- As governments around the world make income tax policy,
there is tension between two opposing factors.
Keeping tax rates as low as possible
while using appropriate tax breaks
to encourage or discourage certain behaviors.
- Okay, tax rates we all understand.
But tax brackets, average tax rates, marginal tax rates,
we've talked about those things.
But tax breaks?
What's a tax break?
- A tax break is a provision in the tax rules
that permits a taxpayer to legally pay less income tax
under certain circumstances.
- Oh, what circumstances?
Can I take advantage of these tax breaks?
- Oh, trust me, you're already taking advantage
of lots of tax breaks.
- No way!
Like what?
- Do you have a 401k retirement savings plan at work?
- Yes, I do, same as you.
- Do you have to pay income tax on the income
that you put in your 401k contribution each year?
- Well, no, no, not until I take it out after I retire.
- Well, there you go.
Your 401k plan is an example of a tax break
to encourage U.S. taxpayers
to save for their own retirement.
The U.S. Congress approved subsection 401k
of the U.S. Internal Revenue Code
that allows taxpayers to delay paying income taxes
on money they put away for retirement.
- Okay, okay, so am I getting any other tax breaks?
- Well, do you get medical insurance through your employer?
Do you donate to charitable organizations?
Do you own a home with a mortgage?
Do you have children?
- Okay, yeah, yeah, I thought tax breaks
were just things that big corporations got.
- No, obviously we need to know more about tax breaks,
sometimes called tax loopholes.