of the year, and another exemption of $600 if such spouse is blind at the close of the year. On a joint return, these exemptions are also allowed to each spouse even though one may have no income. The per capita and additional exemptions are allowable in computing both the normal tax and the surtax. (The additional exemption for blindness replaces the former special deduction of $500 for blindness of the taxpayer.)

(c) The deduction for medical expenses paid in excess of 5 percent of adjusted gross income cannot exceed $1,250 multiplied by the number of exemptions other than those for age and blindness with a maximum deduction of $2, 500, except in the case of a joint return of husband and wife, when the maximum is $5,000.

(d) The optional standard deduction, formerly the smaller of $500 or 10 percent of the adjusted gross income, is increased to the smaller of $1,000 or 10 percent of the adjusted gross income; however, if husband and wife file separate returns, the standard deduction cannot exceed $500 each.

(e) Although the tentative normal tax rate of 3 percent of normal tax net income and the tentative surtax rates ranging from 17 percent of the first $2,000 of surtax net income to 88 percent of such income in excess of $200,000, are retained, the 1948 act substitutes for the 5 percent reduction of the combined tentative taxes a series of larger reductions ranging from 17 percent of the first $400 of combined tentative taxes to 9.75 percent of such taxes in excess of $100,000. The combined normal tax and surtax, thus computed, cannot exceed an amount equal to 77 percent of the net income.

In case of a joint return of husband and wife, the combined normal tax and surtax is twice the combined normal tax and surtax determined on one-half the net income after applicable credits.

(f) The optional tax table under supplement T is revised to reflect the increased amount of exemption, as well as the greater percentage reduction in the combined tentative normal tax and surtax, and to provide a tax on the basis of split-income for joint returns.

(g) The amount of tax withheld at source on wages paid on or after May 1, 1948, is reduced to 15 percent of the excess of wage payments over the withholding exemptions; and revised wage bracket withholding tables state the reduced amounts to be withheld.

(h) In the case of a fiscal year beginning in 1947 and ending in. 1948, the tax liability is the sum of (1) that portion of a tax, computed under the law applicable to 1947 income, which the number of days. falling in 1947 bears to the total number of days in the fiscal year, and (2) that portion of a tax, computed under the law applicable to 1948 income, which the number of days falling in 1948 bears to the total number of days in the fiscal year.

The tax liability tabulated for fiscal year returns is the sum of the prorated taxes; but amounts other than the tax liability are those used in computing the tax applicable to the income year 1948.

BASIC ITEMS

Adjusted gross income is defined in the Code as gross income minus allowable trade and business deductions, expenses of travel and lodg-ing in connection with employment, reimbursed expenses in connection with employment, deductions attributable to rents and royalties,

or to income beneficiaries of property held in trust, and allowable losses from sales of property.

The adjusted gross income and its components are tabulated; all taxable income from whatsoever source is included. However, the income or loss from any source for which deductions are specifically allowed in computing adjusted gross income is the net amount from that source; and a net loss comprises a part of the adjusted gross income (or deficit) as well as a net profit.

Adjusted gross income provides a means whereby different kinds of gross income are placed substantially on a par with each other; and, in cases where the adjusted gross income is less than $5,000, the tax liability may be determined on the basis of adjusted gross income, directly from the tax table, at the option of the taxpayer. Before the concept of adjusted gross income was introduced, tax rates could not be applied to the income of persons engaged in business or profession until the net income had been determined, i. e., after there had been deducted not only the cost of doing business but also other nonbusiness deductions and credits which the law allowed, such as contributions, medical expenses, taxes, interest, and casualty losses. Adjusted gross deficit occurs when the deductions allowable for the computation of adjusted gross income, mentioned above, equal or exceed the gross income.

Net income is the income tax net income reported on long-form returns, Form 1040, which have adjusted gross income in excess of the itemized deductions. Net income does not apply to returns, Form 1040A, nor to short-form returns, Form 1040. Although long-form returns, Form 1040, on which the taxpayers elected to use the optional standard deduction, do show a net income, the amount thereof is not tabulated in this report.

Net deficit, reported on returns, Form 1040, classified as returns with itemized deductions, includes the adjusted gross deficit on short-form returns and the net deficit on long-form returns resulting from the combination of adjusted gross deficit and itemized deductions or from the excess of the itemized deductions over the adjusted gross income. Tax liability is the tax liability after deduction for the two tax credits relating to income tax paid at source on interest from tax-free covenant bonds and to income tax paid to a foreign country or possession of the United States. The amount of these tax credits, allowed only to taxpayers who itemize deductions, is not available for 1948. The total tax, computed without regard to tax credits, is limited to 77 percent of the net income. The tax liability includes the normal tax, surtax, and the alternative taxes paid in lieu thereof; namely, the optional tax provided under supplement T of the Code, and the alternative tax, provided under section 117 (c) (2), for income which includes a net gain from the sales or exchanges of capital assets held for more than 6 months. The tax components are described on pages 32-33.

For the majority of individuals the income tax is paid, in whole or in part, on a current basis through the tax withheld on wages and/or the payments made on a Declaration of Estimated Income Tax, Form 1040-ES. In case these payments are insufficient to cover the tax liability, the balance of tax due is paid when the income tax return is filed. If the tax withheld and/or payments on declaration exceed the tax liability for 1948, the overpayment is refundable to the

taxpayer unless he signifies on a return, Form 1040, that he wishes the overpayment to be credited on his 1949 estimated income tax.

Tax withheld, reported on the income tax return as a payment on tax liability, is the amount of tax withheld by employers from the salaries and wages of the taxpayer. The amount of tax withheld is determined by the employers either by (1) use of the wage bracket withholding tables, in which the amounts to be withheld are based on various wage levels after an allowance for withholding exemptions, or (2) application of the prescribed percentage rate to the amount of wages in excess of the withholding exemptions. Amounts to be withheld under either method were reduced, by the 1948 act, and new withholding tables and rates were applicable with respect to wages paid on or after May 1, 1948. Certain types of wage and salary payments, such as those for military service, agricultural labor, domestic service, and ministry of the gospel, are exempt from withholding.

Payments on 1948 declaration of estimated tax, reported on the income tax return as a payment on tax liability, include the credit for overpayment of the prior year's tax as well as the aggregate payments made on the 1948 Declaration of Estimated Income Tax, Form 1040ES. This combined amount is reported by the taxpayer.

Tax due at time of filing is the excess of the 1948 tax liability over the sum of the tax withheld, the payments on the 1948 declaration, and the credit for an overpayment of the prior year's tax. The amount due is paid in cash with the filing of the return, except in the case of the optional returns, Form 1040A, wherein the tax is determined by the collector of internal revenue and paid upon notice of the assessment. Overpayment (refund, or credit on 1949 estimated tax) occurs if the sum of the tax withheld, the payments on 1948 declaration, and the credit for an overpayment of the prior year's tax exceeds the tax liability for 1948. Such tax overpayment is refundable or, at the option of the taxpayer using Form 1040, may be credited against the 1949 estimated tax. The amount refunded, as indicated on the income tax returns, is tabulated separately from the amount to be credited against the 1949 estimated tax, in one table of this report.

Amount of exemption, allowed as a credit against net income for 1948, is the same for purposes of computing both the normal tax and the surtax. The allowable exemptions consist of $600 for the taxpayer, $600 for his spouse, $600 for each dependent, and additional exemptions of $600 for the taxpayer and his spouse if 65 years of age or over, plus $600 for the taxpayer and his spouse if blind. Exemptions are automatically allowed if the optional tax is paid. A dependent is a close relative specified by law, with income of less than $500, who received more than one-half of his support from the taxpayer. A close relative means: son, daughter, or a descendant of either; stepson, stepdaughter, son-in-law, daughter-in-law; father, mother, or ancestor of either; stepfather, stepmother, father-in-law, or mother-in-law; brother, sister, stepbrother, stepsister, half brother, half sister, brother-in-law, or sister-in-law; uncle, aunt, nephew, or niece; provided he or she is a citizen of the United States, Canada, or Mexico, and has not filed a joint return with another person. Dependents meeting these qualifications need not be under 18 years of age.

The number and amount of exemptions tabulated in Statistics of Income include the exemptions claimed on returns with the optional tax (Form 1040A and short-form 1040), wherein the exemptions are

on which the tax is computed by the taxpayer. Slight duplication of exemption exists on account of dependents with less than $500 income, who file a return in order to claim refund of tax withheld on wages; such wages are not taxable to the dependent, neither do they constitute a part of the gross income of the taxpayer claiming the dependent.

CLASSIFICATION OF INDIVIDUAL RETURNS

Individual returns are classified by adjusted gross income classes, by taxable and nontaxable returns, by returns with standard deduction or with itemized deductions, by returns with tax due at time of filing or with tax overpayment, by marital status of taxpayer, by number of exemptions other than age or blindness, by States and Territories, and for frequency distributions only, by size of each specific source of income or loss comprising adjusted gross income. Taxable returns are classified by types of tax liability, and returns with itemized deductions are classified by net income classes for frequency distribution. Data presented under the various classifications differ, some items not being available for all classifications.

Adjusted gross income classes. Adjusted gross income, being common to all types of returns, supplies the base for adjusted gross income classes regardless of the amount of net income or net deficit when computed. Returns with adjusted gross deficit, disregarding the amount thereof, are designated "No adjusted gross income" and appear in aggregate as the first adjusted gross income class under nontaxable returns.

Returns with standard deduction or with itemized deductions.-Returns with standard deduction are optional returns, Form 1040A, and shortform returns, Form 1040, with adjusted gross income under $5,000 on both of which deductions are allowed automatically through use of the tax table, and long-form returns, Form 1040, with adjusted gross income of $5,000 or more on which the optional standard deduction is used. The standard deduction in the latter case is the smaller of $1,000 or 10 percent of the adjusted gross income, except that on the return of a married person filing a separate return, the standard deduction is $500.

Returns with itemized deductions are long-form returns, Form 1040, on which nonbusiness deductions are itemized; long-form returns, Form 1040, with no deductions filed by spouses of taxpayers who itemized deductions (such spouses are denied the standard deduction); and short-form returns, Form 1040, with adjusted gross deficit. The latter returns are included in this classification so that all returns with no adjusted gross income may be tabulated together.

Taxable and nontaxable returns. This classification is based on the existence or nonexistence of a tax liability after tax credits, and is without regard to tax payments. In the adjusted gross income class designated $500 under $750, taxable returns do not occur below $600. Size of specific source. For the purpose of frequency distributions only, returns are classified by the size of each specific source of income or loss comprising the adjusted gross income. The class intervals for size of specific source are the same as those used last year.

Net income classes.-Returns with itemized deductions are classified on the basis of net income for a frequency distribution. Returns with

Types of tax liability.-Returns are segregated on the basis of the two general types of tax liability: the regular normal tax and surtax combined and the alternative tax paid in the case of capital gain from sales of capital assets held more than 6 months. Returns with normal tax and surtax consist of the optional returns, Form 1040A, and shortform returns, Form 1040, wherein the optional tax is paid in lieu of normal tax and surtax, and the taxable long-form returns, Form 1040, except those on which the alternative tax is imposed. Returns with normal tax and surtax (both short- and long-form returns, Form 1040) include all returns with net loss from sales of capital assets and those with net gain from such sales when the alternative tax is not reported. Returns with alternative tax are long-form returns, Form 1040, wherein the net income includes a net long-term capital gain or an excess of net long-term capital gain over net short-term capital loss, and the alternative tax liability is less than the regular normal tax and surtax computed on net income which includes all net gain from sales of capital assets. Further description of the alternative tax is given on pages 32-33.

Returns with tax due at time of filing or with tax overpayment.-Returns with tax due at time of filing are those on which the tax liability is greater than the payments made by means of the tax withheld and/or the declaration of estimated tax. Returns with tax overpayment are those on which the tax liability is less than the payments made by the same means. Returns in each classification are tabulated according to kinds of tax payments, singly and in combination. Marital status.-The classification of returns for marital status of the taxpayer is based on the marital status of the taxpayer at the close of the year, or on the date of the death of a spouse. The four classifications are: joint returns of husbands and wives, separate returns of husbands and wives, separate community property returns, and returns of single persons. Except for the joint returns, each group is classified as returns of men and returns of women.

Number of exemptions other than age or blindness. For the frequency distribution of returns by number of exemptions, only the per capita exemption for the taxpayer, his spouse on a joint return, and each dependent is utilized. Elimination of the additional exemptions for age and blindness, provides the same basis for classification by number of exemptions as that used in former years. There is a class for each of one through five and for six or more exemptions for all returns in aggregate and for the joint returns of husbands and wives; and a class for each of one through three and for four or more exemptions for the separate returns of husbands and wives (including separate community property returns) and for the returns of single persons.

States and Territories.-This classification consists of the 48 States, Hawaii, and the District of Columbia. The segregation of returns on the basis of States and Territories is determined by the location of the collection district in which the return is filed, except that for the District of Columbia, the segregation is determined by the address of the taxpayer. Collection districts, or groups of such districts, are coextensive with the States and Territories, except that the District of Columbia comprises a part of the district of Maryland, and the Territory of Alaska is a part of the district of Washington. The sampling technique employed does not permit separate tabulation of