Evening star., 1935-03-03

cent earned income credit and where?'
This question now causes more
scratching Of heads and chewing OF
pencils by income taxpayers than any
| Of the changes made by the 1894
| revenue act
The surtax has been altered, the
method Of signing returns has been
changed-in fact, so many new things
have been put in the tax act that the
| Government has issued a circular en-
titled Important Changes in the In
ternal Revenue Laws"
Generally these changes are sup
posed to lift the load from the little
fellow" and increase the load on the
big fellow" But in practice, it is
| working out here in Washington that
| even some of those with larger in
comes have so many exemptions that
they are actually paying less tax this
year than last. Others are paying
much larger taxes.
Surtax Starts Lower.
Last year the surtax didn't start
until $4,000 and then at per cent.
Now it starts at $4,000 at per cent.
Last year no credits were allowed be-
fore computing the surtax. This year
the credits for personal exemptions
and for dependents are permissible in
computing the surtax. This has
helped many men with large families.
Generally the heavier taxpayers, how
ever, are paying much larger levies to
the Federal Government.
But by and large, big and little.
they are all puzzled this year over
! that 10 per cent earned income
credit" They are all trying to find
out, and without much success unless
they consult a Government expert,
! just exactly what the Government
does mean by this language on the
income tax return:
In computing the normal tax, but
| not the surtaX, there may be claimed
credit against net income Of 10 per
centum Of the amount Of the earned
net income, but not in excess of 10
| per centum of the amount Of the net
income. If the net income is not
more than $4,000 the entire net in
| come shall be considered to be earned
net income and If the net income is
| more than $1,000 the earned net in
come shall not be considered to be
less than $1,000"
To the average man that looks easy
to start with, but before he gets
through it reads like 80 much Greek,
according to many who have got
tangled up, particularly with that last
| sentence. It is causing more trouble
than any new feature of the income
| tax returns.
To understand the matter, Govern
ment officials explain, 1t is necessary
to realize that there are two entirely
different kinds of net income in
volved. One of these is just plain
ordinary net income" but the other
| is learned net income" There Is a
vast difference.
| If only the problem were as simple
as taking 10 per cent of the earned
net income and subtracting it, that
would be easy. But it is not so simple
as that by any means. So many Ifs
ands and butts" come into the picture
| Take the simplest example first
however-of a man whose salary Is
less than $4,000 a year, say $2,500
without home on which to pay taxes
| or interest, no contributions and with
out a wife or children for exemptions
and credits. He would simply figure
10 per cent Of his earned net income
of $2,500, which is $3.50, and go about
his figuring as follows:
| Net income e.--....::. $500
Loss nerS0nal PyemnllOn 600 lGON
Balance of income subject to
Tax at Der cent nt S5O
Means Several Things.
| But under this new 1884 law, the
words earned income" mean two
or three things. In the first place,
generally, it means salary. AS ex-
planned in the income tax return
| l040, earned income" is defined as
wages. salaries, professional fees and
other amounts received as compen-
sation for personal services actually
| rendered, but does not include any
amount not included in gross income,
nor that part of the compensation de-
rived by the taxpayer for personal
services rendered by him to a cor
poration which represents distribu-
ton of earnings or profits, rather
than a reasonable allowance as COM
pensation for personal services actually
rendered.
I'm the case of a taxpayer engaged
in a trade or business. in which both
personal services and capital are ma
terial income producing factors,
reasonable allowance as compensation
for the personal services actually rem
dered by the taxpayer, not in excess
of 20 per centum of his share OF the
net profits of such trade or business
i shall be considered as earned In
come"
Earned income deductions" it ex-
plains, means such deductions as are
allowed by section 23 of the revenue
act of 1884, for the purpose of COM
putting net income, and are properly
allowable to or chargeable against
earned income.
Earned Net Defined.
Earned net income means the
excess of the amount Of the earned
income over the sum of the earned
income deductions"
For the man with net income OF
more than 5000, but salary OF less
than $4,000, the rules appear to guar
antee a credit of at least $500.
But the top limit on earned income
credit is placed at $l,400, which Is 1o
per cent on an earned income OF
$4,000. In other words, for the pur-
pose of the law no one Is supposed
actually to earn by his own personal
endeavor more than $4,000 learned
income"
Now, turning to the other kind OF
net income, Just plain met income
1t is derived by the great rank and
file of small and moderate income
| taxpayers by adding up all their In
come and subtracting from 1t certain
deductions, such as taxes paid, con-
| tributions and certain other things
such as interest on personal debts
That gets the figure for met income. "
Next It is from this net income that
the taxpayer subtracts still further
his new earned income credit, per-
sonal exemption and credit for de-
A