Intuit Academy Tax Practice Exam 2025 - Free Tax Practice Questions and Study Guide

A tax credit is an amount that taxpayers can subtract directly from the total tax owed to the government. This means that for every dollar of a tax credit, the taxpayer reduces their tax liability by that same dollar amount. For example, if someone owes $1,000 in taxes and qualifies for a tax credit of $200, their new tax liability would be $800. This direct reduction in taxes owed is what sets tax credits apart from tax deductions.

On the other hand, tax deductions lower the amount of income that is subject to tax, which can indirectly reduce the tax owed by lowering taxable income. However, the amount saved from a deduction can vary based on the taxpayer's tax bracket. Therefore, despite a deduction potentially lowering the tax bill, it does not reduce the liability on a dollar-for-dollar basis as a credit does.

Additionally, tax deductions can pertain to various expenses, including both personal and business-related costs, and are not limited to business expenses only. As for direct tax refunds, they are typically associated with overpayments, rather than being a feature of deductions or credits specifically.

This clear distinction illustrates why the correct answer focuses on the tax credits' ability to reduce the actual amount owed rather than simply reducing taxable income.