Final answer:
A tax credit is a direct subtraction from income tax due, unlike deductions which reduce taxable income. Tax credits provide a dollar-for-dollar reduction in tax liability, making them highly beneficial for taxpayers.
Step-by-step explanation:
A tax credit is a direct subtraction from income tax due rather than a subtraction from taxable income.
Unlike deductions, which reduce the amount of taxable income, tax credits subtract from the final tax liability, meaning the amount of tax that one owes.
Therefore, a tax credit can be much more beneficial than a deduction, as it directly reduces the tax dollar for dollar.
For instance, if you are eligible for a $1,000 tax credit and you owe $3,000 in taxes, your tax liability after the credit would be $2,000.
This is different from a deduction, which would reduce your taxable income and, dependently, the amount of tax owed as per the different tax rates applied.
The concept of taxable income is calculated as follows: taxable income = adjusted gross income - (deductions and exemptions). Once taxable income is determined, taxes are calculated based on the applicable tax rates. Tax credits may then apply, effectively lowering the tax bill directly.