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Net

Income

Deductions

Taxes

Contributions

Interest

so definite in this respect as to make it ill advised fo the Attorney General of the State or the Comptroll to do other than require the inclusion of such incon as subject to the tax.

Net income is gross income less allowable deduction

The deductions allowed in computing net income a much the same as those allowed by the Federal La They include business expenses, interest, taxes, losses business, losses in transactions entered into for prof losses from fire, etc., bad debts actually charged o wear and tear, obsolescence, depletion and contributior

Taxes paid to the Federal Government or any of i possessions or to any territory, state or political su divisions thereof or to any foreign government constitu an allowable deduction. Income taxes and taxes assess against local benefits which tend to increase the val of the property assessed are not, however, permitted be included as a deduction. Non-residents under certa

conditions may deduct income taxes. This subject treated later on under the heading "Non-Residents."

Contributions are an allowable deduction to the exte of 15% of the net income of the taxpayer. They a limited, however, to those made to corporations or as: ciations organized under the Laws of the State and op ated exclusively for religious, charitable, scientific educational purposes, or for the prevention of cruelty children or animals. Also, contributions made to special fund for Vocational Rehabilitation authorized Congress may be included but not beyond the 15% lin Interest paid during the year is a deduction under statute. But in determining the precise amount of in

est which is deductible, a rather complicated and even unsatisfactory situation arises. The law permits in the case of a resident that only such proportion of the total interest may be deducted as the net income of the taxpayer bears to his total income from all sources. The use of the words "total income from all sources" appears I to include "gross income" as defined in the law, plus exempt income.

The Federal Law permits the deduction of interest upon all indebtedness, except only as to indebtedness incurred or continued to purchase or carry exempt obligations other than certain obligations of the United States. It may have been the idea of the New York State Legislature to restrict the deduction of interest on indebtedness in somewhat the same way, but, in its practical operation, the New York State measure seems clearly to discriminate against exempt holdings; to illustrate:

Should a resident have a total income of $60,000, $50,000 from obligations of the United States which are tax exempt and $10,000 from taxable securities; and should he have outstanding indebtedness the interest on which amounted to $6,000 (a portion of the indebtedness being a mortgage upon his home and a portion for the purpose of carrying taxable securities) he would be privileged to use as a deduction, computing the amount in round figures, but $1,000, that is one-sixth of the $6,000. The same individual, with a like income and similar indebtedness, but receiving his total income of $60,000 from taxable sources, would be privileged to deduct practically the entire $6,000 of interest.

Interest deduction is often a very large and important tem to the taxpayer and its benefits may be reduced

Personal

Exemptions

to almost nothing by this provision. Such an arrangement, moreover, if administered along the lines indicated by the statute, would seem to be tantamount to an indirect tax upon exempt income.

The Comptroller in interpreting this provision of the law has held that if the taxpayer has no income from exempt sources the entire amount of interest may be deducted. Where, however, non-taxable income is received the amount of interest which may be treated as a deduction is that proportion which the gross income bears to gross income plus income received from exempt

sources.

In view of the wording of the law it is not readily understandable how such an interpretation is possible, but it must be recognized that the practical result of this interpretation is much more equitable than the method of computation specified in the law. Even accepting the broad and liberal ruling which the Comptroller has made in connection with this provision the required apportionment will, in many instances, work unfairly.

In addition to the foregoing deductions, a resident taxpayer is allowed the following exemptions:

$1,000 personal exemption in the case of a single person or married person not living with husband or wife $2,000 personal exemption in the case of a "head of a family," or a married person living with husband or wife.

$200 for each person (other than husband or wife) de pendent upon and receiving his chief support from the taxpayer if such dependent person is unde eighteen years of age or incapable of self-suppor because mentally or physically defective.

Following the Federal Law, a husband and wife ar allowed, when living together, but one personal exemp

In

=tion of $2,000 against their aggregate net income.
= the event that they file separate returns, the personal ex-
emption of $2,000 may be taken by either or divided be-
tween them.

Personal

of U. S. Officials

Salary, wages and other compensation paid by the United States to officials and employees is exempt. This Exemptions exemption, however, reduces and limits the personal exemption of such officials or employees by the amount of such salary, wages or compensation. For example, a resident of the State who received $5,000 salary as an official of the United States Government and $5,000 other income from taxable sources apparently would not be allowed any credit in the form of personal exemption but would be obliged to pay the tax on the entire $5,000 of income received from taxable sources; another resident of the State, however, receiving a like income in amount but made up of $5000 from exempt bonds and $5,000 from taxable sources could receive credit for the personal exemption. In effect this seems to be an indirect tax upon the salaries, wages, etc., paid by the United States.

In this connection the Attorney-General of the State has rendered an opinion substantially to the effect that officials or employees of the United States-if their "net income" from taxable sources is less than $1,000 if single or $2,000 if married-need make no return even though they are not entitled to receive credit for the personal exemption against that part of their income. While this ruling would not apparently alter the conditions outlined in the illustration just given it would create a very greatly changed condition where the "net income" (income from taxable sources) did not exceed $1,000 or $2,000 as the case might be.

Income of

Non-
Residents

Deductions of NonResidents

Personal
Exemption

not allowed
Non-
Residents

Non-Residents

Non-residents of New York are taxed at the same ra as residents but the levy is made only upon the incon received from sources within the State. It does not i clude, however, annuities, interest on bank deposits, i terest on bonds, notes or other interest bearing oblig tions or dividends from corporations, except to the exte to which such income shall be a part of income fro any business, trade, profession or occupation carried c in the State and subject to taxation under the Person Income Tax Law of the State.

In determining the amount of net income of a no resident, deductions may be made from gross income: enumerated on pages 18 and 19. All deduction of non-residents, however, shall be allowed only to th extent that they are connected with income arising fro sources within the State. In the case of interest pai on indebtedness a non-resident may deduct only th portion of the interest paid within the taxable ye which the amount of his gross income bears to tl total amount of his income received from all source both within and without the State.

The exemptions of $1,000 and $2,000 and $200 f each dependent as described on page 20 are not allow to non-residents, according to the wording of the la and thus, taxes are to be levied upon the full amou of net income. This provision has been featured in t general question as to whether the State of New Yo has the power to so tax a resident of another Stat Judge Knox of the United States District Court (Sout ern District of New York) in a case brought by t

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