Tax Credits vs Taxes Day 3 Tax Deductions

Tax Credits vs. Taxes Day 3 Tax Deductions

» Tax Credit ˃ Reduces your total tax bill, not just your taxable income. ˃ Examples: 1. Child tax credit – $1000 for each child 2. Earned Income tax credit – Money back for low income families 3. Green Energy Credit – Money for buying energy efficient cars, heating systems, etc. Definitions

» Tax credits are subtracted from the actual tax bill, where tax deductions are subtracted from taxable income. Therefore, tax credits are more valuable than tax deductions.

» Example 1: Your current taxable income is $35, 000, and you are single. » A) Calculate your tax using the 2016 tax table. » B) How much would a $2000 deduction lower your tax, and how much would $2000 credit lower your tax? » C) Would you rather have a $2000 tax deduction or a $2000 tax credit? Explain. Example 1

» Michael has a taxable income of $70, 500. He has a tax credit of $1000 for each child, and he has 3 children. Calculate the amount he pays in taxes. Example 2

» Shantel and Dave are married with 4 kids. They are filing their taxes jointly. Shantel makes $62, 000 a year as a speech therapist, and Dave makes $50, 500 a year as a high school biology teacher. Dave also coaches wrestling, which gives him a yearly salary of $3000. Together they put $4000 in a tax-deferred 401(k) each year. They give $3000 to charities each year, and spend $2500 in state income taxes. The only tax credit they are eligible for is the child tax credit of $1000 per child. Follow the steps below to find how much money Shantel and Dave will pay for taxes. Example 3

a. Find Shantel and Dave’s Gross income. b. Subtract the adjustments they have to find their AGI (adjusted gross income). c. Subtract the exemptions. d. Find the amount you should subtract due to deductions. Decide if they should itemize or use the standard deduction ($12, 700). Subtract the deductions. THIS IS YOUR TAXABLE INCOME

• Using their taxable income, calculate Shantel and Dave’s tax using the bar model.

» Subtract Shantel and Dave’s tax credits from the tax owed. This number is the final amount that they owe in taxes. FINAL TAX