Tax Credits & Rates

Question 1

Tax Credit VS Deduction

Answer 1

Tax credit

• subtracted from the actual tax liability and saves the taxpayer the full amount in dollars

Deduction

• subtracted from income and saves taxpayer an amount equal to the deduction X taxpayer’s marginal tax rate

Example:

• Taxpayer A, who is in the 35% tax bracket, is entitled to a $1,000 deduction. This deduction would result in a $350 tax savings for A. Taxpayer B, who is in the 15% tax bracket, is entitled to a $1,000 deduction. This deduction would result in a $150 tax savings for B. However, if both Taxpayers A and B were entitled to a $1,000 tax credit instead of a $1,000 deduction, both would get a $1,000 tax savings.

Question 2

Personal Income Tax Credits

Answer 2

1. Child and Dependent Care Expenses
   
   1. Expenses incurred for the care of young children and disable dependents or spouses, where the expenses are incurred because the taxpayer is gainfully employed and cannot provide the services personally
2. Credit for expenditures on the rehabilitation of certified historic structures;
3. Credit for qualified research and experimentation expenses
4. credit for energy property and reforestation expenses;
5. Credit for first year wages up to $6K paid to disadvantaged individuals
6. Credit for newly constructed or substantially rehabilitated low-income rental housing

Question 3

Tax Rates

Answer 3

Generally, tax rates are progressive (more income equals higher rates) and capital gains are taxed at rates lower than those for ordinary income.