What is the function of a tax credit?

A tax credit serves the important function of reducing the total taxes owed to the government. Unlike a tax deduction, which lowers the amount of income subject to tax, a tax credit directly reduces the tax bill itself on a one-to-one basis. For example, if an individual owes $1,000 in taxes but qualifies for a $200 tax credit, their tax liability would decrease to $800. This feature makes tax credits particularly valuable, as they provide a direct benefit to taxpayers by lessening their overall tax burden.

The other options do not represent the core function of a tax credit. While increasing taxable income and mandating charitable donations relate to taxation, they do not align with the concept of a tax credit. Additionally, while a tax credit can lead to a refund if it exceeds the amount owed, it is not inherently a guarantee of a refund; that is contingent on one's specific tax situation. Thus, the essence of a tax credit lies in its capacity to directly reduce the amount of taxes that need to be paid, making the correct answer clearly the one that states it reduces the total taxes owed to the government.