What is a tax credit primarily used for?

A tax credit is primarily used to directly reduce the amount of tax owed to the government. When an individual or business claims a tax credit, it decreases their total tax liability dollar-for-dollar. For instance, if someone owes $1,000 in taxes and qualifies for a $200 tax credit, their final amount due will be only $800.

This characteristic of tax credits distinguishes them from other tax-related benefits, such as deductions, which lower taxable income but do not directly lower the amount of tax owed. For example, if a person has $1,000 income and claims a $200 deduction, they are then taxed on $800, but their tax owed isn’t decreased by a specific dollar amount as it is with a credit. Thus, a tax credit functions as a more immediate and effective means of reducing tax bills, providing direct relief to taxpayers.

In contrast, the other options refer to different aspects of tax strategy, such as deductions or exemptions, which have different impacts on tax calculations.