Loophole, deduction, exemption, tax credit

Sorry, there is no link to some expert pundit news story opinion telling you what to think. Just answer in your own ideas.

What is the difference?

Tax Loophole
Deduction
Exemption
Tax credit


What makes it a tax loophole? Is it the amount of money, the purpose of the item, whether the person receiving it is rich or poor? Fairness? Resulting effect on economy and jobs?

I have some ideas, but would like to hear opinions. My basic definition is a Loophole is something someone else gets that they supposedly don't deserve, and a deduction or credit is something you get that you do deserve.

Joe wrote: Sorry, there is no link to some expert pundit news story opinion telling you what to think. Just answer in your own ideas.

What is the difference?

Tax Loophole
Deduction
Exemption
Tax credit


What makes it a tax loophole? Is it the amount of money, the purpose of the item, whether the person receiving it is rich or poor? Fairness? Resulting effect on economy and jobs?

I have some ideas, but would like to hear opinions. My basic definition is a Loophole is something someone else gets that they supposedly don't deserve, and a deduction or credit is something you get that you do deserve.

It all depends on which side of the equation your on. My deduction you could view as a loop hole, and aren't the terms exemption and tax credit interchangeable? My opinion it is time to scrap the whole tax code and start over.

The Bear wrote: It all depends on which side of the equation your on. My deduction you could view as a loop hole, and aren't the terms exemption and tax credit interchangeable? My opinion it is time to scrap the whole tax code and start over.

Deductions are an intentional effort to influence the actons of taxpayers.

Loopholes are unintended methods of protecting income that should othewise be taxed.

Exemptions define income that will not be taxed due to the nature of the income.

Credits are entitlements, they are giveaways to taxpayers.

Nobody that matters wrote:

The Bear wrote: It all depends on which side of the equation your on. My deduction you could view as a loop hole, and aren't the terms exemption and tax credit interchangeable? My opinion it is time to scrap the whole tax code and start over.

Deductions are an intentional effort to influence the actons of taxpayers.

Loopholes are unintended methods of protecting income that should othewise be taxed.

Exemptions define income that will not be taxed due to the nature of the income.

Credits are entitlements, they are giveaways to taxpayers.

Well put. although to me some seem cloudy as to which they are.

...and aren't the terms exemption and tax credit interchangeable?

Some examples of exemptions are the $3650 x the no. of people in your household (Spouse+kids)
Other exemptions are your employer health ins, 401K contributions and match. I'm sure there are more.

They are more like deductions, not credits.

Nobody that matters wrote: Credits are entitlements, they are giveaways to taxpayers.

Yeah, there's even a Child Tax Credit... You get an entitlement/"giveaway" for breeding.

And a few more examples of entitlement/"giveaways":

Examples of Tax Credits

If you purchase new equipment for your business: a computer, a point of sale system, kitchen equipment, manufacturing machinery, an agricultural irrigation system or other tangible personal property that is used to generate revenue, you may be eligible for a 3% Investment Tax Credit.

If you add additional jobs to your workforce, you may be eligible for a $500 Job Tax Credit per additional employee.

If you are an agricultural processing business and you add additional employees to your staff, you may be eligible for an extra $500 Job Tax Credit making a total of $1,000 per additional employee

If you provide additional training for your employees (other than on-the-job training), you may be eligible for a 10% Job Training Credit.

If you provide employer-sponsored health insurance for your employees, you may be eligible for a $200 per employee (for two years) Health Insurance Tax Credit.

If you rehabilitate a 20 year old vacant building, you may be eligible for 25% of the building renovation costs.

Who would have thought that some of those entitlement "giveaways" are incentives to create jobs?!?!?

Exemptions and Credits are not interchangeable...

Exemptions come off the top, and are amounts you deduct from your income when you are calculating your AGI that is subject to tax.

Credits come off of the tax you owe after it's been computed...(and are, therefore, worth more.)

Nobody that matters wrote: Loopholes are unintended methods of protecting income that should otherwise be taxed.

Very good definitions NTM

So then what is an "intended" method of protecting income that should otherwise be taxed?

An illegal unfair deduction?

LadyJazzer wrote: Who would have thought that some of those entitlement "giveaways" are incentives to create jobs?!?!?

Exemptions and Credits are not interchangeable...

Exemptions come off the top, and are amounts you deduct from your income when you are calculating your AGI that is subject to tax.

Credits come off of the tax you owe after it's been computed...(and are, therefore, worth more.)

See, I knew you had a brain in there somewhere. Glad to see you let it out for minute. Good post.

I think a loophole is something that isn't a defined exemption, deduction, or credit...a hole in the tax code...that allows a credit or deduction (maybe an exemption) so not as much has to be paid in taxes. As to whom it applies: well, since it is the wealthier of us that have paid accountants to know and learn the tax code, they are usually the ones that will find and use a loophole.

If I had the time, inclination, and energy to read the tax codes everytime they changed (only when I need help falling asleep), I would probably find some loopholes I could take advantage of.

An exemption is a setting aside of the bill or amount due.
A deduction is a subtraction from the total due.

I think a loophole isn't anything written...and since it isn't written in the rules as a "do" or a "don't", people take advantage of it and don't pay as much as they'd have to.

good post CB.....you explained well why loopholes should be closed. They were never intended to create a deduction or a credit, they are areas of the tax code that are either undefined or open to interpretation that can be exploited by those who understand taxes better than the average person, even the average tax preparer. It usually take a tax lawyer along with a good corporate CPA to identify and exploit them.