1. NUMBER OF RETURNS: Table 2A (Appendix B) shows the extent to which husbands and wives filed joint or separate returns for 1939. Of approximately 7,600,000 individual returns with net income /1/ 3,700,000 were returns of husbands and wives living together. Of these marital returns approximately 3,300,000 were "joint" returns, and approximately 400,000 were separate returns of husbands and wives, including community property returns. /2/

Since two separate returns represent but one family, the number of families in which husband and wife filed separately was approximately 200,000 or 6 percent of the total number of families represented. The distribution by States of families filing joint and separate returns is shown in Table 3 of Appendix B.

The predominance of joint returns was confined to the lower net income classes. Of the 3,300,000 joint returns filed, approximately 3,000,000 or 92 percent showed net income under $6,000. In not income classes of this size, no tax advantage was to be gained from filing separate returns, since the income remaining after personal exemption was subject only to the flat normal rate. /3/ In all classes with net income of $20,000 and over separate returns, including community property returns, predominated.

2. NET INCOME: The net income reported on returns of husbands and wives living together aggregated for 1939 $15.2 billion. (See Appendix B, Table 2B.) Of this amount $11.8 billion, or 78 percent, was reported on joint returns, and $3.4 billion on separate returns (including community property returns). Nine billion of the net income on joint returns, however, was in net income classes under $6,000. In classes with net income of $6,000 and over the aggregate net income reported was $2.8 billion on joint returns and $2.6 billion on separate returns (including community property returns). It is apparent that the problem under consideration is of particular importance in the higher net income classes, even though under the present reduced exemptions and extension of surtax the level of net income at which separate returns become advantageous is lower than in 1939. (See section IIB2 below.)


/1/ Individual returns with no net income are not classified by sex and family relationship of the taxpayer.

/2/ In connection with these comparisons it should be noted that in the statistics joint returns include the returns of husbands and of wives whose spouses have no income; and that while joint returns are classified by size according to the combined net income of husband and wife, separate returns are classified by size of the net income of the spouse filing the return.

/3/ No surtax was imposed in 1939 on the first $4,000 of surtax net income, and the personal exemption of husband and wife was $2,500. Therefore on combined net incomes of $6,500 or less the tax would in general be the same whether joint or separate returns were filed. For married couples with dependents the breaking point specified should be increased by the amount of the dependent credit.



1. TAX REDUCTION UNDER JOINT RETURNS: In some cases the combined tax on husband and wife is less under a joint return than it would be under separate returns. This fact accounts for some joint returns filed in high net income classes. /1/ Since the option as to type of return rests with the taxpayer, the Government stands to lose in all cases where the tax is affected. Situations in which the tax may be reduced by a joint return include the following:

If one spouse has net income and the other has either a deficit or no income but an allowable deduction, the pair necessarily profit from filing a joint return.

Even though both spouses have net income, the tax under a joint return may be smaller than the combined tax under separate returns if the aggregate net income is sufficiently smaller than the sum of the separate net incomes. (See Appendix A, Case 7.) As indicated above in Section IA3, the computation of certain limited deductions and losses under present Regulations may frequently reduce aggregate net income below the sum of the separate net incomes, though the reduction will not in all cases be large enough to cause a tax differential in favor of a joint return.

Finally, should one or both spouses file under Supplement T, a joint return may reduce the tax, primarily because of the requirement that the personal exemption in such case must be divided equally. /2/ Thus, a husband and wife with gross income of $2,400 and $500 respectively, filing under Supplement T, will pay a tax of only $114 if they file a joint return, but a combined tax of $139 if they file separate returns, since under separate returns $250 of the combined personal exemption will be lost. Similar cases will arise under Supplement T wherever one spouse has gross income lees than $750. /3/ If both spouses elect the optional tax, disadvantages from separate filing will be apparent from the schedule, but if only one spouse elects it, the disadvantage may not be apparent though it may exist. /1/


/1/ In addition, as already noted, some returns classified as joint are the returns of husbands or wives whose spouses have no income.

/2/ Some minor discrepancies under Supplement T between the tax on a joint return and the tax on separate returns may be ascribed to the averaging of the tax on specified ranges of income, and to rounding.

/3/ Or less than $833.33 if account is taken of the earned income credit. In some cases the virtual disallowance of part of the personal exemption and earned income credit of the spouse with the smaller income will not matter because the other spouse will have enough credits of his own to be nontaxable.


2. TAX REDUCTION UNDER SEPARATE RETURNS: Despite exceptions of the sort noted above, ordinarily if husband and wife each have net income and the combined amount is large enough to be subject to progressive surtax rates, they can lower their combined tax by filing separate returns. The division of the income in effect shifts some income from higher surtax brackets to lower surtax brackets, with a consequent reduction in surtax.

The point at which separate returns become advantageous may be placed under existing law (1941 Act) at a combined net income just over $3,000. /2/ Except for the effect upon normal tax of possible variations in the earned income credit (discussed in Section IB3 above) /3/ the breaking point would be $3,500. A husband and wife with combined net income in excess of this level will ordinarily secure a lower combined tax under separate returns than under a joint return.


/1/ In some instances the sum of two separate taxes under Supplement T, though not larger than the tax on a joint return, will be larger than the sum of two separate taxes computed in the ordinary way, where the entire personal exemption can be allocated between the spouses in such way as to minimize the tax.

Filing under Supplement T may also be disadvantageous for a number of reasons independent of the type off return; e.g., because the taxpayer has deductions in excess off the amount accorded under the schedule, or else has dependents. (Taxpayers with dependents are at a relative disadvantage under the tax schedule incorporated in Supplement T.)

/2/ Inasmuch as the aggregate net income under a joint return may differ from the sum of the separate net incomes, it is impossible to establish for all cases a breaking point at or below which either type of return will yield the same combined tax and above which separate returns will yield a lower tax. The breaking points indicated assume that the aggregate net income equals the sum of the separate net incomes and that the full personal exemption of $1,500 is divided between the spouses in such way as to minimize the tax. For married couples with dependents the breaking points specified should be increased by the amount of the dependent credit (assuming that both the personal exemption and the dependent credit are fully utilized).

/3/ Thus, in cases where one or both spouses have only imputed earned net income, separate returns would be advantageous as soon as combined net income exceeded $3,000. Were the same earned income credit allowed under a joint return as under two separate returns, the breaking point would be $3,500.


If the combined net income is not in excess of $3,000, or $3,500, then no difference in tax results whether joint or separate returns are filed (unless one or both spouses elect the optional tax under Supplement T, in which case, as previously noted, separate returns may be disadvantageous). On incomes not exceeding $3,500 the amount remaining after personal exemption is subject only to the first surtax rate of 6 percent, which yields the same aggregate surtax regardless of whether joint or separate returns are filed. Similarly the income remaining for normal tax is subject to the flat rate of 4 percent, which yields the same aggregate normal tax under either type of return.

The possible extent of the tax reduction under existing law, if separate returns are filed, is shown in Table 4 of Appendix B. The tax saving varies according to the division of income between husband and wife, and is greatest where the incomes are equally divided. /1/ For example, as Table 4 shows, a couple with combined net income of $10,000 filing separate returns save $130 in tax if one spouse has only 10 percent of the income but $340 in tax if the income is evenly divided.

On the basis of certain special data available for the year 1936, /2/ Tables 5A and 5B of Appendix B show how the combined net incomes of husbands and wives (excluding net capital gains and losses) were divided in that year. In almost one-third of the cases the incomes were equal, husband and wife each having half of the total. These cases represent chiefly returns on a community property basis. In another 12 percent of the cases, the incomes were nearly equal, one spouse having from 40 to 50 percent of the combined income. The remaining 45 percent of the couples shared their income in varying proportions, indicative of variation in the possible tax saving under separate returns.

3. TAX REDUCTION IN COMMUNITY PROPERTY STATES: Because of the equal division of community income, tax reduction from the filing of separate returns tends to be at a maximum in community property States.


/1/ In some cases where the aggregate amount of income in the common top surtax bracket is not affected, moderately unequal incomes yield the same minimum tax under separate returns as equal incomes.

/2/ The Income Tax Study for 1936 presented data on MATCHED separate returns of husbands and wives. In the regular tabulations for Statistics of Income, no matching of the separate returns is practicable.


Husband and wife filing separate returns under this system are in general subject to a lower combined income tax than husband and wife with the same aggregate income in a non-community property State, even though the latter also file separate returns. /1/

The difference is greatest, however, in cases where the husband and wife in other States file a joint return, or file only one return because only one has income. Thus, two families with equal income derived solely from the husbands activities one in a community property State and one in a non-community property State, are liable under existing law not to equal Federal income taxes but instead to the unequal taxes shown in Table 6 of the Appendix.

This table indicates that on incomes of $3,000 no tax differential appears, for the reasons discussed above. On larger incomes there is a tax differential that increases with the size of the income, amounting under the 1941 Act to $340 on a community property income of $10,000 and to approximately $41,000 on a community property income of $1,000,000. /2/ It should be observed, however, that these seine tax differentials would appear also in non-community property States in the case of any couple with income equally divided filing separate returns, as compared with another couple filing on a Joint basis or having only one income between them.

4. REVENUE INVOLVED: It has been officially estimated that under the 1941 Act and assuming calendar year 1941 estimated levels of income, a revenue increase of $352.8 million would result if joint returns were mandatory; i.e., if the incomes of husbands and wives living together and filing separate returns were taxed at rates applicable to the total of their incomes, /3/ WITHOUT the special relief proposed by the Treasury for earned net income.


/1/ Exceptions may occur in particular circumstances, such as the following: 1) the husband or wife in the community property State may have some separate incomes, so that the division of their aggregate income is not equal; 2) the separate incomes of the husband and wife in the non-community property State may happen to be equal; or 3) the incomes of the husband and wife in the non-community property State, though unequal, may under separate returns be subject only to the first surtax bracket.

/2/ Although the amount of tax saved in community property States increases with the size of the net income, the percent of the saving to the total tax paid in non-community property States is greatest in the middle net income classes, because of the gradation of the surtax rate scale.

/3/ Memorandum, Haas to Blough, November 13, 1941.


Of this total increase, approximately $65.0 million would be ascribable to the conversion of community property returns to joint returns, and approximately $287.8 million would be ascribable to the conversion of other separate returns of husbands and wives to joint returns. /1/


/1/ The estimate for community property returns does not include community property returns with net income under $5,000. It was however indicated that such returns, together with separate returns not on a community property basis filed in community property States would yield under mandatory joint returns $8.5 million additional revenue. This amount is included in the $287.8 million estimated for separate returns other than community property returns.


While the Federal revenue loss on a marital income of specified size is greater in community property States than elsewhere, the AGGREGATE revenue loss from separate returns in community property States as compared with other States depends upon the distribution of incomes in the different States and upon the relative number of taxpayers.



Since the Federal Government recognizes for purposes of the Federal income tax whatever division of income between husband and wife is prescribed by widely different State laws, and also accords husband and wife the privilege of filing separate returns, the Federal tax upon families having combined incomes of the same size necessarily varies in different States. These interstate inequalities would disappear if the tax were levied on the combined net income.

The tax differences are most marked in community property States as contrasted with other States for the two reasons that in community property States the income is equally divided between husband and wife even where it is all earned by one spouse, and the equal division of income reduces the tax to a minimum. In community property States as elsewhere, however, only those married taxpayers are benefitted whose combined income is large enough to be subject to surtax progression; i.e., in general those with combined net income in excess of $3,500 (putting aside possible minor differences in normal tax due to variations under joint vs. separate returns in the earned income credit on combined net incomes in excess of $3,000).


Tax avoidance through transactions between husband and wife is a problem primarily in non-community property States. The transactions aim at such a division of the family income and deductions as will minimize the Federal income tax. They may take place whether joint or separate returns are filed but are probably more common under separate returns.

Such intra-family transactions center on property income. Division of earned income through assignment from one spouse to the other cannot reduce the tax, since earnings except in community property States are considered the income of the spouse rendering the service. /1/ To a considerable extent divisions of property between husband and wife in order to divide the property income may be deterred by the gift tax. Humerous arrangements are available, however, to allocate income or deductions in such way as to reduce the combined Federal income tax of husband and wife.

Following are cases illustrative of intra-family transactions designed to reduce Federal income tax liability. They include prominently various forms of tax avoidance trusts, direct assignments of certain types of income to the spouse, loans, and transactions in capital items.

1. TAX AVOIDANCE TRUSTS: To avoid the application of the graduated surtax to family income as a unit, a spouse may assign his or her property to a number of ownership entities known as trusts, the beneficiaries of which are the other spouse and other members of the grantor's family. In this way, the family income from property can be divided among a number of owners, each owner being entitled to file a separate return. Because of the intimacy of the family relationship, it is possible for the grantor spouse to retain control of the property transferred to such trusts by means of informal agreements known only to the members of the family and the trustees. /2/


/1/ Some lower court decisions to the effect that past earnings could be assigned as a property right, and would then not be taxable to the assignor, were over-ruled (at least in principle) by a decision of the Supreme Court in the case of Helvering vs. Eubank, 311 U.S. 122 (1940).

/2/ Cf. HELVERING VS. CLIFFORD, 60 Sup. Ct. 554 (1940)


For example, a spouse creates an irrevocable truss for benefit of the other spouse with income payable semi-annually on January 2 and July 2, IF THE OTHER SPOUSE IS LIVING AT THAT TIME, and if not living, then payable to some other person. Where the income tax return is made on calendar year basis, the income paid to the beneficiary on July 2 is taxable to the beneficiary, but the income payable to the beneficiary on January 2 is taxable to the fiduciary, as being for the benefit of an unascertained person or a person with a contingent interest. In this way, the income derived from the property held in trust can be split two ways for the purpose of avoiding the graduated surtax. /1/

Where a husband creates a trust for benefit of his wife, their children, the children's issue, making himself a trustee with broad powers of management, the husband is not taxable on trust income despite the fact that the stock, title to which had been conveyed to the trust, was undelivered and remained pledged as collateral for the husband's debts, and despite the fact that the husband retained the right to purchase certain stock from the trust at a fair price. /2/

2. OTHER ASSIGNMENTS: Where there is a valid assignment of property from husband to wife, the wife becoming the legal owner of such property, the income derived from the property so transferred is taxable to the wife, though the assignment itself may involve liability of the husband to the gift tax. Such assignments may be subject to verbal understandings known only to the husband and wife. Thus while the husband may by transfer to the wife divest himself of the ownership of half of his property, actually the parties may agree that such transfer is only for tax purposes and that all of the property will remain under the husband's control /3/

Assignments such as the following do not involve even gift tax liability: (a) Where an agreement is made between husband and wife whereby wife places cash in the hands of husband for stock market investments to be made by him, profits to be divided equally, she is taxable on only one-half of the profits. /4/ (b) Where wife agrees to transfer to her husband a three-fourths interest in a business owned by her, the business to be managed by the husband, three-fourths of the income from such business is thereafter taxable to the husband. /5/ (c) Where husband transfers stock to wife in consideration of wife's promise to pay for such stock (or to pay the husband's indebtedness thereon) with the dividends received, such dividends are taxable to the wife. /6/