Why Is My Tax Return So Low?

Why Is My Tax Return So Low?

Getting a smaller tax refund than expected can be disappointing and confusing. There are several potential reasons why your tax return may be lower than anticipated.

Changes in Tax Laws

Recent changes in tax laws could result in a lower refund. For example, the Tax Cuts and Jobs Act that went into effect in 2018 increased the standard deduction but eliminated personal exemptions. This means you may be deducting less while owing about the same in taxes. As a result, you get less money back.Additionally, changes to things like tax brackets, credits, and deductions can also impact your bottom line refund amount. It’s important to be aware of any tax law changes each year that may be decreasing your return.

Higher Income

If your income increased significantly over the past year, you may find yourself in a higher tax bracket. Moving into a new bracket means a larger portion of your income is now taxed at that rate. The result is often a lower refund or potentially even owing taxes.Even relatively small income bumps can push you just over the threshold into the next tax rate level, unexpectedly increasing your tax liability. Carefully review any salary changes from last year to understand the impact on your tax bill.

Withholding Changes

The amount of taxes withheld from your paycheck determines how much refund you’ll receive. So if your withholding decreased, likely so will your return.Reasons for lower withholdings might include:

  • You claimed more allowances on your W-4
  • You switched jobs and your new employer withheld less
  • You had multiple streams of 1099 or “gig economy” income that had no withholding.

Compare your recent pay stubs to last year’s. A noticeable difference in federal taxes withheld means your refund will too.

Deductions Decreased

Many filers depend on tax deductions, which lower your taxable income, to help generate a refund. If you deducted significantly less than last year, you reduce the amount available for overpayment.Common reasons deductions fall include:

  • You bought a less expensive home resulting in lower mortgage interest
  • You donated less money to charity
  • You switched daycare providers so paid less in expenses
  • You paid off student loans or other debts with deductible interest

Carefully total all deductions from the past year and compare to what you claimed previously. Less deductions directly lowers your return.

Credits Reduced

Tax credits, like deductions, can also create or increase a refund by offsetting taxes owed. If you qualified for fewer credits than last year, you may see a drop in the amount refunded.For example:

  • Your children aged out of the Child Tax Credit
  • You made too much to claim an education credit
  • You bought an electric vehicle in a prior year but not the current

So compare the types and amounts of credits you can substantiate from year to year. Losing just one significant credit can substantially impact refund totals.

Previous Year’s Return Inflated

Sometimes the explanation is simply that last year’s refund was unusually high for a one-time reason.Potential causes could be:

  • You withdrew retirement funds early creating excess tax
  • You sold valuable property or investments owing capital gains tax
  • You got married and filed jointly for the first time

In cases like these, the prior year refund would be inflated over normal. So this year’s amount seems low by comparison when in fact it’s more in line with expectations.

What To Do About A Lower Refund

If your tax refund disappoints this year, take steps to understand why and improve the outcome next filing season.

  • Review any tax law changes for this year to see impacts
  • Compare income and withholding amounts to the prior year
  • Total all deductions and credits to confirm amounts
  • Consider adjusting your W-4 allowances if withholding fell
  • Discuss tax planning strategies with a CPA for subsequent years

While waiting another year for a better refund isn’t ideal, taking proactive measures now means you can likely increase your tax overpayment next time.

Resources