Question

By defining after-tax income, demonstrate the differences resulting from a $1,000 tax deduction versus a $1,000 tax credit for a single taxpayer in the 12% tax bracket with $35,000 of pre-tax income. Round your answers to two decimal places.

After-tax income with tax deduction:

After-tax income with tax credit:

Answer 1

If $ 1000 is Tax Deduction:

Pre Tax Income = $ 35000

tax Deduction = $ 1000

Taxable Income = $ 34000

Tax Liability = Tax Income * 12%

= $ 34000 * 12%

= $ 4080

After Tax Income = Pre Tax Income - Tax Liability

= $ 35000 - $ 4080

= $ 30920

If $ 1000 is Tax Credit:

Taxable Income = $ 35000

Tax Liability = $ 35000 * 12 %

= $ 4200

Tax Payable = Tax Liability - Tax Credit

= $ 4200 - $ 1000

= $ 3200

After Tax Income = Pre Tax Income - Tax Liability

= $ 35000 - $ 3200

= $ 31800