When determining taxable income, which deduction is NOT subtracted from gross income?

To understand why the correct answer is credits, it is important to grasp the concepts of taxable income calculation. Taxable income is determined by starting with gross income and then subtracting allowable deductions to arrive at the amount that is subject to tax.

Exclusions refer to certain types of income that are not subject to taxation; this income does not even count as gross income, and therefore they are not included in the taxable income calculation from the outset. Adjustments are specific deductions that reduce gross income directly, like contributions to traditional IRAs or student loan interest. Exemptions, while historically part of the tax process, functioned similarly to deductions, providing another avenue to reduce taxable income.

On the other hand, credits directly reduce the tax liability itself rather than the amount of income that is subject to tax. They are applied after the taxable income has been calculated and do not adjust the taxable income figure. Understanding this distinction is crucial in tax planning and filing, as credits can significantly impact the final tax owed without influencing the reported income.