What is a direct reduction of the taxpayer’s liability referred to as?

A direct reduction of the taxpayer's liability is referred to as a credit. Tax credits are beneficial because they directly decrease the amount of tax owed, meaning taxpayers pay less in taxes dollar for dollar. For instance, if a taxpayer owes $1,000 in taxes but has a $200 credit, their tax liability is reduced to $800.

In contrast, deductions only lower the taxable income, meaning they can indirectly reduce the tax owed based on the taxpayer's tax bracket. Exemptions are amounts that taxpayers can subtract from their income, reducing taxable income as well, but they don’t directly decrease the actual tax owed. A rebate usually refers to a refund of excess payments, which is not the same as a credit.