What are tax credits?

Tax credits are direct reductions in the amount of tax owed to the government. They allow taxpayers to subtract a specified amount from their total tax liability, essentially lowering the amount they need to pay. This means that if you qualify for a tax credit, it directly decreases the amount of taxes you have to pay out of pocket, which can provide significant financial benefits.

In contrast, other options refer to different tax-related concepts. Allowances for tax preparation costs would relate more to the expenses incurred in filing taxes rather than directly affecting the tax owed. Deductions based on income level reduce taxable income rather than directly reducing tax payments owed, making them a different mechanism altogether. Refunds for overpayment of taxes pertain to situations where taxpayers have paid more than what they ultimately owe, resulting in money being returned to them, which is also not the same as a tax credit that reduces the current tax liability.