Tax credits are programs designed to incentivize certain behaviors or activities, such as investing in renewable energy, paying for education, or supporting low-income families. Unlike deductions, which reduce the amount of income subject to tax, tax credits reduce the tax due dollar-for-dollar. This means if a taxpayer owes $1,000 in taxes and has a tax credit of $200, they only need to pay $800. There are two types of tax credits: refundable and non-refundable. Refundable credits can result in a refund if they exceed the tax owed, while non-refundable credits can only reduce tax liability to zero without generating a refund.