What does it mean when asked if I would like my last years overpayment added onto this year's taxes? Would this cause my refund to decrease?

Yes, your refund would be reduced by the amount you had applied to this year's taxes. The refund would be used to reduce the amount of money you may owe when you file your taxes in 2026, for tax year 2025.

We assume you are asking about a 2024 overpayment/refund  to apply to next year's 2025 tax return? 

An overpayment is your refund. It means Do you want to leave your all or part of your refund with the IRS or state and apply it to next year's tax return you do in 2026. Most people don't want to do that and want to get their refund now. So say NO, not to apply it.