When calculating an obligation, certain concepts can reduce the taxed amount or the amount payable. Deductions, exemptions, and credits are not interchangeable: each figure operates at a different stage and is subject to requirements and limits established by each jurisdiction.
Deduction: base adjustment
An allowed deduction reduces the magnitude on which the tax is calculated. It may depend on the nature of the expense, its relationship with an activity, and the existence of receipts. Not every personal or business disbursement is deductible, and the same class of expense may receive different treatments according to the regulation.
Exemption: a delimited exclusion
An exemption excludes certain income, operations, or subjects from the levy, totally or partially, under specific conditions. The name does not imply that all obligations disappear: informational duties or requirements to request and maintain the benefit may still exist.
Credit: a reduction of the calculated tax
A credit is normally applied against the determined tax amount, instead of reducing the base. Some figures may be refundable and others not, or be limited to an amount; that varies from one system to another. The eligibility and the order of application must be carefully verified.
Proof, limits and conservation
To use any benefit, documents, quantitative limits, a specific activity, or compliance with temporary conditions may be required. It is advisable to record the foundation of each item and maintain sufficient support to explain the calculation. A benefit should not be presumed just because it seems reasonable in economic terms.
Conclusion
The practical question is at what phase each mechanism operates and what requirements accompany it. Understanding that difference helps to review calculations without assuming that any expense, income, or credit produces the same result.