Tax Credits Are Better Than Deductions

Answer each of these questions, explaining the applicable rules and possibilities of each. (Points : 50)

Tax deductions reduce taxable income; their value thus depends on the taxpayer’s marginal tax rate, which rises with income. Tax credits directly reduce a person’s tax liability and hence have the same value for all taxpayers with tax liability at least equal to the credit. In addition, some credits are refundable; they are not limited by the taxpayer’s tax liability.

The 179D tax deduction is part of a federal tax code section that gives tax reducing incentives for the construction of new commercial or government buildings that are energy efficient. Sometimes, it can also be used for other buildings that are remodeled to include new energy efficient features though. It is unique in comparison to other tax credits because of the way it can give both the building 's owner and the architect who designs the structure tax incentives. Because it motivates people to choose environmentally safe building attributes, it is also sometimes called the Environmental Protection Act (EPAct). Many people have become interested in this credit because it offers a hefty tax discount of roughly $1.80 for every square foot of the building that is claimed. This can quickly reduce a person 's tax burden, especially if it is combined with other tax credits, such as the Manufacturers ' Energy Efficient Appliance credit. But, those who wish to claim the deduction must include special features that support energy efficiency. Some of them include:

Tax time in poor neighborhood is not April but January, and this “income tax” is not what you pay but what you receive. As soon as the W-2s arrive, the working poor eager for their checks from the Internal Revenue Service (IRS) and immediately send the documents to the tax preparers who have flourished and gouged impoverished laborers since the welfare tie limits were enacted by the Congress in 1996. The checks that come from Washington include not only a refund of tax withheld but also an additional payment known as the Earned Income Tax Credit (EITC) (Shipler, 2005, p.13), which is a refundable tax credit designed to redistribute incomes and supplement low-wage workers. The EITC was initiated in 1975 and then expended under President Reagan,

For regular taxpayers, personal exemptions and the standard deduction are tax benefits since these are deducted in the calculation of regular tax. However, AMT has become an obligation for some married taxpayers with children, since personal and dependency exemptions are disallowed in the calculation of AMT. Therefore, family size does not make a difference under the obligation of AMT. Additionally, state and local sales taxes, which are benefits for regular taxpayers, are disallowed under AMT rules. Consequently, more taxpayers living in high tax states fall under AMT rules. Under regular tax rules, the deduction of state and local sales tax acts as an incentive for local governments to increase taxes, but the effects of this is counteracted under AMT (Tritz, 2015).

Instead of taking a deduction for education expenses, taxpayers may claim the American Opportunity tax credit (AOTC)/Lifetime Learning credit for qualified tuition and related expenses. The maximum AOTC a taxpayer may claim is $2,500 per year per student, for the first four years of undergraduate education at an eligible education institution. The maximum Lifetime Learning credit that may be claimed is $2,000 per year per taxpayer, for any post-high school education (including courses to acquire or improve job skills) at an eligible education institution. The AOTC/Lifetime Learning credits are also subject to phaseout for taxpayers with high AGI.

Cities and states can receive federal money for airport construction, sewage treatment plants, youth programs, and many other programs, but only if they pay part of the bill

The United States of America is considered the land of the free; however, I view it as the land of working people. Work ethic is one of the most important characteristics of our great country. Studies have shown that our people are overworked and overstressed. People are working longer hours and more years than ever before. I believe the best way to encourage the world of work is to open the window of opportunity and reward. This was the mindset of the government when they establish Earned Income Tax Credit (EITC). This program was established to reward low and moderate income workers through the tax system to continue to encourage work. The central idea of Earned Income Tax Credit is a work-oriented program that provides a

To be eligible for the federal Earned Income Tax Credit, you must show you have taxable Earned Income. This is on occasion incorrectly called “Unearned Income Credit.” People have viewed this as government money given to families with children - false. There are two ways to obtain taxable Earned Income: you work for someone who pays you or you own or run a business or farm. Taxable Earned Income includes wages, salaries, or tips, long-term disability benefits prior to retirement age, and net earnings from Self-Employment. If you collect unemployment benefits or child support, this is not considered taxable Earned Income; neither are retirement benefits, social security, nor alimony (IRS, 2014).

If you are owed a tax refund from the government, it can be tempting to fritter away your money on things you may not really need. Extravagant vacations, an expensive trip to the casino, and buying unnecessary things may provide immediate gratification, but are not good ways to spend your hard-earned money. Cheryl Hawkins, an experienced CPA at Cheryl Hawkins Tax and Accounting in Jordan, MN, explains some smart ways to use your tax return:

The tax credit is available to every university or college student, regardless of their family backgrounds or financial situations. Under this policy, a large portion of the tax credit is actually claimed by wealthier students (McFeat, 2014), who do not need this tax credit. Simultaneously, since the tax credit is non-refundable, it does not benefit the students from low income families who earn less than the basic personal amount. According to Canada Revenue Agency, the basic personal amount for 2016 is $11,474, and individuals earning less than this amount do not have to pay for income tax. In order words, even the credit is transferable and can be carried-forward, the tax credit will only be beneficial to the students who they have to ability to earn more than $11,474. In a 2013 fact sheet by Canadian Federation of Students – Ontario, it described the education tax credit policy as a regressive program as they benefit rich family more. Another argument against the tuition, education and tax credit is that it incurs after students pay their tuition. Students can only receive the tax credit after they file their tax return reporting their activities for the past tax year. This has deferred the payoff effect of the tax credit especially when students have to carry forward their claims. The tax credit is not helpful to

The standard deduction can have an effect on the environment economic fast growing trend of new products, green technology, and gasoline tax, new manufacture that produce strong green component to decrease product that causes environmental pollution to create a stable environment. According to the Internal Revenue Service, “the standard deduction was introduced into the federal tax code with the passage of the individual income Tax Act of 1944 (P.L. 78-315).” Future more; the total amount of recipient who receives the deduction varies from year to year and also listed below is the filing status Medows (2015), reported according to the IRS two out of every three taxpayers claim the standard deduction on their income tax returns in 2014.

The Pittsburgh Courier gives a great example of why this is. Think of it like this, if you had a coupon for 10 dollars’ worth of free food (this would be the tax credit) and then sold that coupon for 8 dollars of actual money. Because you saw the 8 dollars as more valuable than the 10 dollars’ worth of free food (since the coupon/tax credit isn’t actual money, there is a loss of 2 dollars of value. Over time, this has led to around 27 million dollars in tax payer’s dollars to be lost, however, this number doesn’t mean tax credits shouldn’t be sellable (Shoemaker; Holmberg).

The Credit for Increasing Research Activities under IRC section 41 is also known as the research and experimentation (R&E) tax credit, the research tax credit, and the R&D tax credit. The deduction has been a permanent provision of the IRC since it was first enacted in 1954. Its main advantages are that the deduction simplifies tax accounting for R&D expenditures and encourages business R&D investment by taxing the returns to such investment at a marginal effective rate of zero. A similar policy objective lies behind the research tax credit, which has been a temporary provision of the IRC since it went into effect in July 1981. The credit is intended to stimulate more business R&D investment than otherwise would occur by lowering the after-tax cost of qualified research. But unlike the deduction, it complicates tax compliance for firms claiming the credit. A majority in Congress concluded that a “substantial tax credit for incremental research and experimental expenditures was needed to overcome the reluctance of many ongoing companies to bear the significant costs of staffing and supplies, and certain equipment expenses such as computer charges, which must be incurred to initiate or expand research programs in a trade or business (Guenther, 2015, pg. 2). Around the time the credit was enacted, more than a few analysts thought the decline was a primary cause of both a slowdown in U.S. productivity growth and an unexpected loss of competitiveness by a variety of U.S.

The concept of “tax expenditure” was created in 1967 since Stanly S. Surrey, former Assistant Secretary of the Treasury, noticed that many tax preferences were accomplished through federal spending.1 Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 as revenue losses attributable to Federal tax laws which allow a special exclusion exception, or deduction or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”2 Exclusions, deductions, credits and other tax preferences are “expenditures” from government’s perspective. See Figure 1: Examples of Six Types of Tax Expenditures. Tax expenditure is designed by policymakers as a social tool to promote people to invest in education, save for retirement, find job, have houses, etc. Thus, tax expenditures only benefit particular people who conduct certain activities.