How do tax credits differ from tax deductions?

Tax credits and tax deductions serve distinct roles in the calculation of taxes owed, highlighting why the selected answer is accurate. Tax credits provide a direct reduction in the total tax liabilities of an individual or corporation. For example, if a taxpayer owes $1,000 in taxes and is eligible for a tax credit of $200, the final tax owed would be reduced to $800.

On the other hand, tax deductions reduce taxable income rather than directly altering the amount of taxes owed. For instance, if a taxpayer has a gross income of $50,000 and claims a deduction of $5,000, their taxable income would be $45,000; this lower amount is then used to calculate the tax owed, leading to a potentially lower tax liability, but not in the same straightforward manner as a credit does.

The other options introduce misunderstandings about the nature and application of credits and deductions. The comparison in the selected answer accurately captures the essential difference in how each mechanism functions within the tax system, clarifying the benefits they provide to taxpayers in managing their tax obligations.