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1) Joe is in the 22% marginal bracket. He is eligible for a $1,000 tax deduction....

1) Joe is in the 22% marginal bracket. He is eligible for a $1,000 tax deduction. How much will he save in taxes this year if he takes that deduction?

2) Joe is in the 22% marginal bracket. He is eligible for a $1,000 tax credit. How much will he save in taxes this year if he takes that credit?

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Expert Solution

1) A tax deduction reduces the amount of income that is subject to tax. So if your taxable income is $10000, tax deduction of $ 1000 will make your taxable income $9000. The amount of tax saved is 22% of $1000 i.e. 22*1000/100 = $220.

By taking a $1000 tax deduction Joe will save $220.

2)A tax credit directly reduces the amount of tax one owes. So if one has to pay $10000 tax, a tax credit of $1000 will reduce the tax amount to $9000. So the tax saved is $1000.

By taking tax credit, Joe will save $1000.

jeff jeffy answered 2 years ago
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