From the course: Finance for Non-Financial Managers

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Tax deductions and tax credits

Tax deductions and tax credits

From the course: Finance for Non-Financial Managers

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Tax deductions and tax credits

- So let me ask you a question, which would you prefer, a tax deduction or a tax credit? Well by the end of this chapter hopefully you'll be able to answer that question. Now recall in our previous example we took our taxable income and multiplied it by our tax rate to determine how much in tax we owed. Well what's the impact of a tax deduction in our simple tax system? Let's again assume we made $100. Remember the first $50 is never taxed. The second $50 would be taxed at the 50% rate, so you're going to pay $25 in tax total. Now let's say of that $100, you decide to spend $10 in a way that the government favors, perhaps you spend that $10 as a charitable contribution, or you spend that $10 paying mortgage interest on your home. So the government says "Yup, we want to "encourage that behavior, that's a good way to spend $10". Then you're going to get a tax deduction for that $10. So how does that tax deduction enter into…

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