What is the main advantage of tax credits over deductions?

The main advantage of tax credits over deductions is that credits reduce tax liability dollar-for-dollar. This means that for every dollar of a tax credit, the amount of tax owed is decreased by that same dollar amount. For example, if someone owes $1,000 in taxes and qualifies for a $200 tax credit, their tax bill would now be only $800.

In contrast, tax deductions reduce taxable income rather than tax liability directly. For instance, if a taxpayer has a deduction of $200 and their marginal tax rate is 20%, they save only $40 in taxes ($200 deduction x 20% tax rate). Deductions can be beneficial, but tax credits provide a more direct and often more substantial benefit to taxpayers because they reduce the actual amount owed on the tax bill.

The other options presented don’t accurately reflect the nature of tax credits. Not all credits result in cash refunds, as some may only reduce tax liability to zero without resulting in a refund. Credits can sometimes be used or carried over to future tax years, but they aren’t universally allowed to be carried forward indefinitely. Finally, while some credits do apply to business expenses, many credits are available to individual taxpayers for various qualifying activities, such as education and energy efficiency