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What is the purpose in differentiating between adjustments, deductions, and credits when doing taxes? Why not just clump it all together?

Whether or you reduce your taxs before or after you calculate your taxable amount seems unnecessary. It seems like we could just simply use an overall "tax deduction" and calculate tax based off that. Why separate it into so many steps?

closed as unclear what you're asking by Peter Cooper Jr., Nathan L, Dheer, JoeTaxpayer Jul 18 at 19:22

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    Are you asking an economics/politics question about why some countries break out tax code in particular ways? Or are you asking something about what steps you need to take as a taxpayer (in some jurisdiction you haven't told us about) in order to figure out what taxes you're paying? I guess I'm just unclear on what exactly you're trying to ask about. – Peter Cooper Jr. Jul 16 at 18:54
  • Did you want to further differentiate between refundable credits and non-refundable credits? This seems like a very broad question. – Nathan L Jul 18 at 16:37
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Credits give a set amount of money. With deductions, on the other hand, your taxable income is reduced, and so the monetary value depends on your tax rate: the higher your tax rate, the more valuable a deduction is. If your income is low, then a deduction will be worth less. So if, for example, tax credits for buying electric cars were instead deductions, then poor people would get little benefit from them.

There are then "above the line deductions", or adjustments, that can be taken regardless of whether you itemize, and "below the line deductions", or itemized deductions, that require you to forgo the standard deduction.

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It seems like we could just simply use an overall "tax deduction" and calculate tax based off that.

The Standard Deduction is designed for just that purpose.

But politics, special interests (you are a member of multiple special interests, whether you know it or not), and public policy goals above and beyond what the Standard Deduction can handle conspire to complicate things.

  • I'm not sure if you understood my question. There are three ways I reduce my amount of taxes (assume fixed income). 1) Adjust my income (e.g. contribute to 401K). 2) Deduct taxable amounts (e.g. standard deduction). 3) Add in tax credits after I calculated my tax from the tax tables. Why is it necessary to perform all of these adjustment in three different areas? Why not just a deduction section that incorporate all of this? Why apply these discounts in different areas while doing my taxes? – Izzo Jul 16 at 18:53
  • @Izzo the last paragraph says why. – RonJohn Jul 16 at 18:55
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I'm not sure if your are talking about the US but will discuss that. The main reason for all of this is politics.

Some groups advocate a flat tax or even a sales tax to simplify the convoluted system we now have, but that has not gained much real traction.

During a time that, one party was able to exert its will, they were successful in lowering the tax rates for dividend income and long term capital gains. So if you and your neighbor have the same income, and have the same deductions one could pay a lot less taxes if they have a lot of dividend income.

During a different time, the earned income credit came into being and has been expanded since. The result is those with lower incomes, that pay little or no tax get a relatively huge tax refund. Often times this is used on a down payment for a car. Both parties like this because it helped their major contributors.

When Pres. Obama was in office he used the IRS to invoke penalties on those that had no health care. What does income taxes have to do with health care?

So to be clear, I think, all of these policies are crap and representative of both political parties.

Unfortunately there is a lot of incentive to perpetuate the system we currently have.

  • Obama didn't just decide on the penalties; they were imposed by a law, PPACA, passed by Congress with his encouragement and upheld in this part by the Supremes (who struck down another part that tried to force states to expand Medicaid). And they were on lack of coverage i.e. insurance, if you didn't meet any of a long list of exceptions. Coverage and care are related but not the same; some people have coverage but don't get care, and some people get care without having coverage. – dave_thompson_085 Jul 17 at 23:54

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