1. Tax Credits & Deductions 12.3.3 Describe the aims of government fiscal policies (taxation, borrowing, spending) and their influence on production, employment, and price levels.

2. What is a tax deduction? A tax deduction is an amount you subtract from your income before calculating how much you owe. For example, if you make 100,000 a year and have 10,000 in deductions, you are only taxed as if you made 90,000. 100k = $21,460 in taxes 90k = $18,660 in taxes (saved $2800!)

3. So then what’s a tax credit? Even better than a deduction! A tax credit is an amount you subtract out of your taxes after you calculate what you owe. For instance, if you make 100k 100K = $21,460 in taxes -$10,000 tax credit = $11,460 (saved $10,000!)

4. The Standard Deduction In the U.S., every adult is entitled to a deduction of at least $5,950. This is called the “standard deduction.” This means if you only make $5,950, you will not owe a single cent to Uncle Sam. The standard deduction rises every year to match inflation. The deduction increases by $1,100 if you a) are blind, b) are over 65, (x2 if married)

5. Itemized Deductions The standard deduction is the minimum amount by which you can deduct your taxable income. In our system, you can either take the standard deduction or you can make a list of all your deductions (called “itemizing”) and add them up for a higher total than the standard $5,950 Itemizing can save you even more money in taxes if you qualify for enough deductions.

6. Common Deductions Interest you pay on your home mortgage Supporting “dependents” (usually children) Charitable donations State and local income taxes paid Real Estate taxes paid Medical and Dental expenses Health insurance premiums Educator expenses Student Higher Education Expenses Energy Savings Home Improvement Credit Investment and Tax expenses Disaster Area deductions Retirement Tax deduction/credit

7. Why does the gov’t allow deductions? Tax deductions are generally supposed to exist as a form of “subsidy” for behaviors that : –exhibit positive externalities –save the government money –Earn the government money eventually

8. Why charities? If you’re spending money on charity, that usually means you’re helping poor people. Anything that helps poor people is going to make them less poor, so the government won’t have to help them as much.

9. Why medical expenses? Any money you spend on your own medical care, that means government programs like Medicaid and Medicare won’t have to cover you. Also, it makes you healthy, which makes you more productive, which means you generate more money, so you pay more taxes anyway.

10. Why Education? Educated people are more productive (meaning they make more money). Benefits both the individual and their future employers. Both will end up paying more taxes later as a result. It’s kind of like the government investing in you expecting more money back later.

11. Why Retirement? Encouraging people to save up money for retirement makes it less likely that they’ll be dependent on the gov’t for aid when they’re old. Also, the money they’re saving helps stabilize the banking system and provide more funds to be loaned out to companies.

12. Why Home Ownership? This is the “American Dream,” an idea created and supported by politicians. People who own their homes have kids who have better social mobility (their incomes rise, therefore their taxes rise) Also, they’re less likely to become criminals, and that’s lower police costs. Also, people who own homes pay property taxes instead anyway.

13. Energy Saving Home Improvement The less energy you use, the less energy is going to cost everyone else around you. Also, it makes it look like we’re doing something about our excessive carbon dioxide output.

14. Conclusion: The amount of tax you pay can be reduced if you obey the government’s rules about how you should live When you file your taxes, you must consider if you’ll save more money by itemizing or taking the standard deduction.