Dividend Income Under the Revenue Act of 1936

This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.

by JAMES G. CRONIN

UNDER the provisions of the Revenue Act of 1936, dividends received from domestic corporations are no longer a credit in computing normal tax net income as defined in the Act. This change in the method of computing taxable income for normal tax purposes will result in increased tax liability for individuals owning stock of domestic corporations, especially if the present comparatively high level of corporate earnings continues, because of the practical necessity for corporations to distribute 100 per cent of their earnings. In past years the provisions of the various Revenue Acts governing the improper accumulation of surplus have not been rigidly enforced by the government, so that many corporations have made annual distributions at a rate comparable to the distributions made by other corporations in the same type of business. However, under the provisions of the Revenue Act of 1936, a heavy tax is to be assessed against corporations which do not distribute to stockholders all of their earned income during the year in which earned, and it is presumed that distributions by corporations in the latter months of this year will be abnormally large as compared to distributions of prior periods. Inasmuch as corporate distributions paid prior to January l, 1936 were not included in normal tax net income, the provisions of the Revenue Act of 1936 increase the effective rate of tax on this type of income by 4 per cent.

The taxable status of an individual who does not receive dividends from domestic corporations is the same under the provisions of the Revenue Act of 1936 as it was under the provisions of the Revenue Act of 1934. The Revenue Act of 1935 will not apply to the income of any individual who reports on a calendar-year basis, inasmuch as the 1936 Act is applicable to taxable years beginning after December 31, 1935.

The following example illustrates the effect, in computing normal tax net income, of the elimination of the credit for dividends received from domestic corporations on the tax of a married man with one dependent who has a net income of $10,000, which includes $5000 of dividends received from domestic corporations. His tax expense for 1936 has been increased by $200.

INCOME

Salary. $5,000.00

Interest from banks, etc 250.00

Dividends from stock of domestic corporations, $5,000 00

Other income 250.00

Total income $10,500.00

DEDUCTIONS

Taxes paid. $400.00

Contributions 100.00 500.00

Net income $10,000. 00

COMPUTATION OF TAX

Under Revenue Act of 1934 Under Revenue Act of 1936

Net income $10,000.00 $10,000.00

Less personal exemption $2,500 00 $2,500.00

Credit for dependents 400.00 2,900.00 400.00 2,900.00

Surtax net income $7.100 00 $7,100. 00

Less dividends $5,000.00

Earned income credit 500.00 5,500.00 $500.00 500.00

Normal tax net income $1,600.00 $6,600.00

Normal tax (rate 4%) $4.00 $264.00

Surtax (rate $80 on $6000 plus 5%, of $1100) 135.00 135.00

Total tax $199.00 $399.00