What is the primary difference between a tax credit and a tax deduction?

The primary distinction between a tax credit and a tax deduction is clearly delineated in the correct choice, which highlights that a tax credit directly reduces the amount of tax owed on a dollar-for-dollar basis, while a tax deduction reduces the amount of taxable income.

When a taxpayer qualifies for a tax credit, it decreases their tax liability directly. For example, if a taxpayer owes $1,000 in taxes and they have a tax credit of $200, their tax owed becomes $800. This direct reduction makes tax credits a powerful tool for decreasing the overall tax burden.

In contrast, a tax deduction first lowers the income that is subject to tax. For instance, if a taxpayer has an income of $50,000 and they have a tax deduction of $5,000, they would only be taxed on $45,000. The actual tax savings depend on the individual's tax bracket—if they are in the 22% tax bracket, that deduction would save them $1,100 in taxes, not the full amount of the deduction.

This differentiation is crucial for taxpayers as it can significantly influence tax planning strategies. Moreover, the incorrect choices reflect misunderstandings about how these tax benefits function. A tax deduction is not refundable, and tax credits can vary