Question

A tax credit is different from a tax deduction because a tax credit:

• A. Reduces the amount of taxable income.
• B. Is a one-time reduction in tax liability.
• C. Is a deferral of tax payment to a future date.
• D. Reduces the amount of tax owed dollar for dollar.

Answer 1

Answer:

D. Reduces the amount of tax owed dollar for dollar.

• A tax credit directly reduces the amount of tax a person owes, whereas a tax deduction reduces the amount of income that is subject to taxation.