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    Tax Credit & Deduction

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    Please help me with the following questions. I am having some difficulty approaching them.

    The IRS code provides for deductions and credits.
    - List 5 possible deductions.
    - List 3 possible tax credits.
    - Compare and contrast a $10,000 adjustment, $10,000 tax credit and $10,000 of itemized deductions.

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    List 5 possible deductions:

    Deductions imply amounts that are allowable on Schedule A - itemized deductions. They are used to reduce taxable income in amounts beyond the standard deduction. Refer to the 2011 Form 1040, page 2, line 40 where the standard deduction for a single person is $5800. When the total on Schedule A exceeds $5800, the larger amount of deductions can be used to lower taxable income.
    Source: http://www.irs.gov/pub/irs-pdf/f1040.pdf

    Typical Schedule A deductions include:
    - State income taxes paid
    - Real estate taxes paid
    - Home mortgage interest
    - Gifts to charities
    - Certain job-related expenses

    List 3 possible tax credits:
    Tax credits are amounts that can be used to reduce tax as opposed to deductions which reduce taxable income. The difference is that an individual must calculate tax due before tax credits can be used to reduce tax. Again referring to page 2 of Form 1040, the types of tax credits begin on line 47.

    Examples include:
    - Foreign tax credit (taxes paid to other countries on dividends or earnings in a foreign country)
    - Child care credit
    - Education credits
    - Retirement savings contributions credit
    - Energy credits

    Credits are often used to promote social change, as they provide a quick hit to a tax bill of an individual (and to some business tax returns as well). For example, an individual might be encouraged to replace single pane windows knowing the tax credit is available to help offset the cost.

    Compare and contrast a $10,000 adjustment, $10,000 tax credit and $10,000 of itemized deductions.

    An adjustment refers to any reductions from adjusted gross income as shown on page 1 of Form 1040, lines 23 to 35. Moving expenses relate to income and effectively reduce wages, for example. The reason why adjustments are preferable to deductions is that many limitations in tax returns are based on the amount of adjusted gross income (AGI). A tax credit reduces tax dollar for dollar and is the most preferable way to decrease total tax. Itemized deductions reduce taxable income quite effectively.

    In order of preference for reducing a total tax bill:
    1. Tax credit
    2. Adjustments
    3. Deductions

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