What's the Difference Between a Tax Credit and a Tax Subsidy?

Tax credits and subsidies are both government tools to incentivize certain behavior, but they work through different mechanisms. A tax credit directly reduces the amount of tax you owe on your tax return — for example, the Child Tax Credit or the electric vehicle credit reduces your tax bill dollar for dollar at filing time. A subsidy is typically a direct payment or cost reduction from the government, provided outside the tax system — for example, a grant to a business or the premium assistance available under the Affordable Care Act. The premium tax credit under the ACA blurs this line, because it's technically a tax credit but can be paid in advance directly to your insurance company to reduce your monthly premium, functioning more like a subsidy in practice. Both mechanisms ultimately reduce the cost of certain activities, but tax credits are claimed on your return, while subsidies are often received upfront or through non-tax channels.