Today, we're going to cover the differences between a tax credit and a tax deduction. We're going to do this for a very important and timely reason which I will make clear later.
A tax credit is deducted 100% from the tax bill of a taxpayer. If a person owes $1000 in taxes and has access to a $500 tax credit, he now owes $500. The tricky part comes in when someone owes no taxes. If someone owes no taxes, it would be impossible for them to utilize a tax credit, right? Wrong. See, in Washington DC, the word "fair" means something different than it does anywhere else. If, for example, a tax cut proposal only benefitted those who paid taxes in the first place (because cutting taxes for someone who doesn't pay them makes no sense) is seen as "unfair". So, there are "refundable tax credits" which allow a person to receive what essentially amounts to a transfer (i.e. welfare) payment through the tax code. If a person owes $0 in taxes, but has access to a $500 refundable credit, he gets a check for $500.
A tax deduction, on the other hand allows a person to reduce their taxable income by the amount of the deduction when calculating their taxes. If a person makes $1000 and owes 30% in taxes, he owes $300. Now, if he has access to a $500 deduction, his income goes down (on paper) to $500 and he owes $150. His actual benefit is $150, roughly 1/3 of the amount allowed for the deduction.
To not understand this is to fall into the linguistic trap being laid for you by opponents of tax cuts. First, they insist that the tax cuts benefit the rich. I agree. BECAUSE THE TOP 5% OF TAX PAYERS PAY 50% OF THE TAXES!!! Who the heck should benefit from a cut? Well, say the opponents, the poor should benefit - EVEN THOUGH THEY DON'T PAY TAXES.
DO YOU UNDERSTAND THIS?
Opponents of a tax cut for the rich are simultaneously proposing what amounts to new welfare payments. This is absolute insanity. I oppose taxing labor on principal, but even I can tell this debate is total crap. A tax cut benefits taxpayers? Say it ain't so!
Vote libertarian, my friends, or this will never, ever, ever, ever stop.
A tax credit is deducted 100% from the tax bill of a taxpayer. If a person owes $1000 in taxes and has access to a $500 tax credit, he now owes $500. The tricky part comes in when someone owes no taxes. If someone owes no taxes, it would be impossible for them to utilize a tax credit, right? Wrong. See, in Washington DC, the word "fair" means something different than it does anywhere else. If, for example, a tax cut proposal only benefitted those who paid taxes in the first place (because cutting taxes for someone who doesn't pay them makes no sense) is seen as "unfair". So, there are "refundable tax credits" which allow a person to receive what essentially amounts to a transfer (i.e. welfare) payment through the tax code. If a person owes $0 in taxes, but has access to a $500 refundable credit, he gets a check for $500.
A tax deduction, on the other hand allows a person to reduce their taxable income by the amount of the deduction when calculating their taxes. If a person makes $1000 and owes 30% in taxes, he owes $300. Now, if he has access to a $500 deduction, his income goes down (on paper) to $500 and he owes $150. His actual benefit is $150, roughly 1/3 of the amount allowed for the deduction.
To not understand this is to fall into the linguistic trap being laid for you by opponents of tax cuts. First, they insist that the tax cuts benefit the rich. I agree. BECAUSE THE TOP 5% OF TAX PAYERS PAY 50% OF THE TAXES!!! Who the heck should benefit from a cut? Well, say the opponents, the poor should benefit - EVEN THOUGH THEY DON'T PAY TAXES.
DO YOU UNDERSTAND THIS?
Opponents of a tax cut for the rich are simultaneously proposing what amounts to new welfare payments. This is absolute insanity. I oppose taxing labor on principal, but even I can tell this debate is total crap. A tax cut benefits taxpayers? Say it ain't so!
Vote libertarian, my friends, or this will never, ever, ever, ever stop.
posted by Chitchat at 2:53 PM
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