Question

Other things equal, would a tax credit or a tax deduction reduce income taxes?. Also explain how the Earning Income Credit produces a " negative " income tax?

What is Individual shared responsibility provision of ACA? Include the reasons for the provision in your explanation

Answer 1

Deductions reduce taxable income and their value thus depends on the taxpayer’s marginal tax rate, which rises with income. Credits reduce taxes directly and do not depend on tax rates. However, the value of credits may depend on the taxpayer’s basic tax liability. Nonrefundable credits can reduce tax to zero but any credit beyond that is lost.

An individual tax filer has the choice of claiming the standard deduction or itemizing deductible expenses from a list that includes state and local taxes paid, mortgage interest, and charitable contributions. In either case, taxable income is decreased by the amount of the allowed deduction.

The deduction reduces tax liability by the amount of the deduction times the filer’s marginal tax rate, and is thus worth more to taxpayers in higher brackets. For example, a $10,000 deduction reduces taxes by $1,500 for people in the 15 percent tax bracket, whereas the same deduction cuts taxes by $3,500 for those in the 35 percent tax bracket.

IMPACT OF DEDUCTIONS

Determining the actual tax savings associated with deductions is, however, somewhat more complicated. High-income taxpayers have their itemized deductions reduced by the limitation on itemized deductions.

The standard deduction and some itemized deductions are disallowed under the alternative minimum tax (AMT). For example, AMT taxpayers may not deduct state and local tax payments or items in the “miscellaneous” deductions category. The AMT reduces but does not eliminate other deductions.

IMPACT OF CREDITS

Tax credits are subtracted not from taxable income, but directly from a person’s tax liability; they therefore reduce taxes dollar for dollar. As a result, credits have the same value for everyone who can claim their full value.

a negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government.

The EIC is a refundable tax credit. It is purely based on your earned income (wages or self employment), and the number of children you have.  

Oftentimes, the families that receive this credit have one working parent who doesn't make much money. My firm doesn't have many low income clients, so I don't personally encounter the credit very often.

Because of their low income, dependents, and standard/itemized deductions, their income is sufficiently low that even without the EIC, they would still have no or extremely little income tax due, and would get a refund of any excess withholdings from the year. But the EIC is a refundable credit, which means that even if you're already getting a refund, you'll get a bigger refund.

==>The individual shared responsibility provision of the Affordable Care Act requires you and each member of your family to have qualifying health care coverage (called minimum essential coverage), qualify for a coverage exemption, or make an individual shared responsibility payment when you file your federal income tax return.

Under the recently enacted Tax Cuts and Jobs Act, taxpayers must continue to report coverage, qualify for an exemption, or make an individual shared responsibility payment for tax years 2017 and 2018.