Question

A tax (1) reduces a taxpayer's tax liability dollar for dollar. A tax (2) reduces taxable income, resulting in a tax savings that is dependent on the taxpayer's marginal tax bracket.

a) Credit, Deduction
b) Deduction, Credit
c) Exemption, Credit
d) Credit, Exemption

Answer 1

The correct options describing the tax benefits that reduce tax liability and taxable income are Credit and Deduction, respectively.

Step-by-step explanation:

The student's question pertains to the different types of tax benefits and how they reduce tax liability. A tax credit directly reduces a taxpayer's tax liability dollar for dollar. On the other hand, a tax deduction reduces the taxable income, which then reduces the amount of taxes owed based on the taxpayer's marginal tax rate.

Therefore, the correct answer is:

• a) Credit, Deduction

Tax credits and tax deductions are fundamental components of the tax system, affecting the disposable income of individuals and the economic decisions they make. While both can reduce the amount of tax a person owes, they work in different ways. Tax credits lower the tax bill directly, while tax deductions lower the overall income subject to taxation, hence affecting the tax bill indirectly.