Computing tax credits

The video tutorial explains tax credits as reductions in taxes owed to the government, contrasting them with deductions. It categorizes tax credits into affirmative and contingent types, detailing how each affects tax liability. Affirmative credits can reduce liability below zero, potentially resulting in a refund, while contingent credits may be non-refundable or partially refundable. Examples include the earned income credit and child tax credit, illustrating their application in the US tax system.

What is the primary difference between a tax deduction and a tax credit?

• A deduction and a credit both reduce taxable income.

• A deduction is applied after tax liability is calculated, while a credit is applied before.

• A deduction increases taxable income, while a credit increases tax liability.

• A deduction reduces taxable income, while a credit reduces tax liability.

How does an affirmative tax credit affect your tax liability?

• It increases your tax liability.

• It cannot reduce your tax liability at all.

• It can reduce your tax liability below zero, resulting in a refund.

• It can only reduce your tax liability to zero.

What is a characteristic of a non-refundable tax credit?

• It can reduce your tax liability below zero.

• It can only reduce your tax liability to zero.

• It provides a refund regardless of tax liability.

• It increases your tax liability.

In the context of partially refundable tax credits, what happens to the unused portion of the credit?

• It is lost and cannot be used.

• A portion of it can be refunded.

• It increases your tax liability.

• It is added to your taxable income.

Which of the following is an example of a partially refundable tax credit?

• Mortgage interest deduction

• Charitable contributions deduction

• Child tax credit

• Earned income credit