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does so signify, such election shall be irrevocable.

(D) If the adjusted gross income shown on the return is $5,000 or more, but the correct adjusted gross income is less than $5,000, then an election by the taxpayer under subparagraph (A) to take the standard deduction shall be considered as his election to pay the tax imposed by Supplement T; and his failure to make under subparagraph (A) an election to take the standard deduction shall be considered his election not to pay the tax imposed by Supplement T. If the adjusted gross income shown on the return is less than $5,000, but the correct adjusted gross income is $5,000 or more, then an election by the taxpayer under subparagraph (B) to pay the tax imposed by Supplement T shall be considered as his election to take the standard deduction; and his failure to elect under subparagraph (B) to pay the tax imposed by Supplement T shall be considered his election not to take the standard deduction.

(4) Husband and wife. In the case of husband and wife living together, the standard deduction shall not be allowed to either 1f the net income of one of the spouses is determined without regard to the standard deduction. For the purposes of this paragraph the determination of whether an individual is married and living with his spouse shall be made as of the last day of the taxable year, unless his spouse dies during the taxable year, in which case such determination shall be made as of the date of such spouse's death.

(5) Short period. In the case of a taxable year of less than twelve months on account of a change in the accounting period, the standard deduction shall not be allowed.

the credit provided by section 25 (a) (1) and (2) for normal tax purposes with respect to interest on United States obligations and interest, on obligacions of instrumentalities of the United States. The standard deduction is $500, in the case of taxpayers whose adjusted gross income is $5,000 or more, and, in the case of taxpayers whose adjusted gross income is less than $5,000, about 10 percent of the adjusted gross income upon which the tax is determined in the table provided in section 400. A taxpayer having adjusted gross income of less than $5,000, who does not elect to pay the tax imposed by Supplement T, may not take the standard deduction.

The standard deduction is not allowable:

(1) In the case of a taxable year of less than 12 months where such taxable year arises because of a change in accounting period under section 47 (a);

(2) In the case of a return for a fractional part of a year under section 146 (a) (1);

(3) In the case of an estate or trust; (4) In the case of common trust funds;

(5) In the determination of the net income of a partnership;

(6) In the case of nonresident alien individuals (including those who enter and leave the United States at frequent intervals); and

(7) In the case of a citizen of the United States entitled to the benefits of section 251.

An election to take the standard deduction is not precluded by reason of the fact that the return is made for a taxable year of less than 12 months on account of the death of the taxpayer.

(b) Manner and effect of election to take the standard deduction. The following rules are prescribed with respect to the manner of signifying an election by a taxpayer to take the standard deduction:

(1) A taxpayer whose adjusted gross income as shown by his return is $5,000 or more shall be allowed the standard deduction only if he signifies on his return his election to take such deduction. Such taxpayer shall so signify on his return by claiming thereon a deduction of $500 instead of itemizing the deductions allowable under section 23 other than those specified in section 22 (n). The election so signified shall be irrevocable for the taxable year for which such elec

SEC. 2. TAXABLE YEARS TO WHICH APPLICABLE. (Individual Income Tax Act of 1944, Part I.)

Except as otherwise expressly provided, the amendments made by this part shall be applicable with respect to taxable years beginning after December 31, 1943.

§ 29.23 (aa)-1 Standard dedụction(a) General. For taxable years beginning after December 31, 1943, the taxpayer may elect to take, in addition to the deductions from gross income allowable in computing adjusted gross income, a standard deduction in lieu of all nonbusiness deductions (that is, deductions other than those allowable under section 22 (n)) and in lieu of certain credits allowable to the taxpayer had he not so elected. Such credits are the credit provided by sections 31 and 131 for income tax paid to foreign countries or possessions of the United States, the credit provided by section 32 for tax paid at the source under section 143 (a) by the obligor on tax-free covenant bonds with respect to interest on such bonds, and

tion is made. If in any case the adjusted gross income shown on the return of the taxpayer is $5,000 or more, but the correct adjusted gross income is less than $5,000, then:

(i) If the taxpayer has elected on his return to take the standard deduction such election shall be deemed to be an irrevocable election by the taxpayer to pay the tax imposed by Supplement T; and

(ii) If the taxpayer has not so elected upon his return, it shall be deemed that the taxpayer has irrevocably elected not to pay the tax under Supplement T.

(2) If the adjusted gross income shown on the return is less than $5,000, the standard deduction is allowable only if the taxpayer elects in the manner provided in Supplement T to pay the tax imposed by such supplement. As to the manner and effect of election to pay the tax under Supplement T, see § 29.402–1. In any case, however, in which adjusted gross income shown on the return is less than $5,000 but the correct adjusted gross income is in fact $5,000 or more, then:

(i) If the taxpayer has elected to pay the tax imposed under Supplement T, it shall be deemed that he has elected to take the standard deduction; and

(ii) If the taxpayer has not elected on his return to pay the tax under Supplement T, it shall be deemed that he has made an election not to take the standard deduction.

(c) Husband and wife. In the case of husband and wife living together, if the net income of one spouse is determined without regard to the standard deduction, the other spouse may not elect to take the standard deduction. If a joint return is filed and election made thereon to take the standard deduction, such deduction shall be determined by reference to the aggregate adjusted gross income of both spouses. If Form W-2 (Rev.) is filed as a combined return, the standard deduction is allowed through the application to the adjusted gross income shown on such return of the tax table in Supplement T. See $ 29.51-2 limiting the use of Form W-2 (Rev.) as a combined return to cases in which the aggregate adjusted gross income of the spouses is less than $5,000.

If each spouse files Form 1040 both must elect to take the standard deduction or both are denied the standard deduc

tion. If one spouse files Form 1040 and does not elect to take the standard deduction, the other spouse may not elect to take the standard deduction and, hence, may not file Form W-2 (Rev.) as his or her return. Thus, if A and his wife B have adjusted gross incomes of $6,000 and $3,500, from wages subject to withholding, respectively, for the calendar year 1944, and A files Form 1040 and does not elect thereon to take the standard deduction, B may not file Form W-2 (Rev.) but must file Form 1040, taking thereon only her actual allowable deductions and not the standard deduction. In such case, however, if both elect to take the standard deduction, A must file Form 1040, but B may file Form W-2 (Rev) or, in the alternative, shę may file Form 1040 and compute the tax under Supplement T. Under either alternative effect is given to the standard deduction through the application of Supplement T.

The restriction upon the right of a married person to elect the standard deduction in his separate return is applicable with respect to the taxable years of the husband and wife ending in the same calendar year, except that in the event of the death of one spouse the restriction is applicable with respect to the taxable year ended with death and the taxable year of the surviving spouse in which such death occurs. The restriction applies only in the case of a husband and wife living together and for such purpose the spouses are considered as living together unless they are permanently separated. The determination of whether an individual is married and living with his spouse shall be made as of the last day of such individual's taxable year unless his spouse dies during such taxable year, in which event the determination shall be made as of the date of death of such spouse.

Example (1). Taxpayer A makes his returns on the basis of a fiscal year ending June 30. His wife B makes her returns on the calendar year basis. On the return for the fiscal year ended June 30, 1945, A itemized and claimed his actual deductions. In October 1945 A and B were permanently separated. In her separate return for the calendar year 1945 B may elect the standard deduction since she is not married and living with her husband A on the last day of her taxable year.

Example (2). Assume the facts as stated in Example (1) except that, instead of the spouses separating, A died in October 1945. In such case since A and B were married

and living together as of the date of death, B may not elect the standard deduction for the calendar year 1945, if the income of A for the short taxable year ending with the date of his death is determined without regard to the standard deduction. [T.D. 5425, Dec. 29, 1944, 10 F.R. 131 [Insert following statutory quotations immediately preceding § 29.25–1; T.D. 5373, May 23, 1944, 9 F.R. 5501; T.D. 5425, Dec. 29, 1944, 10 F.R. 14)

SEC. 107. REPEAL OF EARNED INCOME CRED.T. (Revenue Act of 1943, Title I.)

(a) In general. Section 25 (a) (3) and (4) (relating to earned income credit for normal tax), and section 185 and section 47 (d) (relating to earned Income) are repealed.

Sec. 103. DETERMINATION OF STATUS FOR PURPOSES OF PERSONAL EXEMPTION AND CREDIT FOR DEPENDENTS. (Revenue Act of 1943, Titie I.)

Section 25 (b) (relating to credits for both normal tax and surtax) is amended by striking out paragraph (3) and inserting in lieu thereof the following:

(3) Determination of status. For the purpose of determining the amount of the personal exemption and credit for dependents, the status of the taxpayer shall be determined as of July 1 of the taxable year, unless the taxable year does not include July 1, in which case such status shall be determined as of the last day of the taxable year.

SEC. 101. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE. (Revenue Act of 1943, Title I.)

Except as otherwise expressly provided, the amendments made by this title shall be applicable only with respect to taxable years beginning after December 31, 1943.

SEC. 10. CREDITS AGAINST NET INCOME. (Individual Income Tax Act of 1944, Part I.)

(a) For normal taz. Section 25 (a) (relating to credits against net income for the purposes of the normal tax) is amended by adding at the end thereof a new paragraph to read as follows:

(3) Normal-tax exemption. A normal-tax exemption of $500. In the case of a joint return by husband and wife under section 51, the normal-tax exemption shall be $1,000. except that if the adjusted gross income of one spouse is less than $500, the normal-tax exemption shall be $500 plus the adjusted gross income of such spouse.

(b) For surtax. Section 25 (b) (relating to credits for both normal tax and surtax) is amended to read as follows:

(b) Credits for surtar only_(1) Credits. There shall be allowed for the purpose of the surtax, but not for the normal tax, the following credits against net income:

(A) A surtax exemption of $500 for the taxpayer;

(B) A surtax exemption of $500 for the spouse of the taxpayer if

(1) A Joint return is made by the taxpayer and his spouse under section 51, in which case the surtax exemption of the spouses under subparagraph (A) and this subparagraph shall be only $1,000 in the aggregate, cr

(ii) A separate return is made by the taxpa"er, and his spouse has no gross income for th? calendar year in which the taxable year of the taxpayer begins and is not the dependent of another taxpayer;

(C) A surtax exemption of $500 for each dependent whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $500, except that if such dependent is married the exemption in respect of such dependent shall not be allowed if such dependent has made a joint return with the other spouse under section 51 for a taxable year beginning in such calendar year.

(2) Determination of status. The determination of whether an individual is married shall be made as of the last day of the taxable year, unless his spouse dies during the taxable year, in which case such determination shall be made as of the date of his spouse's death.

(3) Definition of dependent. As used in this chapter the term "dependent" means any of the following persons over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer:

(A) A son or daughter of the taxpayer, or a descendant of either,

(B) A stepson or stepdaughter of the taxpayer,

(C) A brother, sister, stepbrother, or stepsister of the taxpayer,

(D) The father or mother of the taxpayer, or an ancestor of either

(E) A stepfather or stepmother of the taxpayer,

(F) A son or daughter of a brother or sister of the taxpayer,

(G) A brother or sister of the father or mother of the taxpayer,

(H) A son-in-law, daughter-in-law, fatherin-law, mother-in-law, brother-in-law,

or sister-in-law of the taxpayer.

As used in this paragraph, the terms "brother” and “sister” include a brother or sister by the half-blood. For the purposes of determining whether' any of the foregoing relationships exist, a legally adopted child of a person shall be considered a child of such person by blood. The term "dependent" does not include any individual who is a citizen or subject of a foreign country unless such individual is a resident of the United States or of a country contiguous to the United States. A payment to a wife which is includible under section 22 (k) or section 171 in the gross income of such wife shall not be considered a payment by her husband for the support of any dependent.

SEC. 2. TAXABLE YEARS TO WHICH APPLICABLE. (Individual Income Tax Act of 1944, Part I.)

before January 1, 1944, for the purpose of computing the normal tax is 10 percent of the amount of the earned net income, but not in excess of 10 percent of the amount of the entire net income. (First paragraph amended by T.D. 5373, May 23, 1944, 9 F.R. 5501]

Except as otherwise expressly provided, the amendments made by this part shall be applicable with respect to taxable years beginning after December 31, 1943.

$ 29.25–1 Credits of individuals against net income-(a) Tazable years beginning before January 1, 1944. *

These include interest exempt from normal tax only (and hence included in gross income) received upon (1) certain obligations of the United States and (2) certain obligations of corporations organized under Act of Congress which are instrumentalities of the United States; an earned income credit; a personal exemption; and a credit for dependents.

was

(b) Tarable years beginning after December 31, 1943. For taxable years beginning after December 31, 1943, the taxpayer's net income as determined pursuant to sections 21 to 24, inclusive, is reduced, for the purpose of computing the normal tax, by (1) the income exempt from normal tax only received upon certain obligations of the United States and upon certain obligations of corporations organized under act of Congress which are instrumentalities of the United States, and (2) one normaltax exemption of $500, or in the case of a joint return, by husband and wife a normal-tax exemption of $1,000, but if one of the spouses has less than $500 adjusted gross income the normal-tax exemption is $500 plus the amount of the adjusted gross income of such spouse. No exemption - for dependents is allowed for normal tax purposes. [Paragraph (b) added by T.D. 5425, Dec. 29, 1944, 10 F.R. 14]

CODIFICATION: $ 29.25–1 was amended in the following respects during the period covered by this Supplement:

1. The second sentence was amended by Treasury Decision 5373, May 23, 1944, 9 F.R.

CODIFICATION: $ 29.25-2

further amended, by Treasury Decision 5373, May 23, 1944, 9 F.R. 5501 by inserting immediately after “sections 25 (a) (3) and 25 (a) (4)” in the first sentence of the fourth paragraph thereof the following: "prior to their repeal by section 107 of the Revenue Act of 1943".

$ 29.25–3 Personal exemption and surtax exemptions-(a) Taxable years beginning before January 1, 1944. For taxable years beginning before January 1, 1944, a

(b) Taxable years beginning after December 31, 1943. For the purpose of the surtax on individuals for taxable years beginning after December 31, 1943, there are allowed as credits against net income a surtax exemption of $500 for the taxpayer and, provided certain prescribed conditions are met, a surtax exemption of $500 for the spouse of the taxpayer and for each dependent of the taxpayer. Two surtax exemptions of $500 each are allowable in case a joint return is filed under section 51 by a husband and wife or in case a separate return is made by the taxpayer, and his spouse has no gross income for the calendar year in which the taxpayer's taxable year begins, and his spouse is not the dependent of another taxpayer. If in any case a joint return is made by the taxpayer and his spouse, no surtax exemption is allowed any other person for such spouse even though such other person would have been entitled to claim a surtax exemption for such spouse as a dependent if such joint return had not been made. In addition to the surtax exemptions allowed to a taxpayer for himself and for his spouse he is entitled to a surtax exemption of $500 for each individual whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $500, who receives more than one-half of his support from the taxpayer for such calendar year, who does not file a joint return with his spouse and who is related to the taxpayer within one of the following relationships: Child; the descendants of such child; stepchild; brother; sister; brother or sister by the half-blood; stepbrother or stepsister;

5501.

2. The existing text of the section was designated paragraph (a) with headnote as set forth above; the phrase "for taxable years beginning before January 1, 1944" immediately preceding the words "an earned income credit;" in paragraph (a) (2) was deleted, and paragraph (b) was added, by Treasury Decision 5425, Dec. 29, 1944, 10 FR. 14.

$ 29.25-2 Earned income credit for tarable years beginning before January 1, 1944. Under section 25 (a) (3) prior to its repeal by section 107 of the Revenue Act of 1943, the earned income credit allowable for taxable years beginning

parent; the ancestors of such parent; stepfather or stepmother; son or daughter of the taxpayer's brother or sister; brother or sister of the taxpayer's father or mother; son-in-law; daughter-in-law; father-in-law; mother-in-law; brotherin-law; or sister-in-law. In the case of a joint return it is not necessary that the prescribed relationship exist between the person claimed as a dependent and the spouse who furnishes the support; it is sufficient if the prescribed relationship exists with respect to either spouse. Thus, a husband and wife making a joint return may claim as a dependent a daughter of the wife's brother (wife's niece) even though the husband is the one who furnishes the chief support. The relationship of affinity once existing will not terminate by divorce or the death of a spouse. A legally adopted child of a person shall be considered a child of such person by blood. A citizen or subject of a foreign country may not be claimed as a dependent, unless he is a resident of the United States, Canada, or Mexico at some time during the calendar year in which the taxable year of the taxpayer begins. Whether or not over half of a person's support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer, shall be determined by reference to the amount of expense incurred by the taxpayer for such support. A payment to a wife which is includible under section 22 (k) or section 171 in the gross income of such wife shall not be considered a payment by her husband for the support of any dependent.

CODIFICATION: In § 29.25–3 the existing headnote and the first word of the first sentence were deleted, the text set forth above substituted therefor, and paragraph (b) was added, by Treasury Decision 5425, Dec. 29, 1944, 10 F.R. 15.

$ 29.25–5 Personal exemption of married person for taxable years beginning before January 1, 1944.

For taxable years beginning after December 31, 1943, the personal exemption, as such, of married persons is not applicable and there are substituted therefor the normal-tax exemption and the surtax exemptions. See $ 29.25–1.

CODIFICATION: The headnote of $29.25-5 was amended to read as set forth above, and the sentences set forth above were added at the end of the section, by Treasury Decision 5425, Dec. 29, 1944, 10 F.R. 15.

§ 29.25–6 Credit for dependents-(a) Taxable years beginning before January 1, 1944. For taxable years beginning before January 1, 1944, a

(b) Taxable years beginning after December 31, 1943. For taxable years beginning after December 31, 1943, the provisions of paragraph (a) of this section have no application. For surtax exemptions for dependents for such taxable years, see 29.25–3.

CODIFICATION: In $ 29.25-6 the existing headnote and first word of the first sentence were deleted, the text set forth above substituted therefor, and paragraph (b) was added, by Treasury Decision 5425, Dec. 29, 1944, 10 F.R. 15.

§ 29.25–7 Personal exemption and credit for dependents where status changes during taxable years beginning before January 1, 1944.

CODIFICATION: % 29.25-7 was amended in the following respects, by Treasury Decision 5373, May 23, 1944, 9 F.R. 5501:

1. By amending the headnote thereof to read as above.

2. By striking out “the taxable year" in the first sentence and inserting in lieu thereof "a taxable year beginning before January 1, 1944".

3. By inserting immediately after “determined" in the second sentence of the second paragraph thereof the following: "for taxable years beginning before January 1, 1944," [Insert following statutory quotations immediately preceding § 29.26–1; T.D. 5384, June 30, 1944, 9 F.R. 7370; T.D. 5401, Aug. 26, 1944, 9 F.R. 10449)

SEC. 116. CREDIT FOR DIVIDENDS PAID ON PREFERRED STOCK OF PUBLIC UTILITIES. (Revenue Act of 1943, Title I.)

(a) Dividends unpaid and accumulated. Section 26 (h) (1) (relating to credit for dividends paid on certain preferred stock) is amended by inserting at the end of the first sentence thereof the following: "For the purposes of the credit provided in this subsection the amount of dividends paid shall not include any amount distributed in the current taxable year with respect to dividends unpaid and accumulated in any taxable year ending prior to October 1, 1942. Amounts distributed in the current taxable year with respect to dividends unpaid and accumulated for a prior taxable year shall for the purposes of this paragraph be deemed to be distributed with respect to the earliest year or years for which there are dividends unpaid and accumulated."

(b) Stock issued to replace existing securities. Section 26 (h) (2) (B) (defining "preferred stock") is amended by inserting at the end thereof the following: "Stock issued on or after October 1, 1942, shall be

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