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FOOTNOTE TO TABLE

/1/ Earned net income under the provision that if net income is more than $3,000, earned net income shall not be considered to be less than $3,000.

END OF FOOTNOTE

In this situation, husband and wife secure a larger combined earned income credit by filing separately because under separate returns the wife is allowed a $300 credit even though all her income is unearned.

CASE 2. One spouse subject to the maximum credit of $1,400.

                                          Combined    Aggregate
                                           amount       amount
        Items      Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________

   Earned net
   income          14,000    5,000         19,000      14,000
   Net income      20,000    7,000         27,000      27,000
   Earned income
   credit           1,400      500          1,900        1,400

In this situation, husband and wife secure a larger income credit by filing separately because under a joint return the aggregate earned net income is limited to the maximum of $14,000.

CASE 3. Aggregate net income under a Joint return smaller than the sum of the separate net incomes (and the net income limitation operative).

                                          Combined    Aggregate
                                           amount       amount
        Items      Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________

   Earned net
   income           7,000    5,000         12,000      12,000
   Net income       5,000    4,000          9,000       8,000
   Earned income
   credit             500      400            900         800

In this situation, husband and wife secure a larger earned income credit under separate returns, because aggregate net income by which their credit is limited under a Joint return is less than the sum of the separate net incomes limiting their separate credits.

CASE 4. Earned net income of each spouse smaller than net income but aggregate net income smaller than the sum of the separate earned net incomes (and the net income limitation operative).

                                          Combined    Aggregate
                                           amount       amount
        Items      Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________

   Earned net
   income          10,000    5,000         15,000      15,000
   Net income      11,000    6,000         17,000      14,000
   Earned income
   credit           1,000      500          1,500       1,400

In this situation the combined earned income credit under separate returns is larger than the credit under a Joint return because the limitation in terms of net income is more stringent under the joint return whenever the aggregate net is not merely lower than the sum of the separate net incomes but lower also than the sum of the separate earned net incomes.

                Cases 5-6. Earned income credit under
                   a Joint return larger than the
                 combined earned income credit under
                     separate returns (1941 Act)

CASE 5. Earned net income of one spouse larger than net income, and earned net income of the other spouse smaller than net income.

                                          Combined    Aggregate
                                           amount       amount
        Items      Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________
   Earned net
   income           8,000    4,000         12,000      12,000
   Net income       5,000    8,000         13,000      13,000
   Earned income
   credit             500      400            900       1,200

In this situation, husband and wife secure a larger earned income credit under a Joint return, because in effect under such a return one spouse with earned net income in excess of net income is allowed to draw upon the excess net income of the other spouse in connection with the limitation upon the earned income credit. The only exceptions would occur in cases where the aggregate net income chanced to be lower than the sum of the separate earned net incomes as limited in effect for one spouse by separate net income; e.g., in Case 5, if aggregate net income were lower than $9,000.

CASE 6. Aggregate net income under a Joint return larger than the sum of the separate net incomes (and the net income limitation operative).

                                          Combined    Aggregate
                                           amount       amount
        Items      Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________

   Earned net
   income           7,000    5,000         12,000      12,000
   Net income       5,000    4,000          9,000      10,000
   Earned income
   credit             500      400          9,000       1,000

In this situation husband and wife secure a larger earned income credit under a Joint return because aggregate net income by which their credit is limited is greater than the sum of the separate net incomes limiting their separate credits.

Case 7. Tax reduction under a joint ?? as compared with two separate returns (1941 Act)

                                          Combined    Aggregate
                                           amount       amount
       Items       Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________

   Salary           5,000                   5,000         5,000
   Dividends                  5,000         5,000         5,000
   Net short-term
   capital gain     4,000                   4,000           500
   Net short-term
   capital loss               3,500 /1/     3,500 /1/         -
   Net income       9,000     5,000        14,000        10,500
   Normal tax         280       188           468           340
   Surtax             815       430         1,245         1,110
   Total tax        1,095       618         1,713         1,450

FOOTNOTE

/1/ Disallowed on the wife's separate return.

END OF FOOTNOTE

In the situation above though husband and wife each have net income subject to progressive surtax rates, the tax under a joint return is lower than the combined tax under two separate returns because the aggregate net income is considerably lower than the sum of the separate net incomes.

         Cases 8-9. Operation of provision in H.R. 5417 /1/
          respecting earned net income for purposes of the
              normal tax under mandatory joint returns.

THE PROVISION: "For the purpose of computing the normal tax upon the aggregate net income of the husband and wife in the case of a single return made by them jointly, the earned net income shall be the sum of the earned net incomes of the spouses computed separately." /2/

According to the legal draftsmen, the purpose of this provision was to allow on a joint return the same earned income credit for purposes of the normal tax as on two separate returns. This result would not have been accomplished, however, in situations like the following:

CASE 8. One spouse has earned net income greater than net income and the other spouse has earned net income smaller than net income.

                                                Aggregate
                                                 amount
            Items       Husband    Wife          under a
                                                  joint
                                                 return
_______________________________________________________________

    Earned net income   14,000     6,000         20,000
    Net income           7,000    12,000         19,000

In this case the earned income credit on the joint return would have been $1,900, whereas the sum of the separate earned income credits would be only $1,300. /3/

FOOTNOTES

/1/ 77th Congress, 1st Session, H.R. 5417, committed to the Committee of the Whole House July 24, 1941 (Union Calendar No. 350), Sec. 111(c).

/2/ The House Report on H.R. 5417 says (page 39) with respect to this provision: "The earned net income of the husband and the earned net income of the wife are to be added together and 10 percent of such earned net income, but not in excess of 10 percent of the aggregate net income, is allowable as a credit for the purposes of the normal tax." A practically identical statement appears on page 10 of the same Report (77th Congress, 1st Session, House Report 1040). The legal draftsmen say, however, that the additional limitation thus implied in terms of aggregate net income was not intended in the bill.

/3/ Further variation would arise if the aggregate net income of the spouses were greater than or smaller than the sum of the separate net incomes. For example, if the aggregate net income were $22,000, the credit would be $2,000, and if the aggregate net income were only $12,000, the credit would be $1,200, or smaller than under separate returns.

END OF FOOTNOTES

CASE 9. Both spouses have earned net income greater than net income, and the aggregate net income is greater than the sum of the separate net incomes.

                                          Combined    Aggregate
                                           amount       amount
       Items       Husband    Wife         under        under a
                                          separate       joint
                                          returns       return
_______________________________________________________________

    Earned net
    income         10,000    9,000         19,000       19,000
    Net income      5,000    6,000         11,000       15,000

In this case, the earned income credit on the joint return would have been $1,500 as compared with $1,100 on two separate returns.

Neither of the above cases would arise if earned net income of each spouse were limited by statutory definition to that spouse's net income. For example, in Case 8 above the aggregate earned net income would then be $13,000 and in Case 9 it would be $11,000. The present statutory limitation by amount of net income applies to the credit for earned net income and not to earned net income itself.

Cases 10-17. Comparison of tax on selected incomes of husbands and wives under separate returns and under mandatory joint returns a) as proposed by the Ways and Means Committee in H.R. 5417, 1941, and b) as proposed by the Treasury, with relief for earned net income. /1/

                       (1)              (2)             (3)

                    Aggregate        Aggregate        Separate
       Case        net income,       earned net       returns
      number         equally           income,        (combined
                     divided          divided           tax)
_______________________________________________________________

        10             3,000            3,000            138
        11             5,000            5,000            330
        12            10,000            5,000            965
        13            20,000           10,000          2,985
        14            50,000           25,000         14,448
        15           100,000           28,000         41,763
        16           500,000           28,000        316,383
        17         1,000,000           28,000        691,308

                    (4)           (5)          (6)            (7)

                         Mandatory            Increase over tax
       Case            joint returns        under separate returns
      number   Ways and Means            Ways and Means
                 Committee     Treasury     Committee       proposal
                 proposal,     proposal      proposal         (5-3)
                   1941                      (4 - 3)
____________________________________________________________________

        10           138           138          -               -
        11           375           330           45             -
        12         1,325 /2/     1,280          360            315
        13         4,630 /2/     4,290        1,645          1,305
        14        20,395 /2/    17,930        5,947          3,482
        15        52,648 /2/    49,698       10,885          7,935
        16       345,028 /2/   342,078       28,645         25,695
        17       732,498 /2/   729,548       41,190         38,240

Treasury Department, Division of Tax Research December 16, 1941

FOOTNOTES TO TABLE

/1/ Assuming rates as under the 1941 Act.

/2/ Differs from joint tax shown in Table 4 of Appendix B because of differences in the earned income credit for purposes of the normal tax. END OF FOOTNOTES TO TABLE

Case 18. Effect of the mandatory joint returns provision on community property vs. non-community property returns, under different assumptions respecting definition and treatment of earned income and earned net income.

CASE: California vs. New York, husband in each State earning $10,000 and wife having $3,000 separate income from dividends.

          Assumption /1/                 Earned income credit
                                         California New York
_______________________________________________________________

PRESENT LAW
  1. Separate returns, 1941 Act            1,000      1,300

  2. Joint return, 1941 Act, single        1,000      1,000
     earned income credit

MANDATORY JOINT RETURNS
  3. Joint return, H.R. 5417, double       1,000      1,300
     earned income credit

  4. Joint return, double earned           1,000      1,300
     income credit and Treasury
     relief for earned income

EARNED INCOME REDEFINED
  5. Joint return, double earned           1,000      1,300
     income credit and Treasury
     relief, but FOR RELIEF
     PROVISION income considered
     earned only to spouse
     rendering service

  6. Joint return, double earned             800      1,300
     income credit and Treasury
     relief, but income considered
     earned only to spouse
     rendering service, BOTH for
     earned income credit and for
     relief provision

EARNED NET INCOME REDEFINED
  7. Joint return, double earned           1,000      1,300
     income credit and Treasury
     relief, but FOR RELIEF
     PROVISION imputed earned net
     income of $3,000 disallowed.
     BOTH for earned income credit
     and for relief provision

  8. Joint return, double earned           1,000      1,000
     income credit and Treasury
     relief, but imputed earned
     net income of $3,000
     disallowed BOTH for earned
     income credit and for relief
     provision

REDEFINE BOTH EARNED INCOME AND
EARNED NET INCOME

  9. Joint return, double earned           1,000      1,300
     income credit and Treasury
     relief but FOR RELIEF
     PROVISION a) income
     considered earned only to
     spouse rendering service and
     b) imputed earned net income
     of $3,000 disallowed

 10. Joint return, double earned             500      1,000
     income credit and Treasury
     relief but a) income
     considered earned only to
     spouse rendering service and
     b) imputed earned net income
     of $3,000 disallowed, BOTH
     for earned income credit and
     for relief provision.

          Assumption /1/                      Tax credit
                                         California New York
_______________________________________________________________

PRESENT LAW
  1. Separate returns, 1941 Act               -        -

  2. Joint return, 1941 Act, single           -        -
     earned income credit

MANDATORY JOINT RETURNS
  3. Joint return, H.R. 5417, double          -        -
     earned income credit

  4. Joint return, double earned             340      480
     income credit and Treasury
     relief for earned income

EARNED INCOME REDEFINED
  5. Joint return, double earned             180      480
     income credit and Treasury
     relief, but FOR RELIEF
     PROVISION income considered
     earned only to spouse
     rendering service

  6. Joint return, double earned             180      480
     income credit and Treasury
     relief, but income considered
     earned only to spouse
     rendering service, BOTH for
     earned income credit and for
     relief provision

EARNED NET INCOME REDEFINED
  7. Joint return, double earned             340       -
     income credit and Treasury
     relief, but FOR RELIEF
     PROVISION imputed earned net
     income of $3,000 disallowed.
     BOTH for earned income credit
     and for relief provision

  8. Joint return, double earned             340       -
     income credit and Treasury
     relief, but imputed earned
     net income of $3,000
     disallowed BOTH for earned
     income credit and for relief
     provision

REDEFINE BOTH EARNED INCOME AND
EARNED NET INCOME

  9. Joint return, double earned              -        -
     income credit and Treasury
     relief but FOR RELIEF
     PROVISION a) income
     considered earned only to
     spouse rendering service and
     b) imputed earned net income
     of $3,000 disallowed

 10. Joint return, double earned              -        -
     income credit and Treasury
     relief but a) income
     considered earned only to
     spouse rendering service and
     b) imputed earned net income
     of $3,000 disallowed, BOTH
     for earned income credit and
     for relief provision.

          Assumption /1/                      Total tax
                                         California New York
_______________________________________________________________

PRESENT LAW
  1. Separate returns, 1941 Act            1,495      1,623

  2. Joint return, 1941 Act, single        2,115      2,115
     earned income credit

MANDATORY JOINT RETURNS
  3. Joint return, H.R. 5417, double       2,115      2,103
     earned income credit

  4. Joint return, double earned           1,775      1,623
     income credit and Treasury
     relief for earned income

EARNED INCOME REDEFINED
  5. Joint return, double earned           1,935      1,623
     income credit and Treasury
     relief, but FOR RELIEF
     PROVISION income considered
     earned only to spouse
     rendering service

  6. Joint return, double earned           1,943      1,623
     income credit and Treasury
     relief, but income considered
     earned only to spouse
     rendering service, BOTH for
     earned income credit and for
     relief provision

EARNED NET INCOME REDEFINED
  7. Joint return, double earned           1,775      2,103
     income credit and Treasury
     relief, but FOR RELIEF
     PROVISION imputed earned net
     income of $3,000 disallowed.
     BOTH for earned income credit
     and for relief provision

  8. Joint return, double earned           1,775      2,115
     income credit and Treasury
     relief, but imputed earned
     net income of $3,000
     disallowed BOTH for earned
     income credit and for relief
     provision

REDEFINE BOTH EARNED INCOME AND
EARNED NET INCOME

  9. Joint return, double earned           2,115      2,103
     income credit and Treasury
     relief but FOR RELIEF
     PROVISION a) income
     considered earned only to
     spouse rendering service and
     b) imputed earned net income
     of $3,000 disallowed

 10. Joint return, double earned           2,135      2,115
     income credit and Treasury
     relief but a) income
     considered earned only to
     spouse rendering service and
     b) imputed earned net income
     of $3,000 disallowed, BOTH
     for earned income credit and
     for relief provision.

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