Jansen, a single man, has a gross income of $4,000.00 for the current calendar year ending December 31. This income is received from the following sources:

Income
Salary:

$2,400.00
Profit from the Sale of Real Estate.

1,000.00 Interest on Notes Receivable.

80.00

520.00 In preparing his return, he ascertains that he is entitled to the following deductions from income:

Rent.....

I 10.00

Deductions
Taxes on Real Property.

$ 75.00
Interest on Mortgage.
Repairs on Property Leased..

42.00
Donations to Church.....

30.00 He has no dependents. Prepare statement showing proper classification of income and deductions and compute the amount of his income tax.

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Surtax. (a) In lieu of the tax imposed by section 211 of the Revenue Act of 1921, but in addition to the normal tax imposed by section 210 of this Act, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a surtax as follows:

Upon a net income of $10,000 there shall be no surtax; upon net incomes in excess of $10,000 and not in excess of $14,000, i per centum of such excess.

$40 upon net incomes of $14,000; and upon net incomes in excess of $14,000 and not in excess of $16,000, 2 per centum in addition of such excess.

*The items of income and deductions are classified and listed in this solution in the same order as they would appear in the official Income Tax Return. This policy is maintained in future illustrations of returns.

$80 upon net incomes of $16,000; and upon net incomes in excess of $16,000 and not in excess of $18,000, 3 per centum in addition of such excess.

$140 upon net incomes of $18,000; and upon net incomes in excess of $18,000 and not in excess of $20,000, 4 per centum in addition of such excess.

$220 upon net incomes of $20,000; and upon net incomes in excess of $20,000 and not in excess of $22,000, 5 per centum in addition of such excess.

$320 upon net incomes of $22,000; and upon net incomes in excess of $22,000 and not in excess of $24,000, 6 per centum in addition of such excess.

$440 upon net incomes of $24,000; and upon net incomes in excess of $24,000 and not in excess of $26,000, 7 per centum in addition of such excess.

$580 upon net incomes of $26,000; and upon net incomes in excess of $26,000 and not in excess of $28,000, 8 per centum in addition of such excess.

$740 upon net incomes of $28,000; and upon net incomes in excess of $28,000 and not in excess of $30,000, 9 per centum in addition of such excess.

$920 upon net incomes of $30,000; and upon net incomes in excess of $30,000 and not in excess of $34,000, 10 per centum in addition of such excess.

$1,320 upon net incomes of $34,000; and upon net incomes in excess of $34,000 and not in excess of $36,000, 11 per centum in addition of such excess.

$1,540 upon net incomes of $36,000; and upon net incomes in excess of $36,000 and not in excess of $38,000, 12 per centum in addition of such excess.

$1,780 upon net incomes of $38,000; and upon net incomes in excess of $38,000 and not in excess of $42,000, 13 per centum in addition of such excess.

$2,300 upon net incomes of $42,000; and upon net incomes in excess of $42,000 and not in excess of $44,000, 14 per centum in addition of such excess.

$2,580 upon net incomes of $44,000; and upon net incomes in excess of $44,000 and not in excess of $46,000, 15 per centum in addition of such excess.

$2,880 upon net incomes of $46,000; and upon net incomes in excess of $46,000 and not in excess of $48,000, 16 per centum in addition of such excess.

$3,200 upon net incomes of $48,000; and upon net incomes in excess of $48,000 and not in excess of $50,000, 17 per centum in addition of such excess.

$3,540 upon net incomes of $50,000; and upon net incomes in excess of $50,000 and not in excess of $52,000, 18 per centum in addition of such excess.

$3,900 upon net incomes of $52,000; and upon net incomes in excess of $52,000 and not in excess of $56,000, 19 per centum in addition of such excess.

$4,660 upon net incomes of $56,000; and upon net incomes in excess of $56,000 and not in excess of $58,000, 20 per centum in addition of such excess.

$5,060 upon net incomes of $58,000; and upon net incomes in excess of $58,000 and not in excess of $62,000, 21 per centum in addition of such excess.

$5,900 upon net incomes of $62,000; and upon net incomes in excess of $62,000 and not in excess of $64,000, 22 per centum in addition of such excess.

$6,340 upon net incomes of $64,000; and upon net incomes in excess of $64,000 and not in excess of $66,000, 23 per centum in addition of such excess.

$6,800 upon net incomes of $66,000; and upon net incomes in excess of $66,000 and not in excess of $68,000, 24 per centum in addition of such excess.

$7,280 upon net incomes of $68,000; and upon net incomes in excess of $68,000 and not in excess of $70,000, 25 per centum in addition of such excess.

$7,780 upon net incomes of $70,000; and upon net incomes in excess of $70,000 and not in excess of $74,000, 26 per centum in addition of such excess.

$8,820 upon net incomes of $74,000; and upon net incomes in excess of $74,000 and not in excess of $76,000, 27 per centum in addition of such excess.

$9,360 upon net incomes of $76,000; and upon net incomes in excess of $76,000 and not in excess of $80,000, 28 per centum in addition of such excess.

$10,480 upon net incomes of $80,000; and upon net incomes in excess of $80,000 and not in excess of $82,000, 29 per centum in addition of such excess.

$11,060 upon net incomes of $82,000; and upon net incomes in excess of $82,000 and not in excess of $84,000, 30 per centum in addition of such excess.

$11,660 upon net incomes of $84,000; and upon net incomes in excess of $84,000 and not in excess of $88,000, 31 per centum in addition of such excess.

$12,900 upon net incomes of $88,000; and upon net incomes in excess of $88,000 and not in excess of $90,000, 32 per centum inaddition of such excess.

$13,540 upon net incomes of $90,000; and upon net incomes in excess of $90,000 and not in excess of $92,000, 33 per centum in addition of such excess. $14,200 upon net incomes of $92,000; and upon net incomes in excess of $92,000 and not in excess of $94,000, 34 per centum in addition of such excess.

$14,880 upon net incomes of $94,000; and upon net incomes in excess of $94,000 and not in excess of $96,000, 35 per centum in addition of such excess.

$15,580 upon net incomes of $96,000; and upon net incomes in excess of $96,000 and not in excess of $100,000, 36 per centum in addition of such excess.

$17,020 upon net incomes of $100,000; and upon net incomes in excess o $100,000 and not in excess of $200,000, 37 per centum in addition of such excess.

$54,020 upon net incomes of $200,000; and upon net incomes in excess of $200,000 and not in excess of $300,000, 38 per centum in addition of such excess.

$92,020 upon net incomes of $300,000; and upon net incomes in excess of $300,000 and not in excess of $500,000, 39 per centum in addition of such excess.

$170,020 upon net incomes of $500,000; and upon net incomes in excess of $500,000, in addition 40 per centum of such excess.

(b) In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demon. strated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed 16 per centum of the selling price of such property or interest.

(Section 211–1924 Act) The surtax is a tax levied upon incomes in addition to the normal tax. It is based upon the net income of the taxpayer. While in computing the normal tax, there are certain credits to be subtracted, no such provision applies to the computation of the surtax. However, a taxpayer is entitled to a net income of $10,000.00 without having to pay a surtax.

In other words, a surtax is levied in addition to the normal tax when the net income exceeds $10,000.00. The rate of the surtax is said to be graduated beginning at 1% on net incomes in excess of $10,000.00 but not exceeding $14,000.00, and reaching a maximum of 40% upon net incomes of $500,000.00 or more.

The computation of the surtax under the present Law is greatly simplified owing to the fact that the amount of the tax upon incomes of various amounts is specified in the Law. It is, therefore, only necessary to compute the tax upon the incomes in excess of the amounts so specified.

To illustrate the computation of the surtax, we will assume that a taxpayer has a net income of $49,250.00 for the current taxable year. By referring to the Law, it will be noted that the surtax upon a net income of $48,000.00 is $3,200.00. In addition to this, there is a surtax of 17% on the income in excess of $48,000.00, hence the total surtax assessable upon this income may be computed as follows: Surtax on $48,000.00...

$3,200.00
Surtax on
1,250.00 @ 17%.

212.50

Total Surtax...

$3,412.50

The following propositions will serve to further illustrate the proper method of computing the normal and surtax.

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