Saturday, March 4, 2017

Who Benefits from Tax Credits?

It's the season for news articles about taxes! I've already seen some news articles about taxes, which get things wrong. That's not good! So I came up with a scenario to help highlight a problem in understanding non-refundable credits.

Let's pretend Michael owes $2,000 in taxes this year. His handsome friend Arglefumph owes $5,000 in taxes, because he made a lot more money.

Now let's pretend both Michael and Arglefumph are eligible for the fictional Hardy Boys Fan Tax Credit. The rules of the credit are that if you like the Hardy Boys series, you get $3,000 taken off your taxes. The credit can't take your taxes below zero, though. When the tax credit is applied, Michael owes $0 in taxes, and Arglefumph owes $2,000 in taxes.

Here's the big question: Who benefited the most from the tax credit? Is it Michael, because he owes no taxes? Or is it Arglefumph, who got the full $3,000 tax break while Michael only got a $2,000 break? You could make a strong argument for both answers.

Anyway, that's the situation that I saw the news articles mess up on. They got tripped up over the "can't take your taxes below zero" part, as well as the idea that both Michael and Arglefumph get the tax break; it's not the case that if Michael gets the tax break, Arglefumph can't get it, too.

1 comment:

Phil said...

Honestly, the IRS should hire you to write a tax manual. When I read their instructions/explanations, my eyes cross. When you explain it I get it instantly. Great job Michael!