What are tax credits designed to do?

Tax credits are specifically designed to reduce the tax liability of eligible taxpayers. When a taxpayer qualifies for a tax credit, it directly lowers the amount of tax owed to the government. This is beneficial because it can potentially increase the taxpayer's refund or decrease the amount they need to pay when filing their tax return. Unlike deductions, which reduce taxable income, tax credits provide a dollar-for-dollar reduction of the tax owed, making them a powerful tool for taxpayers looking to lessen their overall tax burden.

Tax credits can be based on various factors including income level, number of dependents, or specific expenses such as education or energy costs. By qualifying for a credit, taxpayers can effectively keep more of their hard-earned money, which is a primary intention behind the design of tax credits in the tax system.

Other options do not accurately capture the essence of what tax credits do. Increasing a taxpayer's total income or providing refunds for overpaid taxes are not functions of tax credits. The process of filing taxes is also not extended by tax credits; in fact, these credits may help simplify the process by clarifying the final tax liability owed.