Tax deductions and tax credits can _____ tax liability.

Tax deductions and tax credits can _____ tax liability.

a. increase

b. reduce

c. not affect

d. none of the above

Answer: b. reduce

An expense allowance and tax credit are typically involved in operations and are in reality utilized in the real world as means through which the taxes paid by an individual or an organization can be reduced. On the other hand, tax exemptions decrease the tax revenue base by allowing a certain amount or expense to be offset from the gross income in order that the amount arriving therefrom will be less than the gross income and attract less tax than; the gross income. But tax credits include a reduction of the actual tax amount which means that the credits which are being offered are cutting amounts on the overall tax rate directly. Hence, while deductions are a proportionate reduction of the assessable amount of income, credits are a proportionate reduction of the actual tax amount, and they appear to be more useful since they can work as a percentage of the final tax payable. Approved expenses and allowances are some of the avenues through which taxpayers can reduce their taxed liability to the state, and therefore, the lesser tax becomes payable.