The following is a combined digest of the old law, as amended, and of the War Income Tax provisions of the new Revenue Act. The differences between the two taxes are noted. 1. Persons Subject to Income Taxes. The Pre-War Income Tax applies to (a) every citizen of the United States, whether residing at home or abroad, (b) every resident alien, (c) every estate of a deceased person during the period of settlement, (d) every trust the proceeds of which are not distributed regularly, (e) the members of every business partnership in the individual capacity of each, and (f) every nonresident alien individual who derives a net income from sources within the United States. The War Income Tax applies to all of the above except (f) nonresident aliens. 2. Returns Required to Be Made. The Pre-War Income Tax requires a sworn return to be made annually by every person listed above, and on behalf of every estate or trust, whose net income amounts to $3,000 or more. The War Income Tax requires a similar return to be made by every unmarried person, and on behalf of every estate or trust, whose net income amounts to $1,000 or more, and by every married person or head of a family whose net income amounts to $2,000 or more, regardless of the additional exemptions to which the person making the return may be entitled. 3. Nature of the Taxes. Both the Pre-War Income Tax and the War Income Tax consist of two parts: the so-called “normal tax" and the "additional tax" or surtax. The normal tax, in both cases, is levied at a flat rate upon the entire net income of every taxable individual, less certain credits and exemptions allowed by the law and more fully described below. The additional tax, in both cases also, is graduated according to the size of the income, and is not affected by any credits or exemptions whatever. 4. How to Compute Taxable Net Income. Taxable net income is the sum of all of the items of gross taxable income received during the calendar year by any individual, less certain deductions. For the purpose of the normal tax only, certain credits and exemptions are also allowed. The meaning of these terms, as defined by the law, is as follows: "Income" Defined: Certain kinds of income are expressly declared to be taxable, while other kinds of income are expressly exempted from the income tax, as follows: (a) Taxable income consists of 1. Gains, profits, and income derived from salaries, wages, or compensation for personal services of any kind; 2. Income from professions, vocations, businesses, trade, commerce, or sales, and from dealings in real and personal property; and 3. Income from interest, rent, dividends, securities, and from the transaction of any business carried on for gain or profit. (b) Exempt income consists of 1. Proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured; also amounts repaid to insured persons on endowment or annuity contracts; 2. Value of property acquired by gift, bequest, devise or descent (although the income from such property is taxable); 3. Interest upon the obligations of the United States or of any State or political subdivision thereof, except that in the case of United States bonds issued after September 1, 1917, the income therefrom will be exempt only if and to the extent provided in the Act authorizing the issue thereof; and 4. The salaries and compensation of the present President of the United States, Federal judges now in office, and of all officers and employees of any State or political subdivision thereof. "Deductions" Defined: The law provides that there shall be allowed as deductions from gross taxable income the following classes of items: 1. Necessary expenditures actually paid in carrying on any business or trade, but not including personal, living or family expenses; 2. All interest paid within the year on indebtedness, except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from the tax; 3. All domestic and foreign taxes paid within the year, except income and excess profits taxes; 4. Losses actually sustained during the year in business or trade, or arising from fire or other casualty, or from theft; 5. Bad debts actually charged off during the year; 6. Contributions or gifts actually made within the year to corporations or associations operated exclusively for religious, charitable, scientific or educational purposes, to an amount not in excess of fifteen per cent of the taxpayer's taxable net income; 7. Where a subsidiary business is engaged in, the losses actually sustained during the year may be deducted from the gains, if any, arising from the same subsidiary business, but only to the extent of such gains; 8. A reasonable allowance for the exhaustion, wear and tear and depreciation of any property used in a trade or business; and 9. In the case of oil and gas wells, a reasonable allowance for reduction in flow. "Credit" Allowed for Both Normal and Additional Tax: The law provides that the net income embraced in the taxpayer's return shall be credited with the amount of any excess profits tax assessed against the tax-payer for the same year. "Credits" Allowed for Normal Tax Only: For the purpose of the normal tax only, the taxpayer is allowed the following credits, as deductions from his taxable net income: 1. The amount of any dividends received during the year upon the stock or from the net earnings of corporations which are taxable upon their income; and 2. The amount of any interest derived from "tax-free" corporation bonds or other obligations wherein the corporation or mortgagor has contracted to pay the tax on behalf of the person receiving the interest.* "Exemptions" Allowed for Normal Tax: The Pre-War Income Tax allows an exemption of $3,000 from the net income of an unmarried person or of an estate or trust, and $4,000 from the net income of a married person or head of a family, with an additional exemption of $200 for each dependent child if under 18 years of age or if incapable of self-support. The War Income Tax allows an exemption of $1,000 from the net income of an unmarried person or of an estate or trust, and $2,000 from the net income of a married person or head of a family, with an additional exemption of $200 for each dependent child, as above. *For the calendar year 1917 this credit is allowed only for the purpose of the Pre-War Income Tax. After January 1, 1918, the amount of such interest may be credited on either the Pre-War Income Tax return or the War Income Tax return, but not on both. Nonresident Aliens: A nonresident alien individual (subject to the Pre-War Income Tax only) may receive the benefit of the above deductions and credits (but not of the exemptions) by filing with the Collector of Internal Revenue an accurate return of his total income from sources within the United States. 5. The Tax Rates and Their Application. The Pre-War Income Tax consists of (a) a normal tax at the rate of two per cent per annum upon the total net income of each individual, less the credits and exemptions to which he is entitled, and (b) a graduated additional tax on the amount by which his total net income exceeds $20,000, as follows: Above $20,000 and not exceeding $40,000.... Above $40,000 and not Above $60,000 and not Above $80,000 and not Above $100,000 and not Above $150,000 and not Above $200,000 and not Above $250,000 and not Above $300,000 and not exceeding $500,000. Above $500,000 and not exceeding $1,000,000 Above $1,000,000 and not exceeding $1,500,000. Above $1,500,000 and not exceeding $2,000,000. On all net income exceeding $2,000,000... exceeding $60,000. 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% The War Income Tax consists of (a) a like normal tax at the rate of two per cent per annum upon the total net income of each individual, less the credits and exemptions to which he is entitled, and (b) a graduated additional tax commencing at $5,000, as follows: Above $5,000 and not exceeding $7,500.. 6. The Two Tax Rates Combined. 1% 2% 3% 4% 5% 7% 10% 14% 18% 22% 25% 30% 34% 37% 40% 45% 50% The normal rates levied by the Pre-War Income Tax and the War Income Tax, less the exemptions, combine as follows: Normal Rates Combined. Amount of Income Subject to Normal Rate $1,000 or under Between $1,000 and $2,000: Married persons and heads of families... Between $2,000 and $3,000 (all income subject to the normal tax) Between $3,000 and $4,000: Married persons and heads of families.. Above $4,000 (all income subject to the nor- The additional rates levied by the Pre-War Income Tax and the War Income Tax combine as follows: Additional Rates Combined. Old New Total Rate Rate Rate 0 0 1% 2% 10% 12% 3% 14% 17% 4% 18% 22% 5% 22% 27% 25% 31% On that part of net income which is 7. Examples of Calculation. 6% 7% The following are a few examples of how the two taxes apply to typical incomes of different sizes and kinds : (1.) Smith, an unmarried man, receives a salary of $3,000 per annum. He is required to make a return of his income for the War Income Tax only, and will be assessed as follows: |