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Reporting Net Income Taxpayers are required to file annually a report (referred to in the law and the regulations as a return of net income) showing the amount of taxable income received, the deductions and exemptions claimed, and the net income upon which the tax is to be imposed. This return is filed in the collection district in which the taxpayer resides or has his principal place of business. Non-residents having no place of business in this country file their returns with the collector of internal revenue at Baltimore, Maryland.26 The tax is paid in the district in which the return is filed. The return of annual net income is filed by individuals on or before March 1 in each year. In it is reported the income received during the preceding calendar year. Corporations also file an annual return at the same time, and for the same period, except those corporations which have elected to report for their fiscal years instead of the calendar year, in which case the return is filed within sixty days after the close of the fiscal year.27 Partnerships, as such, file no annual re
Individuals. No person whose net income is less than $1,000 in any calendar year is required to file a return for that year.
Unmarried persons receiving $1,000 or more net income during the calendar year, and married persons receiving $2,000 or more net income during the same period, are required to file the annual return, although after deducting the personal exemptions to which they are entitled no tax may be due.29
26 This district is the one in which Washington, the national capital, is located.
27 See Chapter 12. 28 See Chapter 10.
PERSONAL EXEMPTION. The personal exemption is an arbitrary amount of net income on which residents and citizens are not taxed. It may be said to be an amount allowed for personal or family expenses, the actual amount of such expenses not being deductible from gross income in the annual return. Non-resident aliens are not entitled to claim any personal exemption, but are taxed on their entire net income from sources within this country. Corporations, also, are not allowed any exemption, but are taxed upon their entire net income whatever the amount may be. The amount of personal exemption allowed depends upon the status of the individual. Under the 1916 Law single persons are entitled to an exemption of $3,000, married persons living together, and heads of families whether married or not, are entitled to an aggregate exemption of $4,000. Under the 1917 Law the personal exemptions are $1,000 and $2,000, respectively. Under each law an additional exemption of $200 is allowed to the head of the family for each child dependent upon him, if under eighteen years of age, or of any age if the child is incapable of self-support because mentally or physically defective. The personal exemption may be deducted only in computing the normal tax, which is imposed upon the entire net income of the individual over and above such exemption. Since the income tax is assessed under two separate laws with different rates and different exemptions, each individual is entitled to two personal exemptions but this does not mean that he is entitled to the sum of the two, that is
29 See Chapter 5 as to requirements for filing returns in the case of non-resident aliens.
to say, while a single person is entitled to a personal exemption of $3,000 under the 1916 Law and $1,000 under the 1917 Law, this does not give him a total exemption of $4,000. Each exemption is used only in computing the tax due under the law to which it applies and has no application to the other law.30
Normal Tax. In the case of individuals a normal tax of 2% is payable on the entire net income of the individual, over and above the exemptions, under each law, making in the case of single persons a total normal tax of 4% on all incomes over $3,000 and a normal tax of 2% of the amount between $1,000 and $3,000. In the case of married persons and heads of families the total normal tax is 4% on all income over $4,000 and 2% on the income between $2,000 and $4,000. Nonresident alien individuals are subject only to the 2% normal tax imposed by the 1916 Law, the normal tax imposed by the 1917 Law being expressly limited to citizens and residents of this country.
Supertax. In addition to the normal tax payable under each law a supertax is imposed under the 1916 Law on all incomes over $20,000. The supertax is graduated so as to bear more heavily as the amount of net income increases. Under the 1917 Law the supertax commences at $5,000. The law refers to the supertax as the
'additional tax” but for the sake of clearness the tax will be referred to in this book as the supertax. The supertax is assessed on the entire net income of each individual, in excess of the minimum amounts, but on the separate, not combined, incomes of husband and wife. While in the case of non-resident aliens only one normal tax is
30 For a further discussion of the personal exemption see the chapter on citizens and residents.
assessed, the supertaxes of both the 1916 Law and the 1917 Law are applicable to them with respect to their entire net income received from sources within the United States in excess of $20,000 and $5,000, respectively.31
Corporation Tax. The rate of tax imposed upon the net income of corporations is 2% under the 1916 Law and 4% under the 1917 Law making a total of 6%. This total rate applies to all corporations, whether domestic or foreign, and to all amounts of income no matter how large or how small, except that for the purpose of computing the amount of net income under the 1917 Law dividends received by one corporation on the stock of another corporation may be deducted, but in determining the net income for the 1916 Law such dividends must be included. 32
Collection of the Tax at the Source. Collection at the source, deduction at the source, withholding at the source and stoppage at the source, are synonymous terms meaning that the one paying income to another deducts or withholds an amount equal to the tax on the sum so paid and turns it over to the Government to the credit of the one against whom it was withheld. This method is used in order to facilitate the collection of the tax and to prevent evasion. Collection at the source applies at the present time only to (a) payments of fixed and determinable annual or periodical income to non-resident alien individuals, (b) payments of interest on bonds and similar obligations of domestic corporations to nonresident foreign partnerships and non-resident foreign corporations, (c) payments of dividends to non-resident foreign corporations and (d) payments of interest on bonds and similar obligations of corporations, if such bonds contain a so-called “tax-free covenant” which requires the corporation to assume the burden of the tax which it may be required to withhold or deduct from the interest paid to its bondholders.33 In the last of the aforementioned cases deduction applies whether the recipient of the income is a citizen or alien, resident or non-resident. With this exception no withholding is required against citizens and residents of this country.
31 See Chapter 2 for further statement of the rates of tax.
32 For a further discussion of this subject see Chapter 12 on corporations.
Information at the Source. For the purpose of checking up the returns of taxpayers the law provides for a system of information at the source whereby every corporation may be required to report to the Commissioner of Internal Revenue the names and addresses of its stockholders and the amount of dividends paid to each; stockbrokers may also be required, when called upon, to report the names and addresses of customers and information as to the profits and losses of each, and all persons, corporations or partnerships may be required to report the names and addresses of any persons to whom they pay fixed or determinable gains, profits or income of $800 or more in any taxable year. In the case of payments of interest to the bondholders of corporations the names and addresses of such bondholders are required to be reported regardless of the amount paid during the year as is also the rule in the case of collection of foreign items of interest and dividends.34
33 See Chapter 41 on Collection at the Source.
34 For a further discussion of this subject see the chapter on Information at the Source.