$3,000 in the case of a single person, and on the amount in excess of $2,000 and not in excess of $4,000 in the case of a married person or the head of a family; (b) at the rate of 4 per cent (combining the 2 per cent rate of the old law and the 2 per cent rate of the new law) on the amount in excess of $3,000 in the case of a single person and on the amount in excess of $4,000 in the case of a married person or the head of a family. Should a married person or the head of a family be entitled to the additional exemption of $200 for each dependent child, the amount of income subject to tax only at the 2 per cent rate of the new law would be the amount in excess of ($2,000 plus the additional exemption for dependent children) and not in excess of ($4,00 plus the additional exemption for dependent children) and tax would be imposed at the rate of 4 per cent (combined rates) only on net income in excess of ($4,000 plus the additional exemption for dependent children.) For instance: a married person with one dependent child would be taxed at the rate of 2 per cent on net income between $2,200 and $4,200 and at the rate of 4 per cent on net income in excess of $4,200, and so on with the amount determining the tax rate increased by $200 for each dependent child. (6) Deduct Normal Tax Withheld. Having ascertained total normal tax liability, the individual is entitled to deduct from the amount of such liability any amount of normal tax which has been withheld at the source, and the remainder is the amount of normal tax still due the Government. (7) Get Additional Tax Basis. Ascertain the basis of computation of additional tax by reverting to the amount of net income before dividends were deducted. While dividends in the hands of the individual are not subject to normal tax, they are subject to additional tax. Therefore, go back to the result that was obtained when steps No. 1 and No. 2, above, had been taken. If the amount of net income, as ascertained at the end of step No. 2, is not in excess of $5,000 no additional tax is due; if it is in excess of $5,000, additional tax liability may be ascertained by considering the ascending rate scales of both the old and the new laws. The additional tax rates of the new law alone apply if net income does not exceed $20,000 and the combined additional tax rates if net income does exceed $20,000. The following table shows the application of each rate scale and Note preceding instructions as applied in the following illustrations: No. 1 John Smith is single with a net income of less than $1,000. He is not required even to file a return. No. 2 William Jones is married with a net income of less than $1,000. He is not required even to file a return. No. 3 Peter Brown is single, with no one dependent on him for support and with a net income of $1,500. He is required to file a return and pay a tax of 2 per cent on $500. No. 4 Arthur Burns is single, with a net income of $1,500, but his aged mother is dependent on him for support. He is the head of a family. He should file return but in it claim exemption of $2,000 and thus have no tax to pay. No. 5 William Tupper is married and lives with his wife and six-year-old son. His net income is $6,000. His exemption under the new law is ($2,000 plus $200) and under the old law is ($4,000 plus $200). He is taxed at the rate of 2 per cent on the $2,000 between the new law exemption of $2,200 and the old law exemption of $4,200; and at the rate of 4 per cent on the $1,800 in excess of $4,200. But he is also subject to additional tax under the new law, which is figured at the rate of 1 per cent on the amount of $1,000, which is in excess of $5,000, but not in excess of $7,500. None of his income consists of dividends; no Excess Profits Tax has been assessed for the same year, and none of his income has been taxed at the source. In such circumstances, Tupper's total tax liability is $40 plus $72 plus $10 or $122. No. 6 John Morrison is a widower supporting two daughters, aged 6 and 9, respectively. He is a lawyer by profession. His net income is $52,000. It is all from the practice of his profession except the amount of $800, representing a dividend on oil stock. The amount of his Excess Profits Tax for the same year figures (for the purpose of this example) $3,680. His exemption under the new law is $2,400 and under the old law $4,400. After deducting from his net income of $52,000, the amount of his Excess Profits Tax, which is $3,680, there is a remainder of $48,320 on which income tax must be paid. However, from such remainder should be deducted the $800 dividend in order to ascertain normal tax liability. This having been done, Morrison finds that he has $47,520 on which to compute his normal tax and he proceeds to do so as follows: 2 per cent on the amount of $2,000 between $2,400 and $4,400; and 4 per cent on all of the $47,520 above $4,400. In other words, 2 per cent of $2,000 and 4 per cent of $43,120, which results in normal tax liability of $1764.80. Then Morrison turns to the additional tax computation. He goes back to the amount obtained when he deducted from his net income the amount of his Excess Profits Tax. On such amount, $48,320, he figures his additional tax, as follows: On the $2,500 between $5,000 and $7,500 at 1 per cent, $25. On the $2,500 between $7,500 and $10,000 at 2 per cent, $50. On the $2,500 between $10,000 and $12,500 at 3 per cent, $75. On the $2,500 between $12,500 and $15,000 at 4 per cent, $100. On the $5,000 between $15,000 and $20,000 at 5 per cent, $250. On the $20,000 between $20,000 and $40,000 at 8 per cent, $1,600. On $8,320 (over $40,000 but not over $60,000) at 12 per cent, $998.40. The above computation gives a total additional tax liability of $3098.40. The addition of this amount to the normal tax of $1,764.80 shows Morrison's total income tax liability in such circumstances to be $4,863.20. 6.-COMPUTATION OF CORPORATION TAX. The income tax liability of a domestic corporation under both the old and the new laws will be ascertained, in general, as follows: (1) Determine Net Income. Determine net income by subtracting from gross income the total of allowable deductions. By "deductions" are not meant the credit allowed under the new law (but not under the old) for dividends received from another corporation and that given under both laws for the amount of Excess Profits Tax assessed for the same year. By "deductions" are meant only the allowances for actual and necessary business operating expenses, losses, depreciation, depletion, interest, and taxes. (2) Credit for Excess Profits Tax. Credit net income, ascertained as just explained, with the amount of Excess Profits Tax assessed for the same year. The result, at this point, is the only basis of assessment of any income tax. (3) Compute Tax Under Old Law. On the amount of net income shown when Steps No. 1 and No. 2, just above, have been taken, compute tax at the rate of 2 per cent—on the entire amount of net income thus shown, without any credit for dividends received from another corporation. (4) Compute Tax Under New Law. From the amount of net income shown when Steps No. 1 and No. 2, just above, have been taken, deduct the amount of income represented by dividends from another corporation. On the remainder compute tax at the rate of 4 per cent. (5) Total Tax Liability. Ascertain total tax liability for the year by adding the amount due at the old rate and the amount due at the rate imposed by the new law. |