Answer:
Tax deductions, exemptions, and credits are all ways to lower taxable income and reduce the amount of taxes owed.
Tax deductions are reductions in taxable income based on expenses the taxpayer incurs. For example, a taxpayer can claim deductions for mortgage interest, state and local taxes, charitable contributions, and business expenses. Deductions lower the taxpayer's taxable income, reducing the amount of income that is subject to taxation. Taxpayers can choose between taking the standard deduction or itemizing their deductions, whichever results in a lower taxable income.
Tax exemptions are reductions in taxable income based on the number of exemptions claimed. Each exemption reduces taxable income by a set dollar amount. Taxpayers can claim exemptions for themselves, their spouse, and their dependents. The number of exemptions a taxpayer can claim is determined by their tax filing status and their income.
Tax credits are reductions in the amount of taxes owed, rather than reductions in taxable income. Tax credits are subtracted from the total amount of taxes owed, dollar-for-dollar. Tax credits can be earned for a variety of reasons, such as having children, being a student, or investing in energy-efficient home improvements. Unlike deductions and exemptions, tax credits are not limited to a specific amount, and can result in a tax refund for the taxpayer if the credit exceeds the amount of taxes owed.