Questions: Deductions reduce the amount of income that can be taxed, and credits reduce the amount of taxes you owe.

Transcript text: Deductions reduce the amount of income that can be taxed, and credits reduce the amount of taxes you owe.

Solution

Answer

The answer is: Deductions reduce the amount of income that can be taxed, and credits reduce the amount of taxes you owe.

Explanation

Option 1: Deductions are used for future tax bills, and credits are used to help with past tax bills.

This statement is incorrect. Both deductions and credits are applied to the current tax year, not future or past tax bills.

Option 2: Deductions reduce the amount of income that can be taxed, and credits reduce the amount of taxes you owe.

This is the correct answer. Deductions lower your taxable income, which in turn reduces the amount of tax you owe. Credits, on the other hand, directly reduce the amount of tax you owe, dollar for dollar.

Option 3: Deductions report your spending, and credits report how much you borrowed.

This statement is incorrect. Deductions and credits do not serve as reports of spending or borrowing. They are mechanisms to reduce tax liability.

Option 4: Deductions refer to money spent on goods, and credits refer to money spent on services.

This statement is incorrect. Deductions and credits are not categorized based on spending on goods or services. They are tax mechanisms that apply to various eligible expenses and situations.

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