Question

Discuss the Tax Credit System in detail (with examples).

minimum 150 words

Answer 1

A tax credit is a type of tax incentive that can reduce the amount of money a taxpayer owes the government. Unlike a tax deduction, which reduces taxable income, a taxpayer can subtract a tax credit from the amount of taxes they owe, lowering their tax liability dollar-for-dollar.

Tax credits reduce your tax liability dollar-for-dollar. For example, if your 2016 Federal income tax is $3,500, and you are entitled to a $1,000 tax credit, it reduces the amount of your tax bill to $2,500. Tax credits are offered by the federal government, and your state or local government may have its own.

A tax credit is designed to incentivize taxpayers to do certain things, or to make certain activities more affordable. The Lifetime Learning Credit is designed to lower the financial burden of continuing education, and the Retirement Savings Contributions Credit is intended to incentivize retirement saving.

Most tax credits are offered as a percentage of certain expenses, up to a maximum amount. In addition, many tax credits are subject to income limitations. For example, there are two tax credits available for higher education expenses, both of which are not available to high-income taxpayers