A tax ______ reduces and a tax __________ eliminates. Which pair is correct?

• A. Deduction, Exemption
• B. Credit, Deduction
• C. Exemption, Deduction
• D. Deduction, Deduction

Answer: (A)

In taxation, a deduction lowers your taxable income by subtracting an amount from your gross income, which reduces the tax base. An exemption acts as an allowance that reduces the amount of income that is subject to tax, effectively removing that portion from being taxed. So the pair that fits the statement is: a deduction reduces taxable income, and an exemption eliminates that portion of income from taxation. The other options don’t fit because two deductions wouldn’t describe any elimination of income from tax, whereas credits (not present here) are what directly reduce tax owed.