Tax question: What's the difference between an exclusion, a deduction, and a credit?

Answer 1

An exclusion is income you do not need to report, such as a gift. A deduction is an expense that the IRS allows you to claim that reduces your taxable income, ie your income is $10,000 and you have a deduction of $3000 so you owe tax on $7000. A Credit is like a deduction but it reduces your tax owed dollar for dollar, ie you complete your return and owe $2000 then find a Tax Credit for $300 and now owe $1700.

Answer 2

An exclusion is an amount of income that does not appear in your adjusted gross income on your tax return.

A deduction is an amount of income that appears in your adjusted gross income but is not subject to tax.

A credit is an amount by which your tax is reduced. Some credits can reduce your tax to zero. Other credits will refund you money if the credit amount is greater than your tax.

Answer 3

A deduction is money you get to subtract from your income before you calculate the tax on it. (Your Adjusted Gross Income minus your deductions equals your Taxable Income.)

A credit is money can subtract from your tax liability directly. Example: Foreign Tax Credit ...
If you owned a mutual fund that paid taxes in another country, you get credit for that. If the tax liability for your Taxable Income is $1,000, but you paid $25 in foreign taxes, the credit lets you reduce your total liability to $975.