During the fiscal year ended June 30, 1941, the income tax continued as the single most important source of revenue in the Federal tax structure. Collections amounted to more than $3,400,000,000 and were surpassed only in 1920 when war-time rates under the Revenue Act of 1918 were in effect. The yield of the income tax during each of the last five years exceeded $2,000,000,000. In this 5-year period (July 1, 1936-June 30, 1941) income tax collections were more than double those of the preceding 5-year period (July 1, 1931 to June 30, 1936) and were greater than income tax collections for the eight fiscal years 1929-36. In the fiscal year 1941, the Federal individual income tax produced $1,417,655,000; the corporation income and excess profits tax, $2,044,373,000; a total of $3,462,028,000. This constituted 47 per cent of total Federal internal revenue and customs.
State income tax collections for 1941 amounted to an estimated $420,000,000. This represented 12 per cent of estimated total 1941 state tax revenues (exclusive of unemployment compensation taxes).
Individual Income Tax.
The Revenue Act of 1941 made important changes in the Federal income tax for taxable years beginning after Dec. 31, 1940. The changes included lower personal exemptions and filing requirements, revision of the dependent credit, higher surtax rates, a simplified income tax for small taxpayers, and a change in the treatment of income from noninterest-bearing securities sold at a discount.
Under the Revenue Act of 1940, the personal exemptions were $800 for single persons and $2,000 for married persons. These have been reduced to $750 and $1,500, respectively. Filing requirements were lowered to accord with the exemption levels. Prior to the Revenue Act of 1941, a person, though unmarried, who supported in one household one or more persons actually dependent upon him for their chief support, was deemed to be the head of a family and was allowed an exemption as such, plus $400 for each person dependent upon him who was less than 18 years of age or incapable of self-support. The present law provides that a dependent counted to constitute an individual as the head of a family cannot be counted again for purposes of the dependent credit.
The surtax rates have been increased, the 10 per cent defense tax has been made permanent and an integrated surtax schedule which includes the defense tax on the total individual income tax has been provided. Under the Revenue Act of 1940, the first $4,000 of net income in excess of the personal exemption and dependent credit was exempt from surtax; under the present law, surtax is imposed on the entire surtax net income. Surtax rates under present law range from 6 per cent on the first $2,000 of surtax net income to 77 per cent on amounts in excess of $5,000,000. Formerly, the rates ranged from 4 per cent on surtax net incomes in excess of $4,000 but not over $6,000 to 75 per cent on amounts in excess of $5,000,000. The normal tax rate of 4 per cent has not been changed. Under prior law, however, both the normal tax and surtax were increased by a 10 per cent defense tax, with the limitation that such defense tax was not to exceed 10 per cent of net income remaining after normal tax and surtax.
A simplified tax schedule has been provided for individuals with gross incomes of $3,000 or less derived solely from salaries, wages, compensation for personal services, dividends, interest, rent, annuities and royalties. Such individuals may elect to forego the reporting of deductions and the computation of tax and pay the tax shown on the tax return. Nonresident alien individuals, estates and trusts are not allowed to use the simplified method.
The tax on nonresident alien individuals not engaged in business or not having an office within the United States has been increased generally from 16 per cent to 27 per cent on interest, dividends and other fixed or determinable annual or periodical income from sources within the United States. The rate of withholding at source has been increased accordingly. The rates generally applicable to nonresident aliens do not apply where they would infringe upon a treaty obligation. Under prior law, these rates could be reduced to not less than 5 per cent as applied to residents of a contiguous country if so provided by treaty. The present law authorizes a similar reduction in the case of residents of any country in North, Central, or South America, the West Indies or Newfoundland.
Under prior law, income from noninterest-bearing securities sold at a discount was, for taxpayers reporting on a cash basis, taxable in full upon redemption of the bond. Taxpayers on the accrual basis could report and pay tax on the income as it accrued. The present law extends to taxpayers on the cash basis the privilege of electing to report income from these securities as it accrues.
There were no additions in 1941 to the list of states which have individual income taxes. At present, 31 states and the District of Columbia have general income taxes. Four other states tax income from intangibles only. Aside from the District of Columbia law which was enacted in 1939, all of the state income tax laws were enacted in 1937 or prior years. The states made numerous revisions in income taxes during 1941. Maryland lowered its rates and South Dakota both lowered the rates and increased the exemptions. West Virginia increased the rates on incomes of $4,000 and over. New York dropped its emergency 1 per cent tax but Massachusetts and Wisconsin extended their temporary surtaxes. Massachusetts also enacted an additional 3 per cent surtax, the proceeds of which are to be used for old-age assistance.
During the calendar year 1940, 7,715,660 Federal individual and taxable fiduciary income tax returns were filed, more than half of which were taxable. Data on taxable returns filed in 1940 show that net income of individuals and fiduciaries exceeded $15,000,000,000, and tax liability was $928,394,000. The average effective tax rate on the net income of taxable returns was 5.87 per cent. Forty-five returns showed net income of $1,000,000 and over. These reported a total net income of $81,370,000, and indicated a total tax liability of $53,181,000.
Tax Anticipation Notes.
See NATIONAL DEBT.
Corporation Income and Excess Profits Taxes.
The Revenue Act of 1941 imposes a surtax applicable to all corporations, and increases the rate of tax on foreign corporations. Also, the defense income tax is made permanent and integrated with the basic rates.
A surtax of 6 per cent on the first $25,000 of surtax net income and 7 per cent on the balance has been imposed upon corporations. The normal corporation income tax rates have not been changed except to round the rates to the nearest whole per cent, including the defense tax.
The rate of tax on foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein has been increased from 16 per cent to 27 per cent. The rate for withholding at source has been increased accordingly. Treatment similar to that accorded nonresident alien individuals who are residents of the Western Hemisphere has been accorded foreign corporations organized under the laws of any country in North, Central, or South America, the West Indies, or Newfoundland.
The declared value excess profits tax has been continued without change except that the 10 per cent defense tax has been made permanent.
The excess profits tax imposed by the Second Revenue Act of 1940 has been amended by the Excess Profits Tax Amendments of 1941 and the Revenue Act of 1941. The changes made by the Excess Profits Tax Amendments of 1941 are applicable for taxable years beginning after Dec. 31, 1939. These changes consist of a series of relief provisions concerning: (1) The carry-over of unused excess profits tax credit to succeeding years; (2) the restoration to base period income of abnormal deductions; (3) relief for corporations that experienced rapid growth during the base period; (4) relief in cases of abnormal conditions during the base period; and (5) the use of a predecessor's earning experience by corporations resulting from tax-free exchanges or reorganizations.
The amendments to the excess profits tax made by the Revenue Act of 1941 are applicable for taxable years beginning after Dec. 31, 1940. The chief changes include increases in rates, reduction in the invested capital credit, reversal of the deduction for income and excess profits taxes, more liberal allowance for additions to capital and elimination of the exemption for income from mining strategic materials.
Excess profits tax rates have been increased by ten percentage points in each bracket. Under prior law, the rates ranged from 25 per cent on the first $20,000 of adjusted excess profits net income to 50 per cent on the portion in excess of $500,000. Present rates range from 35 per cent to 60 per cent.
The invested capital credit, which, under prior law, was 8 per cent of invested capital, has been left 8 per cent on the first $5,000,000 of invested capital but is reduced to 7 per cent on the balance.
Under prior law, the income tax was allowed as a deduction in the computation of the excess profits tax. In order that the part of the income tax which is computed on income which is not subject to the excess profits tax should not reduce the excess profits net income, the deduction has been reversed. As a result, the excess profits tax is allowed as a deduction in computing both the normal tax and the surtax but the normal tax and the surtax are not allowed as a deduction in computing the excess profits tax.
In order to encourage new capital in corporate enterprise, it was deemed desirable to offer a special inducement in the form of a more liberal credit where new capital is present. To achieve this result, new capital in the form of money or property paid in for stock during taxable years beginning after Dec. 31, 1940, and taxable stock dividends made during the same period, is counted at 125 per cent of its value.
Under prior law, that portion of the adjusted excess profits tax net income of a domestic corporation which was attributable to mining within the United States of tungsten, quicksilver, manganese, platinum, antimony, chromite, or tin, was exempt from excess profits tax. The Revenue Act of 1941 eliminates this exemption.
There were no additions during 1941 to the list of 32 states and the District of Columbia which had general corporate income taxes. During 1941, rates were reduced in South Dakota and changed in Arkansas from a flat 2 per cent rate to a rate graduated from 1 per cent on the first $3,000 of net income to 5 per cent on all income in excess of $25,000. Massachusetts and New York extended the temporary additional taxes on corporations and Massachusetts enacted an additional surtax of 3 per cent for the purpose of financing old-age assistance.
Federal corporation income tax returns for 1939 indicate that approximately 516,000 returns were filed in 1940, of which 200,000 showed net income, and 270,000 showed no net income, while 46,000 corporations were inactive. The active corporations reported a gross income of $132,000,000,000, deficit corporations accounting for $27,000,000,000. Net income corporations reported a total net income of $8,800,000,000 and those with no net income reported deficits aggregating $2,100,000,000. The returns with net income indicated a total tax liability on 1939 income of $1,232,000,000 including $1,216,000,000 income tax and $16,000,000 declared value excess profits tax. See also TAXATION.
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