4. Demonstrate the differences resulting from a $1,000 tax credit versus a $1,000 tax deduction for a single taxpayer in the 25% tax bracket with $40,000 of pre-tax income.
A deduction is simply a reduction in the amount of taxable income. Therefore, if you claim a $1000 deduction, you will reduce your taxable income by the same amount. [ If you are in a 25 percent tax bracket then your total tax savings from this $1000 reduction in taxable income would be $250 (25% of $1000). On the other hand a tax credit is a dollar for dollar reduction in your tax liability.
Therefore if you were able to take a $1000 tax credit, you would reduce your tax liability by the full amount of the credit, or $1000...a much better deal. ]
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