Tax Credit or Income Transfer?

By:  Laurence Vance
03/25/2013
       
Tax Credit or Income Transfer?

It is a good thing when taxes are reduced. But when refundable tax credits provide taxpayers with more money than they paid in, that’s a subsidy, not a tax cut.

Tax season will soon be over. Although this doesn’t mean that paying taxes is over for the year, it does mean that we will no longer see the glut of roadside signs advertising tax preparation services that claim they can get you a tax credit of up to $4,169 per child.

Now, in principle, tax credits, like tax exclusions, tax exemptions, tax deductions, tax shelters, tax incentives, and tax loopholes, are a good thing because they allow people to keep more of their money in their pockets and out of the hands of the government.

After both tax rates and tax brackets increased during the Bush Sr. and Clinton years, the so-called Bush tax cuts — the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) — fixed the tax brackets at 10, 15, 25, 28, 33, and 35 percent, increased to $1,000 the child tax credit, set the long-term capital gains and qualified dividend tax rates at 15 percent, increased the section 179 expense deduction for small businesses to up to $250,000, and gradually reduced the estate tax.

The tax code was most recently changed by the “American Tax Relief Act of 2012,” (ATRA) passed by the lame-duck Congress to keep from going over the “fiscal cliff.” The Bush-era tax cuts were made permanent, but only for those making under $400,000 a year ($450,000 for married couples); the estate tax increased to a maximum rate of 40 percent with a $5.25 million exemption; the top marginal tax rate was increased to 39.6 percent; and some tax credits were extended.

A tax credit is a dollar-for-dollar reduction of the amount of income tax owed. Current tax credits include the credit for child and dependent care expenses, education credits, the foreign tax credit, the retirement savings contributions credit, the child tax credit, the adoption credit, the plug-in electric vehicle credit, and residential energy credits. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken.

Unless the tax credit is refundable.

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Photo: AP Images

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