What is the primary function of tax credits compared to tax deductions?

The primary function of tax credits is that they directly reduce tax liability on a dollar-for-dollar basis, which provides a significant benefit for taxpayers. In contrast, tax deductions lower the amount of income that is subject to tax, thereby lowering the taxable income. While both credits and deductions provide tax relief, the impact of credits is more direct and can be more favorable to taxpayers because they reduce the tax owed immediately, whereas deductions only reduce the taxable income based on a percentage of the tax rate, which can result in less savings.

In this context, tax credits are advantageous because they can effectively provide a greater reduction in the overall amount owed in taxes compared to the amount saved through deductions. This distinction is critical for taxpayers when planning their finances or when seeking to reduce their overall tax burden.