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Explain the difference between the terms tax rates and tax credits. - Leaving Cert Business - Question 3 - 2012
Question 3
Explain the difference between the terms tax rates and tax credits.
Worked Solution & Example Answer:Explain the difference between the terms tax rates and tax credits. - Leaving Cert Business - Question 3 - 2012
Step 1
Tax Rates
Answer
Tax rates refer to the percentage of income that is deducted as tax based on the level of taxable income. Income is typically taxed at two different rates:
- The standard tax rate is up to a certain income level, which is currently set at 20% for incomes up to €32,800.
- For any income above this threshold, a higher tax rate of 41% applies.
This means that individuals pay 20% on their income up to this cutoff, after which they pay 41% on the remaining amount.
Step 2
Tax Credits
Answer
Tax credits, on the other hand, are amounts that taxpayers can deduct from their total tax liability. The calculation is performed as follows:
Gross Tax less Tax Credits = Tax Payable.
Tax credits can vary based on personal circumstances (e.g., marriage status or employment situation) and are used to lower the overall tax burden. It is important to note that tax credits are non-refundable, meaning that if the credits exceed the tax owed, they cannot be refunded. Any unused tax credits can be carried forward to subsequent pay periods within the tax year.