War Tax A complete analysis and now imposed by the Federal Government, corporations, partnerships, individuals, etc. C# WAR TAX FOREWORD On October 3, 1917, Congress enacted a revenue law that will bring 7,000,000 persons under the operation of the income tax. The new law imposes obligations, in connection with many taxes, upon a very large part of the population not heretofore included in the taxable class; so that practically every person receiving an income must inform himself or herself. Persons failing or neglecting to comply with the law are liable to severe penalties. This analysis of the revenue laws now in effect, is arranged in a form that will make clear to the taxpayer how the taxes are levied, assessed and collected; when they are due, and how and where they must be paid. It is important to note that the rates given cover the taxes under both the old and the new laws. There are two income tax laws in effect. The act of October 3, 1917, does not repeal the act of September 8, 1916; the old tax continues in full force and effect. The War Revenue Act carries important amendments to the law of September 8, 1916. The two taxes are, in a sense, separate and distinct, but the new taxes are computed, levied, assessed, collected and paid upon the same basis and under the same regulations as the taxes under the old law. In addition to the income tax, individuals in business are subject to the Excess Profits tax, provided their net income exceeds $6000. (See Excess Profits Tax for details.) INDIVIDUAL INCOME TAX (New law effective as of Jan. 1, 1917.) Every person, a citizen or resident of the United States, who received more than $1000 net income in the preceding calendar year, if unmarried, and more than $2000, if married, must pay income tax on any sum in excess of these amounts. This income tax applies to every citizen or resident of the United States, as to his or her net income from all sources within and without the United States, and to every non-resident alien, as to his or her net income from sources within the United States, including the interest on bonds, notes and other interest-bearing obligations, not specifically exempted. INCOME DEFINED-GROSS AND NET Income includes gains, profits and income from salaries, wages or compensation for personal services of every character, or from professions, vocations, business, trade, commerce or sales, or dealings in property, real or personal, growing out of the ownership or use of or interest in real or personal property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, and income derived from any source whatever. Gross income is the total income from all sources. Net income is that which remains after the deductions herein enumerated are made from the gross. NORMAL AND ADDITIONAL TAXES DEFINED The income tax on individuals is divided into two parts, the normal tax and the : additional, or surtax. Both are computed upon the net income for the preceding calendar year ending December 31. The normal tax is a fixed rate on the net income above the personal exemptions. The additional, or surtax, is a graduated tax on net incomes above $5000, under the new law, and above $20,000 under the old law. The entire net income, without any deductions, is taken as the basis for the additional tax. NORMAL TAX THE RATES The normal tax on an unmarried person's net income is 2% on the total amount over $1000 and not over $3000, and 4% on the total amount over $3000. The normal tax on a married person's (or the head of a family) net income is 2% on the total amount over $2000 and not over $4000, and 4% on the total amount over $4000. PERSONAL EXEMPTIONS For the purpose of the normal tax only, the following exemptions are allowed: $1000 for a single person not the head of a family. $2000 for a married person living with spouse, or the head of a family. $200 for each dependent child under 18 years of age. EXEMPTIONS BY GUARDIANS Guardians or trustees may make these personal exemptions as to income derived from the property which such guardian or trustee has in charge, in favor of each ward or cestui que trust; but in no event shall a ward or cestui que trust be allowed a greater personal exemption than is provided in the law, from the amount of net income received from all sources. EXEMPTION ON ESTATES IN SETTLEMENT There is also allowed an exemption from the amount of the net income of estates of deceased citizens or residents of the United States during the period of administration or settlement, and of each trust or other estates of citizens or residents, the income of which is not distributed annually or regularly, the sum of $1000. EXEMPTION AS TO NON-RESIDENT ALIEN A non-resident alien is not required to pay the 2% additional normal tax imposed by the war revenue law. To compensate for this exemption such non-resident alien is allowed no personal exemption for the purpose of the normal tax of 2% imposed by the law of 1916. JOINT EXEMPTION One deduction only, of $4000 (in the form of exemption), can be made from the aggregate amount of income of both husband and wife, if living together. The exemption of $200 for each dependent child under 18, can be deducted by only one parent, in case they make separate returns; or it may be divided between them. RETURN-WHO MUST MAKE WHEN On or before March 1, 1918, and each year thereafter, a true and accurate return under oath, to the Collector of Internal Revenue for the district, must be made by the following persons: 1. Every unmarried person whose net income equaled or exceeded $1000 for the preceding calendar year. 2. Every married person, living with spouse, or the head of a family, whose net income equaled or exceeded $2000 for the preceding calendar year. 3. Every guardian, trustee, executor, administrator, receiver or conservator, and every person, corporation, or other concern acting in any fiduciary capacity, as to the income of the person, trust or estate for whom or which they act (subject to the provisions which apply to individuals); provided, that the net income amounts to $1000 or more. 4. Every person carrying on business in partnership is liable to income tax in his individual capacity; the return must include the share of the profits of the partnership he would be entitled to if the profits were divided, whether divided or not. (Partnerships may return on the basis of their fiscal year, the same as a corporation.) Failure to file a return will incur severe penalties (see "Penalties"). If the return is mailed it should be registered, and forwarded so as to reach the collector on or before March 1st. If the person making return has no legal residence or place of business in the United States he will file with the Collector of Internal Revenue at Baltimore, Md. In case of absence, illness or non-residence of a person, the return may be made by an agent, who is responsible for its correctness. Reasonable extension of time in meritorious cases for filing returns by persons residing or traveling abroad and who are unable to file their return on or before March 1st, will be granted. PAYMENT OF INCOME TAX The taxpayer, having filed his return on or before March 1st, will receive on or before June 1st, notice of the amount of tax due. This he must pay on or before June 15th. If not paid on that date he will receive a demand for payment within 10 days, after which 10 days penalty for delinquency attaches. CAN PAY IN ADVANCE The Secretary of the Treasury, under rules and regulations prescribed by him, will permit taxpayers liable to income and excess profits taxes, to make payments in advance in installments, or in whole, of an amount not in excess of the estimated taxes which will be due from them. Upon final determination of such taxes actually due, any amount paid in excess will be refunded. If paid in installments at least one-fourth of the estimated tax must be paid before the expiration of 30 days after the close of the taxable year; at least one-fourth within two months after the close of the taxable year; at least one-fourth within four months after the close of the taxable year, and the remainder due, on or before June 15th. Interest on advance payments will be credited. Uncertified checks may be received in payment. PENALTIES Refusal or neglect of any taxable person to file a return within the time fixed by law will incur a fine of not less than $20, nor more than $1000, and an increase of tax by 50 per cent. For making a false return the penalty is a fine not exceeding $2000, or imprisonment not exceeding one year, or both, and an increase of tax by 100 per cent. "HEAD OF A FAMILY" DEFINED The "head of a family" is held to be a person who actually supports and maintains one or more individuals who are closely connected with him by blood relationship, relationship by marriage or adoption, and whose right to exercise family control and provide for those dependent individuals is based upon some moral or legal obligation. EXEMPT INCOME Income from the following sources is exempt from taxation: 1. Proceeds of life insurance policies paid to individual beneficiaries upon death of insured. 2. Amount received by the insured as return premiums under life insurance endowment, or annuity contracts, either during the term, or at the maturity of the term, or upon surrender of the contract. 3. Value of property acquired by gift, bequest, devise or descent (but income from such property shall be included as income). 4. Interest on obligations of a State or any political subdivision thereof, or on obligations of the United States (which contain no provision specifically subjecting them to taxation), or its possessions, or securities under the Federal Farm Loan act. 5. Compensation of the present President of United States during the term for which he has been elected, and the judges of the Supreme Court and inferior courts of United States now in office, and compensation of all officers and employees of a State or any political subdivision thereof, except when such compensation is paid by the United States Government. DEDUCTIONS ALLOWED In computing the net income of a citizen or resident the following deductions are allowed: 1. Necessary expenses actually paid in carrying on any business or trade, not including personal, living or family expenses. 2. All interest paid within the year on indebtedness, except indebtedness incurred for the purchase of obligations or securities, the interest on which is exempt from taxation as income. 3. Taxes paid, including those imposed by the United States (except income and Excess Profits taxes), or of any foreign country, or of any State, county, school district or municipality, not including those assessed against local benefits. ("Local benefits" means street improvements, sewers, and such like.) 4. Losses actually sustained in business or trade, or from fires, storms, shipwreck or any other casualty, and from theft, when such losses are not compensated for by insurance or otherwise. To ascertain losses sustained from the sale or other disposition of property, real, personal or mixed, acquired before March 1, 1913, the fair market price or value as of March 1, 1913, shall be the basis for determining the amount of such loss sustained. 5. In transactions entered into for profit but not connected with the business or trade, the losses actually sustained therein during the year to an amount not exceeding profits arising therefrom. (This refers to speculative losses, and are deductible only in so far as they exceed the profits from similar transactions during the year.) 6. Debts due actually ascertained to be worthless and charged off within the year. Bad debts, to be deductible must be shown to be absolute losses. 7. Reasonable allowance for exhaustion, wear and tear of property from its use or employment in business or trade. (See "Depreciation.") 8. (a) In the case of oil or gas wells, a reasonable allowance for actual reduction in flow and production, to be ascertained not by the flush flow but by the settled production, or regular flow. (b) In the case of mines, a reasonable allowance for depletion not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year, such reasonable allowance to be made in cases of both (a) and (b) under regulations prescribed by Secretary of Treasury. (See "Depletion.") When the allowances authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March 1, 1913, the fair market value as of that date, no further allowance shall be made. |