What amount of deductions would be required to equal the tax benefit of a $960 child care credit for a couple in the 22% marginal income tax bracket?

What amount of deductions would be required to equal the tax benefit of a $960 child care credit for a couple in the 22% marginal income tax bracket?

• A. $4,364
• B. $749
• C. $211
• D. $1,230

Answer: (A)

The correct answer relates to understanding the relationship between tax credits and tax deductions. A tax credit, such as the $960 child care credit, directly reduces the tax liability dollar for dollar. On the other hand, a tax deduction reduces taxable income and, therefore, results in a tax benefit that depends on the taxpayer’s marginal tax rate. To determine the amount of deductions needed to produce a similar tax benefit to that of a $960 credit when a couple is in the 22% marginal tax bracket, you can use the following calculation: 1. Since the credit reduces tax liability directly, a $960 credit reduces the tax owed by $960. 2. To find the equivalent deduction that would yield the same tax savings, you can set up the following equation: Tax savings from deductions = Amount of deduction x Marginal tax rate. 3. To find the amount of deduction, rearrange the equation: Amount of deduction = Tax savings / Marginal tax rate = $960 / 0.22 = $4,363.64. When rounded, this amount is approximately $4,364. This amount of deduction would thus generate the same tax benefit as the $960 child care credit for someone in the 22% tax bracket

The correct answer relates to understanding the relationship between tax credits and tax deductions. A tax credit, such as the $960 child care credit, directly reduces the tax liability dollar for dollar. On the other hand, a tax deduction reduces taxable income and, therefore, results in a tax benefit that depends on the taxpayer’s marginal tax rate.

To determine the amount of deductions needed to produce a similar tax benefit to that of a $960 credit when a couple is in the 22% marginal tax bracket, you can use the following calculation:

1. Since the credit reduces tax liability directly, a $960 credit reduces the tax owed by $960.

2. To find the equivalent deduction that would yield the same tax savings, you can set up the following equation:

Tax savings from deductions = Amount of deduction x Marginal tax rate.

3. To find the amount of deduction, rearrange the equation:

Amount of deduction = Tax savings / Marginal tax rate = $960 / 0.22 = $4,363.64.

When rounded, this amount is approximately $4,364. This amount of deduction would thus generate the same tax benefit as the $960 child care credit for someone in the 22% tax bracket