Why Am I Getting Less Back in Taxes This Year?

Many taxpayers are noticing a decrease in their tax refunds this year, prompting questions about the underlying reasons. Understanding why refunds might be smaller is essential for financial planning and avoiding unexpected shortfalls.

Revised Withholding Methods

The IRS has updated the withholding tables employers use to calculate federal income tax from employees’ paychecks. These revisions aim to better reflect recent tax law changes, including the Tax Cuts and Jobs Act (TCJA). As a result, taxpayers may have seen more accurate withholding throughout the year, which could lead to smaller refunds or even a balance due at tax time.

Employers now use the updated Form W-4, which emphasizes income, deductions, and credits rather than allowances. This shift requires employees to actively manage their withholding. Those who haven’t updated their W-4 forms to account for changes like marriage or additional income may find discrepancies in their anticipated refund amounts.

Tax Credit Adjustments

Adjustments to tax credits, which directly reduce the amount of tax owed, are affecting refund amounts. For instance, the Child Tax Credit (CTC) has reverted to its pre-expansion level of $2,000 per qualifying child, down from the temporary increase of up to $3,600. This reduction particularly impacts families that relied on the higher credit.

The Earned Income Tax Credit (EITC) has also seen changes in eligibility criteria and credit amounts tied to inflation adjustments. Taxpayers should review these criteria annually, as even small changes can alter their tax liability and refund.

The American Opportunity Tax Credit (AOTC), which offsets educational expenses, remains valuable. However, phaseout thresholds for higher-income taxpayers have shifted, potentially reducing the credit for those whose incomes exceed the updated limits. Understanding income levels and credit eligibility is critical for taxpayers looking to maximize benefits.

Changes in Deduction Thresholds

Shifts in deduction thresholds are influencing taxpayers’ strategies for optimizing tax efficiency. The standard deduction has increased to account for inflation, reaching $14,000 for single filers and $27,800 for married couples filing jointly for the 2024 tax year. These changes can affect whether taxpayers choose to itemize deductions or take the standard deduction.

Itemized deductions, including the $10,000 cap on state and local tax (SALT) deductions, require careful consideration. Mortgage interest deductions, which are subject to limits based on the mortgage acquisition date, also need attention to ensure compliance and efficiency.

Charitable contributions are another area where deduction strategies must be recalibrated. With the expiration of the temporary allowance for cash contributions up to 100% of adjusted gross income (AGI), taxpayers can now deduct up to 60% of their AGI for cash donations to qualifying charities.

Filing Status Shifts

Filing status plays a significant role in determining tax liability and refund amounts. The choice between filing as single, married filing jointly, married filing separately, head of household, or qualifying widow(er) affects tax rates, the standard deduction, and eligibility for credits and deductions. For example, married filing jointly often provides the most favorable tax rates and highest standard deduction but may not be advantageous if one spouse has significant deductions or credits that could be lost.

Life changes such as marriage, divorce, or the death of a spouse necessitate reevaluating filing status. For instance, a recently divorced taxpayer with a dependent child might benefit from filing as head of household rather than single.

Additional Income Sources

Increased income from various sources can impact tax refunds, particularly if that income isn’t subject to withholding or is taxed at a different rate. Taxpayers with additional earnings from side gigs, freelance work, or investments may face higher tax liabilities or enter a higher tax bracket. Self-employment income, for instance, is subject to both income tax and a self-employment tax rate of 15.3% to cover Social Security and Medicare.

Investment income, including capital gains, dividends, and interest, also affects tax liability. Short-term capital gains are taxed at ordinary income rates, while long-term gains benefit from lower rates. High earners with modified adjusted gross income (MAGI) above $200,000 (or $250,000 for married couples filing jointly) are also subject to the 3.8% Net Investment Income Tax (NIIT).

Other income sources, such as rental income or withdrawals from retirement accounts, add complexity. For example, distributions from traditional IRAs or 401(k)s are taxed as ordinary income, which can increase tax rates or lead to phaseouts for certain deductions and credits.

Phaseouts for Certain Tax Benefits

Income phaseouts for tax benefits can reduce refunds, especially for taxpayers whose earnings have increased. Many credits and deductions have income limits that phase out eligibility as income rises. For instance, the Child Tax Credit begins to phase out for single filers with MAGI above $200,000 and married couples filing jointly above $400,000, reducing the credit by $50 for every $1,000 of income over the limit.

Similarly, deductions for contributions to traditional IRAs phase out for individuals covered by workplace retirement plans and earning above certain thresholds. For 2023, the phaseout range is $73,000 to $83,000 for single filers and $116,000 to $136,000 for married couples filing jointly if only one spouse is covered.

Education-related benefits like the Lifetime Learning Credit also have income phaseouts. For 2023, the credit phases out for single filers with MAGI between $80,000 and $90,000, and for married couples filing jointly between $160,000 and $180,000. Taxpayers must monitor phaseouts carefully to understand how rising income affects their overall tax situation.