Wait…Why Is My Refund Even Smaller This Year?
Welcome to ‘Tax Time Talk’—a special series where we break down tax season topics in a way that makes sense!
In my last Tax Time Talk post, I explained why tax refunds aren’t really a bonus—they’re just the result of how much tax you’ve already paid versus what you actually owe. But this year, many people are noticing that their refunds are even smaller than before, and they’re wondering why.
If you’re in that boat, don’t panic! Refunds fluctuate for a few key reasons, and in this post, I’ll break down why your refund may have shrunk this year and what you can do about it.
1. Did Your Withholdings Change?
Your tax refund is simply the difference between:
What you paid in taxes throughout the year (via paycheck withholdings or estimated payments)
What you actually owe in taxes
If your employer adjusted your W-4 form, or you changed jobs, your withholdings may have been lower, which means less was taken out of your paycheck for taxes—resulting in a smaller refund.
This issue may be exacerbated when you switch employers during a given year. Your new employer only withholds based on your expected income from the time you start with them to the end of the year. If you started at the beginning or towards the end of the year, your new employer may project you to be in a lower tax bracket than when you bring all of your income sources together, further creating a divide between what you paid and what you owed.
What You Can Do:
Check your paystub’s “Federal Tax Withheld” line to see if less was taken out this year compared to last year.
If needed, submit a new W-4 with your employer to adjust withholdings for next year.
2. Expired or Reduced Tax Credits
Many tax credits change every year, and a reduction in credits could shrink your refund. Here are some major changes that may be affecting yours:
🚫 Child Tax Credit (CTC): In 2021, the CTC was expanded ($3,600 per child). But now, it’s back to the standard $2,000 per child, meaning smaller refunds for parents.
🚫 Earned Income Tax Credit (EITC): If you qualify for this credit, but your income changed slightly, you may have received a lower amount this year.
🚫 No More Stimulus Payments or Recovery Credits: The last few tax seasons included stimulus payments and special tax credits related to COVID-19. Those no longer exist, meaning refunds are lower for many people.
What You Can Do:
If you expect lower credits next year, plan ahead so it doesn’t surprise you again.
Double-check if you qualify for any other deductions or credits that could help!
3. Higher Income = Smaller Refunds
If your income increased this year—even just a little—you may have:
Moved into a higher tax bracket (resulting in more tax owed).
Qualified for fewer tax credits (some credits phase out as income rises).
Even if you made just a few thousand dollars more, it could reduce your refund because of changes in tax brackets and credit eligibility.
What You Can Do:
Look at your Adjusted Gross Income (AGI) on your tax return and compare it to last year.
If your income is rising, consider adjusting your withholdings so you don’t get caught off guard.
4. No More Extra Withholding from Side Jobs or Bonuses
If you had extra tax withheld last year from a side job, bonus, or freelance work, that could have inflated your refund previously. If that extra withholding didn’t happen this year, it could explain why your refund looks smaller.
What You Can Do:
If you have side income, make sure you’re setting aside money for taxes.
Consider making estimated tax payments if needed.
What If You Owe Instead of Getting a Refund?
If your refund is way lower than expected—or you owe taxes instead—don’t panic! Here’s how to handle it:
File early so you have time to prepare.
Adjust your withholdings for next year (update your W-4).
Set up a payment plan with the IRS if you owe and can’t pay it all at once.
Final Thoughts: Tax Refunds Are Changing—Stay Informed!
If your refund is smaller this year, chances are it’s due to changes in withholdings, credits, or income. The best way to avoid surprises next year is to stay proactive, review your tax situation, and plan ahead.
Next Up in Tax Time Talk: We’ll break down tax credits—how they impact your refund and why refundable credits can give you money back even if you don’t owe taxes! Stay tuned!
Did your refund shrink? Let’s discuss! Drop your thoughts in the comments!
