Why is My Tax Refund So Low

Taxpayers will receive a tax refund when the total taxes withheld exceeds their tax bill. Even though this is what determines your tax refund the most, there are other things that go into it. Although it doesn’t apply to everyone, you may receive a lower tax refund after the loss of certain deductions or credits.

If you were to lose a hefty deduction or a credit you claimed in previous years and no longer eligible for it, as a result of that you may receive a lower tax refund. The deductions you claim don’t have a direct effect on your tax bill but to your taxable income. Since your tax bill is calculated on your taxable income or AGI, a higher AGI will result in a bigger tax bill. Therefore, shriveling your tax refund.

Also, on your W-4 you may have claimed allowances based on the number of qualifying children you have for the CTC. Due to eligibility reasons at some point, you will not be able to claim the Child Tax Credit. This credit has a refundable amount of $1,400 which adds up to your existing tax refund. This or any other tax credit can have a huge impact on your refund.

There are also many other reasons why your tax refund is so low this year. Here are the common reasons why taxpayers were shocked to see such a low tax refund.

Reasons for a Small Tax Refund

You can have a low tax refund because of many things. On top of the chart, there will be your tax withholding which we dive into below. Another common reason is losing eligibility to claim certain deductions and credits.

This applies to taxpayers who itemize so well because of qualifications for certain itemized deductions change constantly.

Tax Credits and Deductions

Losing eligibility to claim any deduction or credit will increase your tax bill. It is best to compare your tax returns in recent years to see what went wrong this year.

For this, you can request a copy of your tax return by filling out Form 4506. Keep in mind that you will have to pay a $50 fee for each return that you request. If you’ve filed your taxes with tax software like TurboTax, don’t request a tax return transcript. Instead, log in to your tax software account and look up your tax returns.

As far as any tax software is concerned, you shouldn’t pay a dime for your previously filed tax returns.

Taxes Withheld

If you withheld less for your 2024 taxes, there is no doubt that you will receive a low tax refund or owe the IRS. This may not be because of how you filed the tax withholding Form W-4 though. The Internal Revenue Service (IRS) is trying to more closely match the amount withheld from your paycheck to your anticipated tax bill.

Assuming you completed the 2023 or 2024 version of Form W-4, claiming more allowances than necessary could result in this. Especially when your marital status has changed, had children that qualified for certain credits but no longer eligible, and similar life events can have an impact on your taxes withheld.

All and all, besides deductions and credits, how much tax you withheld will play the most of the role on your tax refund. If you received a low tax refund this year, take a look at your W-4. Need to fill out a new W-4? Make sure to complete Form W-4 more accurately.

See our Form W-4 guide on how you can maximize tax refund or withhold enough tax by reading our Form W-4 instructions here.

Increased Taxable Income (AGI)

An increased income doesn’t always mean you will withhold a higher tax. Keeping the same W-4 when you had a raise can result in not enough taxes being withheld. Most people who got promotions don’t really fill out a new W-4 in thinking that everything is going to be adjusted automatically. This is farther from the truth.

With the increase in income when you have dependents, you may need to complete a new Form W-4. Especially if you’ve entered any amount on the extra tax you want it to be withheld. In similar cases like this, fill out a new Form W-4 to have more accurate withholding.