Question

• - Explain how tax credits differ substantially from tax deductions.
• - Explain which one provides the most tax benefit to taxpayers and why.

Answer 1

Tax credit is a credit of tax which an individual had paid well before declaring the income to the government. This tax credit can be availed by the individual at the time of submitting his income tax return. Tax credit is paid to the government on behalf of the individual by the person from whom he has purchased something.

Whereas on the other hand tax deduction are those deductions which are prescribed by the government and can be reduced by the individual from its total income and paying the tax on the net income after deducting deductions from his total income.

Sometimes the individual cannot take the tax credit because of limitation of using the tax credit. However tax deduction can be used fully at the time of submitting income tax return by deducting it straight from the total income therefore tax deduction are more beneficial as compared to tax credit .

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