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Conceptual Questions

1. Deduction reduces taxable income; Credit reduces tax owed directly.
   Example: Deduction – student loan interest. Credit – Child Tax Credit.
   A credit usually offers greater savings.
2. Marginal rate applies to your next dollar earned; effective rate is your total tax ÷ total income.
3. Capital gains come from selling investments.
   • Short-term gains (held <1 year): taxed as ordinary income
   • Long-term gains (held >1 year): taxed at 0%, 15%, or 20%
4. AGI is your total income minus “above-the-line” deductions.
   It determines eligibility for many credits and deductions.
5. Bracket creep occurs when income rises with inflation but thresholds don’t, pushing you into higher tax brackets.
6. Standard deduction is a fixed amount; itemizing is useful if deductions (mortgage, charity, etc.) exceed it.
7. Refundable credit: can result in a refund (e.g. AOTC).
   Non-refundable: only offsets tax owed (e.g. Child & Dependent Care Credit).
8. Freelance income is taxable. Forms include 1099-NEC or 1099-K.
9. Tax software can’t correct wrong inputs. It’s only as accurate as the information you provide.
10. Filing status affects your tax brackets, standard deduction, and credit eligibility.

Problem Solving Questions

1. AGI = $55,000 – $2,000 – $6,500 = $46,500
2. Tax Breakdown for $45,000 (Single Filer):
   • First $11,000 *10% = $1,100
   • Next $33,725 *12% = $4,047
   • Final $275 *22% = $60.50
   • Total Tax ≈ $5,207.50
3. Total Itemized = $9,000 + $2,500 + $1,000 = $12,500
   Standard deduction is higher → Take standard
4. Capital Gain = $8,500 – $5,000 = $3,500
   Held > 1 year → Long-term gain taxed at 15%
5. Tax owed: $700 – $1,200 credit = $500 refund
6. Self-employment tax = $20,000 × 15.3% = $3,060
7. Head of Household gets higher deduction and lower tax brackets than single.
   Benefit: lower total tax owed.
8. Tax owed = $3,800 – $3,200 withheld = $600 owed
9. $1,000 credit saves $1,000.
   $1,000 deduction in 22% bracket saves $220.
   Credit is more valuable
10. Quarterly payment = $60,000 × 15% = $9,000 ÷ 4 = $2,250 per quarter

Interactive Challenges

• Student loan interest → Deduction
• Child Tax Credit → Credit
• IRA contribution → Deduction
• American Opportunity Credit → Credit

1. $70,000 income (Single)
   • Marginal tax rate: 22%
   • Approximate average rate: ~14%–15%
2. Take standard deduction ($13,850) → higher than itemized ($12,000)
3. Sold after 8 months → Short-term gain → taxed as regular income
4. IRS requires all income to be reported, even if < $600.
   1099s are just one reporting tool.
5. Always file to avoid late filing penalty.
   You can request a payment plan later.
6. AGI = $48,000 – $5,000 – $2,000 = $41,000
7. Refund = $2,000 credit – $1,500 tax = $500 refund