Why Is My Refund Smaller This Year?

Welcome to ‘Tax Time Talk’—a special series where we break down tax season topics in a way that makes sense! Today, let’s tackle one of the biggest misconceptions about tax refunds.

For many people, tax season is one of the most dreaded times of the year—more daunting than a harsh winter in the Midwest. It’s so disliked that millions of Americans procrastinate until the very last deadline, some even deciding not to file at all. However, for a select few, tax season can be quite exhilarating, as it often means receiving a sizeable lump-sum refund.

I recall the first time I filed my tax return at 18. As I navigated through the prompts on the tax preparation software, I was focused on increasing that green refund number at the top of the screen. I didn’t fully grasp what I was doing, nor did I understand the basics of the tax code. With just one W-2 from my employer, the process wasn’t overly complicated, but I was frustrated when I saw that the refund amount remained unchanged.

I had heard my co-workers talk about their accountants securing them thousands of dollars in tax refunds. Naturally, I was annoyed, so I reached out to my dad’s CPA to see if spending a couple hundred dollars would yield a greater refund. After consulting with him, I learned that my expected refund would be the same as what my DIY tax software indicated. I was furious.

Now, as a CPA, I understand why my dad’s CPA reached the same conclusion as the tax software. One common misconception I encounter with new clients is the belief that hiring a professional will guarantee a better return on their investment compared to filing their own taxes. While hiring a professional can sometimes yield a better outcome, it isn’t always the case—especially for those with only W-2 income and minimal investment interest 

The reality is that for many of you (mainly, those with only W-2 income and minimal investment interest), your refund isn’t a prize or a secret trick that CPAs can unlock—it’s simply a matter of math. Your refund (or tax bill) depends on how much you’ve already paid in taxes throughout the year versus what you actually owe. To make this clearer, let’s look at an analogy.

 Analogy: Pre-Paid Gift Cards

Think of paying taxes like prepaying for your grocery shopping with gift cards. Each week, you load $100 onto a gift card, similar to how your employer withholds taxes from your paycheck or how self-employed individuals make estimated tax payments.

When you finally go shopping (filing your tax return), the total bill is calculated. Sometimes, it turns out that your grocery total is $110—meaning you didn’t preload enough onto your gift card and now owe an extra $10 (owing taxes when you file). Other times, you might spend only $90, meaning you get $10 back to use for next time (receiving a tax refund).

Now, just like coupons can lower your grocery bill, tax deductions and credits can reduce your overall tax liability. And if you have refundable tax credits, it’s like the store giving you cashback even if your balance is already zero!

At the end of the day, filing your taxes is simply a way to compare what you actually owed with what you already paid—if you overpaid, you get a refund; if you underpaid, you settle the difference.

This is why it’s called a tax refund—you’re simply getting back what you overpaid throughout the year. And if you qualify for refundable tax credits, they can add to your refund, even beyond what you initially paid in.

In the end, filing your tax return is simply a way to reconcile what you actually owed with what you already paid. If you overpaid, you get a refund; if you underpaid, you owe the difference. And if you qualify for refundable tax credits, they can reduce your tax bill even further—sometimes even resulting in extra money back beyond what you initially paid in.