Filing Jointly Financing phase 5 IP Final Essay

Filing Jointly Financing phase 5 IP Final - Essay Example It is only applicable for first and second home, not for afterwards. The tax benefit from this deduction is that if one is paying interest on loans which are secured by their residence as principal, then the person can deduct this expense from the taxable income. 3. Student Loan Interest Deduction: student loan deduction covers the interest expense of the loans that have been taking to be only used for attainment of education. If your income and interest payments meet the conditions set in the deduction form, then you are able to deduct the expense form your income, thus saving a certain amount of taxes. 1. Child Credit: child credit reduces the tax liability of a person if he/she is supporting a child, and the person's income and other requirements as given in the child credit form are fulfilled. The child credit can make the tax liability zero or can even result in payment if the income tax is less than the child credit refund (known as additional child tax credit). The tax advantage for this system is that it works to increase your net income through refund gained. 2. Earned Income Credit: earned income credit is for those families who have low gross incomes (lower than a certain limit), and with a high number of dependents. If a family meets the requirements of this credit, than its tax liability can be reduced to zero, or can even result in a payment to the family if the tax refund s larger than the income tax (known as advanced earned income tax credit). This system also increases your net income. 3. Hope Scholarship Credit: hope credit can be claimed by an individual for the first two years of college education. The requirements that the person or any other person (for which the taxpayer is responsible) is at least a half time student at an eligible educational institution. This credit is taken on only tuition fees and any other college requirement fees (registration fees, lab fees etc.). Books and supplies are not included. This tax credit also increases the net income of the person who is paying for the education (tax information for individuals, 2009). Difference between a Tax Credit and a Tax Deduction A tax deduction has the primary purpose of reducing a taxpayer's income tax. For certain itemized item, a taxpayer is allowed to deduct the expenses from its gross income. This can only be done if the requirements of deductions as stated by the Internal Revenue Service of USA are met. The effect of deducting the expenses from the gross income is that the net income is calculated to be mush smaller than it actually is. This allows for smaller amount of income tax to be paid by the taxpayer. Thus the amount of taxes is reduced. Some examples of tax deduction are medical deduction, home interest deduction, dental deduction etc. As opposed to tax deduction, a tax credit does not reduce the net income. Rather, it works in two ways. One, it reduces the tax liability on certain items by recognizing a part of the payment already made as tax payment due. Two, it recognizes certain items as such on which the taxpayer is refunded, if the requirement of tax credit are met by the taxpayer. If the income tax is greater than the tax