TAX CREDITS Mod 2-3 - MODULE 2-3 TAX CREDITS(Reference 9001...

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MODULE 2-3 TAX CREDITS (Reference: ¶9001 through ¶9165 ) This module continues with the examination of the ways a taxpayer can reduce his or her tax liability. The objectives in this module are to (1) understand the nature of a tax credit (i.e., how it differs from a tax deduction, (2) gain elementary familiarity with the various types of tax credits. I. TAX CREDITS VS. TAX DEDUCTIONS Tax credits are claimed after you have determined Taxable Income, and the Gross Tax Due (Refer to the Tax Equation in Module 1-2,and to Form 1040). Remember, tax deductions lower your taxable income dollar for dollar. Put differently, a $1.00 tax deduction lowers your taxable income by $1.00. How much does it lower your tax bill? That depends on your tax rate. If you are in a 28% tax bracket, lowering your taxable income by $1.00, lowers your tax bill by $.28 (28 cents). So, the amount that a tax deduction saves you depends on your tax bracket. Multiply the amount of the credit by the tax rate and you have the tax savings. In contrast, a tax credit directly reduces your tax bill. If you have a $1.00 tax credit, then your tax bill is reduced by $1.00 (since it’s deducted after you’ve determined the gross tax due). II. TYPES OF TAX CREDITS A. One way of dividing tax credits is to distinguish between non-refundable credits (look at Form 1040 – lines 43 through 51), and refundable tax credits (look at Form 1040 – lines 61 through 63). Most tax credits are non-refundable. Non-refundable
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  • Fall '13
  • jackson
  • Accounting, Taxation in the United States, tax credit, Tax deduction

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