Question

Compare tax deductions and tax credits:

a. What is the difference between tax deductions and tax credits in determining the amount of taxes one owes to the government? Explain.

b. When do deductions produce more efficient outcomes than credits? Explain. c. Which is more vertically equitable in the context of the U.S. tax code – deductions or credits? Explain.

Answer 1

A. Tax credits reduces a dollar-for dollar from the income tax liability. This means that a $800 tax credit would save $800 in taxes. Whereas, tax deductions lowers the taxable income and they are equal to the marginal tax bracket percentage .

B. Tax deduction are more efficient in some cases as most of the tax credits are not refundable whereas, tax deductions clearly reduces the taxable amount.

C. Tax credits are more vertically equitable as, it is provided for variety of things such as college studies etc. Hence, people can access to it more readily .