Exempt Municipal nually or regularly is subjected only to the tax on the individual shares. Any tax hereunder shall be levied against the representative of the estate or trust unless return of such income is made by the beneficiary. The Statute provides that certain so-called income shall be exempt from tax including, among items more fully discussed hereinafter: Proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured; Return premiums (commonly called "dividends") which were previously paid by the insured under life insurance, endowment or annuity contracts (It should be remarked here that "dividends" from paid-up policies are considered income and should be regarded and reported as ordinary dividends); Value of property acquired by gift, bequest, devise or descent, although the income from such property is not exempt; The compensation of the present President of the United States during the remainder of his present term, and of the Judges of the Federal Courts in office on September 8, 1916; also the compensation of all officers and employees of a State or any political subdivision thereof, except insofar as such compensation is paid by the Federal Government. Municipal bonds are exempt from all taxes hereunder, additional as well as normal, it being provided by both the revised and the old Statutes that the obligations of a State or any political sub-division thereof, or of the United States or its possessions, shall not be subject to income tax. It is assumed that Congress has allowed this exemption primarily for constitutional reasons, there being many cases which indicate, if indeed they do not hold, that the taxation of municipal bonds is a burden on the municipality itself and thus an unjust and improper imposition. In this connection it may be worth noting that according to Treasury ruling, "political sub-division" includes special assessment districts or divisions of a State created by proper State authority for a purpose of a public nature such as street improvements, public highways, sewerage, gas and light, and the reclamation, drainage or irrigation of public lands. In this view the obligations of the above public districts are not subject to income tax. It will be recalled that, according to the present regulation of the Department, municipal bonds of the various classes exempt hereunder need not be mentioned in the individual's annual return of income. The Federal Farm Loan Act, approved July 17, 1916, "to provide capital for agricultural development," etc., authorized and made provision for Federal land banks, joint-stock land banks, and other allied agencies, and also for the issuance of farm loan bonds. These farm loan bonds are declared to be exempt from income tax. Political Farm Loan Deductions Allowed Computing In computing the net income of a citizen or resident of the United States the following general deductions are definitely authorized: (a) Necessary expenses actually paid in carrying (b) All interest paid on his indebtedness; (e) Debts due and actually ascertained to be (g) Losses sustained in transactions entered into for profit but not connected with the taxpayer's business or trade, such losses not to exceed the profits arising therefrom. As in the case of computing profit from the sale of real or personal property acquired be fore March 1, 1913, any loss therefrom shall be computed on the basis of the fair market value of such property as of that date. "Losses in trade" have been the subject of much controversy under the previous Law. The interpretation of that Statute by the Treasury Department has been that losses incurred in a business other than that of the taxpayer were not deductible in arriving at his net income even though the profits arising from similar business dealings were required to be included as taxable income. This interpretation had a direct and in many cases an unfair application to dealings in securities by persons not engaged in their purchase and sale as a regular business. The present Statute, however, seems to definitely contemplate security and similar transactions by an individual not engaged in such transactions as a matter of his regular business; and apparently he is now allowed to deduct such losses as he may have in that connection prov ded the losses do not exceed the total amount of profits arising within the year from transactions "entered into for profit but not connected with his business or trade." On account of the more than usual practical importance of the subject of deductions allowed individuals hereunder, there are included in these comments the general purport of several "Losses in Trade" Treasury Decisions Regarding Deductions Deductions Treasury decisions rendered under the previous Income tax paid in any year is deductible in the return made in the following year. This may include any such tax deducted at the source. Customs duties paid during the year by an individual are allowable deductions as taxes, or if the individual be engaged in the importation of goods and merchandise, then as part of the cost price thereof. A bad or worthless debt as contemplated by the Statute is a debt which has been actually ascertained to be worthless and charged off within the tax year. Premiums paid on life insurance by the insured do not constitute allowable deductions for individuals. Depreciation relates only to physical property subject to wear and tear and obsolescence. An individual is not permitted to include as a deduction hereunder the rental value of the property which he owns and occupies, nor is he permitted to deduct from his gross income the interest which the capital invested or employed therein would earn were it otherwise invested. Income from rental of property is taxable, but in computing it a deduction may be made for such expenses as premiums on fire insurance and a reasonable allowance for depreciation. This allowance for depreciation cannot be made on property occupied by the owner as a dwelling. The Statute provides a separate list of deductions for non-resident aliens in the calculation of their net income subject to tax. Most of these deductions are identical with those allowed citizens or residents of the United States except that the non-resident alien's deductions are in respect only to his business or interests |