Question

multiple choice question
which of the following statements is correct?
○ both tax deductions and tax credits reduce taxable income.
○ both tax deductions and tax credits are a matter of legislative grace.
○ both tax deductions and tax credits are specifically granted by congress and are narrowly defined.

Explanation:

1. Analyze the first option: Tax deductions reduce taxable income, but tax credits directly reduce the tax liability (not taxable income). So this statement is incorrect.
2. Analyze the second option: Tax deductions and tax credits are created by legislative action (Congress makes tax laws), so they are a matter of legislative grace (given by the legislature). This is correct.
3. Analyze the third option: While many tax deductions and credits are granted by Congress, the wording "specifically granted" and "narrowly defined" is not accurate for all, as some may be more broadly applied or interpreted. Also, the second option is more fundamentally correct about their legislative nature.

Answer:

B. Both tax deductions and tax credits are a matter of legislative grace