Which of the following statements is true about tax credits?

Tax credits represent a direct reduction in the amount of tax owed, and some of them can be carried forward to future years if a taxpayer is unable to use the full credit in the current year. This is particularly relevant for non-refundable tax credits, which can only reduce tax liabilities to zero but cannot generate a refund. The ability to carry a credit forward allows taxpayers to benefit from the credit over multiple tax years, maximizing the financial impact of the credit when their tax situation allows it.

The other options do not accurately describe the nature of tax credits:

• Tax credits do not always lead to higher tax liabilities; they actually reduce tax liabilities.

• Tax credits and tax deductions are not the same; while deductions reduce the taxable income, tax credits reduce the tax owed directly.

• Not all tax credits are refundable; some can only be used to offset tax liability, while only refundable credits can result in a refund if they exceed the tax owed.

Understanding the nature of tax credits, including the ability to carry them forward, is essential for tax planning and optimizing tax benefits.