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PRACTICAL QUESTIONS AND ANSWERS
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 $2,000 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 $2,000 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 a return.
Q. My net income is $3,200. My personal exemption, because of my wife and two dependent children, amounts to $3,300, showing that I have no tax to pay. Must I file a return?
A. Yes. As a married man living with your wife, you must file a return because your net income equals or exceeds $2,000.
Q. I have computed my income for 1922 as follows:
$6,000 Business expenses.... $4,200 (not including income
125 free from tax, see pages
75 15 and 67.)
2,200 Deductions. 6,750 Bad debts.
100 Net Income (deficit).... $ 750
Am I required to file a return?
A. Yes. The law requires a return from every individual whose gross income is $5,000 or more.
Q. When is it advisable for husband and wife, living together, to make separate returns?
A. That there may not be an over-assessment of tax, it is advisable to make separate returns where the wife has a separate income and where the joint net income exceeds $6,000. In such cases the $2,000 personal exemption may be taken by either husband or wife or divided between them in any way they see fit. Care should be taken that the total exemption claimed in both returns, exclusive of credit for dependents, does not exceed $2,000.
Q. When must my return be filed?
A. Returns of income on a calendar year basis may be filed any time after January 1, but not later than March 15. If, however, the return is based on a fiscal year, it must be filed on or before the 15th day of the third month following the close
of that year.
Q. Where should my return be filed?
A. With the Collector of Internal Revenue for the district in which you reside or have your principal place of business.
Q. Where can I obtain the blank upon which to make my return? A. At the office of any Collector of Internal Revenue,
PERSONAL EXEMPTIONS AND CREDITS
Q. How much personal exemption is a taxpayer allowed?
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), $2,000 if the net income exceeds $5,000, or $2,500 if it is $5,000 or less. When the exemption is reduced from $2,500 to $2,000 because of the net income being greater than $5,000, the reduction does not increase the tax which would be payable if the exemption were $2,500, by more than the amount of net income above $5,000.
A husband and wife living together receive only one personal exemption of $2,000 or $2,500, as the case may be, 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. In no event may the joint exemption, exclusive of credit
for dependents, exceed $2,000 where the aggregate net income is more than $5,000, or $2,500 where the aggregate net income amounts to $5,000 or less.
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 under 18 years of age or is mentally or physically unable to earn his own living.
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 determines the exemption you may claim for the entire year. For example, a child born December 31 brings to its parents an additional exemption of $400; a person who marries December 31 is entitled to an exemption of $2,000 or $2,500, depending upon whether his net income is over or under $5,000; but a man whose wife dies on December 30 may claim only $1,000, since on the last day of his taxable year (December 31) he was single.
Q. What is meant by “ head of a family "'?
A. The "head of a family," as distinguished from a married person, is a person who supports and maintains one or more individuals related to him by blood, marriage or adoption, and whose right to exercise family control and provide for these dependents is based on some moral or legal obligation--for example: a man supporting his mother; a brother supporting his sister; a woman supporting an adopted child, etc. Ordinarily, all must reside in one household. If, however, a father is away from home on business, or a child or other dependent is away at school or on a visit, the additional exemption applies. If,
, through force of circumstances, a parent has to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. On the other hand if, without necessity, the dependent makes his home continuously elsewhere, his benefactor is not the "head of a family.” Again, a resident alien who has children living abroad is not entitled to credit as “head of a family."
Q. What other credits are allowed against net income?
A. In addition to the credits mentioned in the first question under Personal Exemptions (see page 9) individual taxpayers are entitled to credit against net income in computing the amount subject to normal tax 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.
(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.
Q. Do the credits mentioned in question 5 on page 9 and question 3 on page 10 apply in computing net income subject to surtax?
A. No. These credits are allowable only in computing net income subject to normal tax.
Q. I live in New York City where I am employed, and support my mother in our home at Graham, New York, because my income is not sufficient to pay our joint expenses in the city. May I claim exemption as head of the family?
A. According to a ruling of the Treasury Department, a daughter who actually supports and maintains her dependent mother elsewhere than in her own home, because she is unable to earn enough to support them both in the mother's place of abode or to defray their joint expenses in the daughter's place of employment, can be properly classified for income tax purposes as the head of a family. In addition to the head of a family credit of $2,000 or $2,500, as the case may be (depending upon whether your income is over or under $5,000), you may claim $400 credit for one dependent if your mother is physically or mentally incapable of self-support.
Q. My wife and I both contribute to the support of an ex-soldier who has been an invalid since he was discharged from the army. May we divide the credit of $400 between our returns which we file separately?
A. No. The entire credit must be taken by the one contributing the chief support.
RATES AND COMPUTATION OF TAXES
A. There are two taxes which apply to incomes of individuals. They are called the normal tax and the surtax, and are computed by different methods.
The normal tax is 4 per cent of the first $4,000 of net income over and above personal exemptions and credits, and 8 per cent of all net income above that amount.
Non-resident alien individuals are not entitled to the reduced rate of 4 per cent on the first $4,000, but must pay 8 per cent on the entire amount of net income subject to normal tax.
The surtax is imposed, in addition to the normal tax, upon net incomes of more than $6,000. The surtax rates increase from 1 per cent to 50 per cent on successive parts of the income as the income grows larger. (See column C in table on opposite page.) Personal exemptions and credits do not enter into the computation of net income subject to surtax.
INTRODUCTORY NOTES TO INCOME TAX TABLE
The NET INCOME referred to in the first column of the table on the opposite page computed as in the following example: Gross Income
Deductions Salary and commissions.. $10,000 Business expenses.
$ 650 Profits from sale of securities.
Interest paid. Rent...: 1,200 Taxes paid..
250 Partnership profits-your share... 3,300 Losses. Interest on bank account, mort
50 gages, corporation bonds, etc.... 500 Depreciation.
650 Gifts to charities.
800 Total Income.
$15,500 Total Deductions. 2,800 Total Deductions.
$2,800 Net Income...
$12,700 Non-taxable income, such as gifts, interest on State, County and Municipal Bonds, interest on certain United States Government obligations, etc., is not required to be reported, and therefore is disregarded in the above example. For the status of interest on Liberty Bonds, see page 15.
Let us assume that you are married, have no other dependents, and received the above income for 1922. The total tax for 1922 is found from the opposite table by adding to $720 (the amount in column F opposite $12,000), a normal tax of $56 (8 per cent of $700), plus a surtax of $21 (3 per cent of $700). This gives a total tax of $797.
ADDITIONS TO THE ABOVE TAX:-If you are single and without any dependents, as described in the Act, your exemption from the normal tax is only $1,000, instead of $2,000 as shown in the table on the opposite page. This results in an increase of your normal tax by an amount not exceeding $80.
DEDUCTIONS FROM ABOVE TAX:(a) If you have dependents, as described in the Act, your exemption from the 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 $32 for each dependent.
(b) If your income includes dividends, interest from Victory Notes 4%4 per cent, or other income subject only to surtax, your normal tax as computed above will be reduced by not more than 8 per cent of the amount of such income.