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  • Nick Burgess

Why Is My Tax Return So Low? A Comprehensive Guide

The following article is for entertainment and educational purposes only, and should not be considered financial advice. Please contact a licensed financial professional for individual advice. Some links below may be affiliate links that generate a small commission for the site at no added cost to you.


A Guide To Low Tax Returns

Tax season is like the NBA playoffs for your finances; some folks come out on top with a big win, while others are left wondering where things went wrong. This year, a lot of people are scratching their heads, asking, "Why is my tax return so low?" As your friendly neighborhood chief tax information officer (well, in spirit, anyway), I'm here to break it down for you. Now that filing season is officially over, let's hand out some post-season awards.

a blue "taxes" against a digital background with a human finger reaching out to touch it

First off, understanding the mechanics behind your tax refund is crucial. Think of your refund as the end-of-season bonus. It's not about how much you earn but how well you've played the tax game. If your refund size took a hit this year, it could be due to several factors, including changes in tax brackets, a higher tax bracket, or variations in tax credits from the previous year.

The Starting Lineup: Tax Basics

Every tax filer's situation is unique, but let's look at the usual suspects for a lower tax refund. The Internal Revenue Service (IRS) sets the stage with tax forms, tax brackets, and tax rates. Your taxable income, filing status, and eligibility for tax credits like the Earned Income Tax Credit or the Additional Child Tax Credit play key roles in determining your tax liability and, subsequently, your refund amount.

Last Year vs. This Tax Year: What Changed?

The average tax refund can fluctuate for several reasons. Mark Steber, Jackson Hewitt's sage-like chief tax information officer, points out that changes in federal taxes, such as adjustments to the standard deduction or the disappearance of one-time benefits like stimulus checks, can significantly impact your refund. For instance, the expanded child tax credit and the recovery rebate credit gave families bigger refunds in the previous tax year. Without these boosts, your refund might look a bit slimmer.

A Closer Look at Key Players

Tax Credits: These are the MVPs for reducing your tax liability. Credits like the dependent care credit and the Earned Income Tax Credit can lead to bigger refunds, especially for low-income families. However, if you earned more this year or your life situation changed (say, a new job or a dependent aging out), you might not qualify for as much credit, leading to a smaller tax refund.

Tax Brackets and Rates: Moving to a higher tax bracket because you've scored some extra money (whether from a side hustle, a new job, or capital gains in the stock market) means you're playing at a higher rate, which can also result in a smaller refund.

Withholdings and Estimated Payments: If you've started freelancing or engaging in side gigs, managing your quarterly self-employment taxes is crucial. Underestimating these payments or not adjusting your Form W-4 for regular paychecks can lead to an unexpected tax bill or a lower refund.

One-Time Factors: Don't forget about one-off factors like severance payments, unemployment benefits (taxed differently last year due to COVID-19 relief measures), or even owing child support, which can affect your refund via the Treasury Offset Program.

Strategies for Next Season 

So, what's the best way to ensure a bigger tax refund next year? Here are some tactics:

Adjust Your Withholdings: Think of your tax withholdings as your defensive strategy. You want to prevent the IRS from holding onto too much of your money throughout the year. Adjusting your Form W-4 with your employer ensures that you're not giving the federal government an interest-free loan.

Maximize Deductions and Credits: Keep an eye on eligible tax breaks. Whether it's through charitable donations, investing in electric vehicles, or deducting student loan interest, there are numerous ways to lower your taxable income and enhance your refund.

Plan for Side Gigs: If you've got a side hustle, make sure you're setting aside enough for taxes. Paying quarterly self-employment taxes can prevent a smaller refund or a tax bill come tax day.

The Final Whistle

Remember, while a smaller tax refund might feel like a loss, it could also mean you've optimized your tax situation, keeping more money in your pocket throughout the year. High inflation and changes in tax provisions constantly shift the playing field. The key is staying informed and making adjustments as needed.Whether you're aiming for bigger refunds or just trying to navigate the complexities of the tax code, expert advice from tax professionals at H&R Block or Jackson Hewitt can provide a strong start. And, of course, keeping a close eye on IRS data and resources can help you understand your tax situation better. So, as we wrap up this tax season and look towards the next, remember that with the right strategy and a bit of expert advice, you can turn next year's tax season into a championship run for your finances.


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