Which of the following best describes the difference between a tax credit and a tax deduction?

• A. A tax credit increases taxable income, while a tax deduction decreases the amount of tax owed.
• B. A tax credit is only available to corporations, while a tax deduction is only available to individuals.
• C. A tax credit directly reduces the amount of tax owed, while a tax deduction reduces taxable income.
• D. A tax credit and a tax deduction both reduce taxable income by the same amount.

Answer: (C)

Verified step by step guidance

1. Understand the concept of a tax credit: A tax credit directly reduces the amount of tax owed by the taxpayer. For example, if a taxpayer owes \$1,000 in taxes and has a \$200 tax credit, the tax owed is reduced to \$800.
2. Understand the concept of a tax deduction: A tax deduction reduces taxable income, which indirectly lowers the amount of tax owed. For example, if a taxpayer has \$50,000 in taxable income and a \$5,000 deduction, the taxable income is reduced to \$45,000, and the tax owed is calculated based on the reduced income.
3. Compare the effects of a tax credit and a tax deduction: A tax credit provides a direct reduction in the tax liability, while a tax deduction reduces the taxable income, which may result in a smaller reduction in tax liability depending on the taxpayer's tax rate.
4. Analyze the options provided in the problem: Evaluate each statement to determine its accuracy based on the definitions of tax credit and tax deduction.
5. Identify the correct answer: The correct answer is the statement that accurately describes the difference between a tax credit and a tax deduction, which is 'A tax credit directly reduces the amount of tax owed, while a tax deduction reduces taxable income.'