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PREPARATION OF INDIVIDUAL RETURNS.

Gross Income
Q. What income must I report in my return?
A. The following must be reported:

1. Salaries, wages, commissions and other compensation.

2. Interest received on notes, bonds, deposits in banks (including savings banks) and other taxable interest. When bonds are purchased at say 100 "and interest" report only interest received less that paid out.

3. Dividends on stock whether received in cash or stock. A dividend means:

(1.) Any distribution made by a corporation other than a personal service corporation to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings accumulated since February 28, 1913, or (2) any such distribution made by a personal service corporation out of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918.

Any distribution is deemed to have been made from earnings unless all earnings have first been distributed. Any distribution made in 1918 or in any year thereafter, is deemed to have been made from earnings accumulated since February 28, 1913, or in the case of a personal service corporation from the most recently accumulated earnings; but any earnings accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings accumulated since February 28, 1913, have been distributed.

A dividend paid in stock of a corporation is considered income to the amount of the earnings distributed. Amounts distributed in the liquidation of a corporation are to be treated as payments in exchange for stock and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.

If any stock dividend (1) is received by a taxpayer between January 1 and November 1, 1918, both dates inclusive, or (2) is during such period bona fide authorized or

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declared, and entered on the books of the corporation, and is received by a taxpayer after November 1, 1918, and before the expiration of 30 days after the passage of the Revenue Act of 1918 (viz. before March 27, 1919), then, such dividend shall be taxed to the recipient at the rates prescribed by law for the years in which the corporation accumulated the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits.

Any distribution made during the first 60 days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.

4. Partriership Profits-Your share in partnership profits, whether divided and distributed or not (net profits, not gross).

5. Profit resulting from purchases and sales of property including stock market transactions.

If acquired prior to March 1, 1913, the profit is based on the fair market price or value, as of March 1, 1913.

If acquired on or after March 1, 1913, the profit is based on (a) the cost thereof or (b) the inventory value.

When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value, if any; but when in connection with the reorganization, merger or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss is deemed to occur from the exchange and the new stock or securities received are to

be treated as taking the place of the stock, securities or property exchanged.

When in the case of any such reorganization, merger or consolidation, the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged, a like amount in par or face value of the new stock or securities received shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged.

6. Amounts distributed by a personal service corporation during its taxable year shall be accounted for by the distributees; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corporation at the close of its taxable year in proportion to their respective shares.

7. Any other gains or profit and income from any source whatever except non-taxable income noted in the next question and answer. Q. What income can I omit from my return? A. The following items, among others, are not taxable and need not be reported in your return:

1. Proceeds of life insurance policies, paid upon the death of the insured to individual beneficiaries or to the estate of the insured.

2. The amount received by the insured as a return of premium, paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

3. Christmas presents and other gifts, including property acquired through will or by inheritance, but the income from such property must be included in gross income.

4. Interest upon (a) The obligations of a State, Territory or any political sub-division thereof, or the District of Columbia, or (b) Securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916, or (c) the obligations of the United States or its possessions, or (d) Bonds issued by the War Finance Corporation, provided, that every person owning any of the obligations, securities or bonds enumerated in the clauses (a), (b), (c) and (d) shall, in his return submit a statement showing the number and amount of such obligations, securities and bonds owned by him and the income received therefrom in such form and with such information as the commissioner may require. In the case of obligations of the United States issued after September 1, 1917, and in the case of bonds issued by the War Finance Corporation, the interest is exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and is to be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under the Income Tax Law and the War-Profits and Excess-Profits Tax Law.

Interest on Liberty bonds is exempt to the extent authorized by the various statutes. See table of exemptions on page 6.

5. The income of foreign governments received from any source whatever within the United States.

6. Amounts received through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness, plus the amount of any damages received, whether by suit or agreement, on account of such injuries or sickness.

7. Certain income accruing to any State, Territory or any political sub-division thereof, or the District of Columbia, or any possession.

8. So much of the amount as does not exceed $3,500, received during the present war by a person in the military or naval forces of the United States, as salary or compensation in any form from the United States for active services in such forces, including among others the Marine Corps,

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the Coast Guard, the Army Nurse Corps, Female and the Navy Nurse Corps, Female.

9. Allotments and family allowances, compensation and insurance payable under Articles II, III and IV respectively of the War Risk Insurance Act (approved September 2, 1914, as amended) are exempt from all taxation.

Q. I am a stockholder in a corporation and during 1919 I received from the corporation a cash dividend and also an extra dividend paid in stock of the corporation. Must I pay a tax on the stock dividend as income, in view of the fact that it really represents no income to me?

A. The United States Supreme Court decided under the 1913 Income Tax Statute that stock dividends are not income within the meaning of that statute. The Treasury Department, however, now holds that stock dividends are taxable as income since the present law contains a provision expressly defining stock dividends as taxable income.

A decision has been rendered by Judge Mayer, in the Federal District Court for the Southern District of New York, holding that stock dividends are not income, and therefore not taxable under the present law. The Treasury Department, however, will undoubtedly proceed to collect the tax on such dividends until this question is finally decided by the United States Supreme Court, under the law as amended.

Q. Should a married man include his wife's income in his return?

A. This is optional. A joint return may be filed or each may file a separate return if desired. If a joint return is filed, the surtax should be figured separately.

However, where the joint net income is over $5,000 and a surtax begins to apply, it is advisable to file separate returns in order to avoid any possibility of increasing the surtax by figuring it upon their combined incomes.

Net Income Q. What can I deduct from the gross income in my return? A. The following can be deducted:

1. Expenses-All ordinary and necessary expenses

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