Answer
See below:
Work Step by Step
A person in the 10% tax bracket, should not have income more than \$8,700.Let suppose, a person earns \$8,700.
Option 1: Calculating tax income when deductions are equal to \$4,000.
First, calculate taxable income by subtracting deductions from gross income. Then, the tax liability will be computed.
the taxable income is \$4,700.
Compute the tax liability:
\[\begin{align}
& \text{Tax}\,\text{computation}=10percent\times \text{Taxable}\,\text{income} \\
& =0.10\times \$4,700\\&=\$470\end{align}\]
The amount of tax liability is $470.
Option 2: Calculating tax income when tax credit of $2,500 is provided.
First, calculate taxable income by subtracting deductions from gross income. Then, the tax liability will be computed.
\[\begin{align}
& \text{Taxable}\,\text{income}=\text{Gross}\,\text{income}-\text{Deductions} \\
& =\$8,700-0\\&=\$8,700\end{align}\]
Thus, the taxable income is \$8,700.
Compute the tax liability:
\[\begin{align}
& \text{Tax}\,\text{computation}=\left( 10percent\times \text{Taxable}\,\text{income} \right)-Tax\,credits \\
& =\left( 0.10\times \$8,700\right)-\$2,500\\&=\$870-\$2,500\\&=\left(-\$1,630\right)\end{align}\]
The amount of tax credit is \$1,630.
