From the course: Finance Foundations: Income Taxes
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Tax deductions and tax credits
From the course: Finance Foundations: Income Taxes
Tax deductions and tax credits
- What is the impact of a tax deduction in our simple tax system? Let's say you make $100. Remember, the first $50 is never taxed. The second $50 would be taxed at the 50% rate so you pay $25 in tax. Now, let's say of that $100 of income, you decide to spend $10 in a way that the government favors. perhaps you spend that $10as a charitable contribution Perhaps you spend that $10 as a charitable contribution, or you spend that $10 paying mortgage interest on your home. So the government says, "yeah, "we want to encourage that behavior, we want to encourage that behavior, "that's a good way to spend $10." To encourage these behaviors, the government will give you a tax deduction for the $10 that you spent in this favorable way. that you spent in this favorable way. So how does this $10 deduction enter into the payment of your taxes? Well now you have torecompute your taxable income. Well, now you have to re-compute your taxable income. You made $100 but $10 youspent in a special way You…
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