Question

All other things being equal, the tax benefits of a tax credit outweigh the tax savings produced by a tax deduction because:

1) It reduces a taxpayer's tax liability

2) It reduces a taxpayer's taxable income

3) It reduces a taxpayer's capital gains

4) None of these

In 2019, what is the earned income credit allowed Don Andersen, a head of household taxpayer, assuming he has adjusted gross income of $9,500 (consisting of interest income of $3,500 and earned income of $6,000? He maintains his household with his daughter.

1) $2004

2) $2049

3) $2094

4) $0

5) None of the above answers are within $20 (plus or minus) of the correct answer.

Answer 1

1.

All other things being equal, the tax benefits of a tax credit outweigh the tax savings produced by a tax deduction, as the tax credits are the direct tax benefits amount which are directly deducted from the tax amount. however in case of tax deductions it reduces the taxable income not the tax amount.

So tax credits are more benefecial and higher saving of taxes as it reduces the tax income which has a more relevant saving compared to reduction in taxable income.

The correct option is A, i.e 1option i.e It reduces tax payers liability

2.

Earned Income tax credit is the credit allowed to the small earners or low wage earners, it is an benefit provided who has a very lower earned income limit . The earned income tax credit allowed for 1 child household person is maximum of $3526 , which covers the earned income for the maximum credit is  $ 10370.

It means to earn the maximum credit of $ 3526 the minimum earned income is to be $ 10370.

Further in 2019 the earned income tax credit can be taken only if other investment income is less than $3600 .

In the given case, the interest income = $3500 , which is less than the investment income limit so he is eligible for earned income tax credit.

Since for the limit of $10370, the maximum credit will be $ 3526 , so for earned income of $6000 the earned income tax credit = $ 2049

Thus the correct option is ---B i.e 2nd option i.e $2049.