Why Is My Federal Tax Refund So Low This Year?
Understand the key factors that may be affecting your federal tax refund this year, from withholding adjustments to changes in credits, deductions, and income.
Many taxpayers are surprised to find their federal tax refund lower than expected. Refund amounts fluctuate due to changes in tax laws, personal finances, and paycheck withholdings. Even small adjustments can have a noticeable impact.
Withholding Adjustments and Employer Errors
The amount withheld from each paycheck directly affects your refund. If too little is withheld, your refund will shrink or you may even owe taxes. Many taxpayers unintentionally reduce their withholding when adjusting their Form W-4, often after a job change or salary increase. The IRS redesigned the W-4 in 2020, removing personal allowances and requiring taxpayers to estimate deductions and additional income. Miscalculating these amounts can lead to under-withholding.
Employers also impact withholding accuracy. Payroll departments may misinterpret W-4 entries or fail to update settings after a raise or bonus. This is especially common with supplemental income, such as commissions or overtime, which is often taxed at a flat 22% rate. If your total tax liability exceeds what was withheld, your refund will be lower than expected.
Reduced Tax Credits or Deductions
Many taxpayers see smaller refunds because they no longer qualify for certain tax credits or deductions, or the amounts have been reduced. Temporary provisions from previous years may have expired. For example, the expanded Child Tax Credit, which provided up to $3,600 per child in 2021, reverted to $2,000 per child.
Other credits, such as the Earned Income Tax Credit (EITC), fluctuate based on income and filing status. If your earnings increased, you might receive a smaller EITC or lose eligibility entirely. In 2024, the maximum EITC for a taxpayer with one child is $4,213, but the amount decreases as income rises beyond certain thresholds. Similarly, the American Opportunity Credit, which helps offset education expenses, begins to phase out for single filers earning over $80,000 and disappears at $90,000.
Deductions also affect refunds. The standard deduction increases annually due to inflation, but if you previously itemized deductions and now take the standard deduction, you might lose tax benefits. Mortgage interest, state and local taxes (SALT), and medical expenses are only deductible when itemizing. If your total itemized deductions no longer exceed the standard deduction—$14,600 for single filers and $29,200 for married couples filing jointly in 2024—you could see a lower refund.
Changes in Filing Status or Dependents
A change in filing status can significantly alter tax liability and refunds. Marriage, divorce, or the death of a spouse affects how income is taxed. A taxpayer who previously filed as Married Filing Jointly but now files as Single or Head of Household may lose access to lower tax brackets and certain deductions.
Dependents also impact tax benefits. If a child turns 17, they no longer qualify for the Child Tax Credit, dropping from $2,000 to the $500 Credit for Other Dependents. If a dependent moves out or becomes financially independent, they may no longer be claimed, eliminating eligibility for deductions and credits tied to dependents. Taxpayers who alternate claiming children after divorce may see fluctuations in their refund depending on whose year it is to claim the child.
Higher Income Thresholds
An increase in earnings can push taxpayers into a higher tax bracket. The U.S. tax system is progressive, with different portions of income taxed at increasing rates. In 2024, the 22% tax bracket for single filers applies to income between $47,151 and $100,525, while income above $100,525 moves into the 24% bracket. If a raise, bonus, or additional income pushed taxable earnings into a higher bracket, a greater share of income was taxed at a higher rate, reducing the final refund or even resulting in a tax bill.
Investment income also affects refunds. Long-term capital gains tax rates range from 0% to 20%, depending on taxable income, while qualified dividends are taxed at similar rates. If total income exceeded $200,000 for single filers ($250,000 for married couples), the 3.8% Net Investment Income Tax (NIIT) may apply. This surtax affects capital gains, dividends, rental income, and passive business income, increasing overall tax liability.
Outstanding Financial Obligations
Certain debts can reduce or eliminate a tax refund through federal or state offset programs. The Treasury Offset Program (TOP) allows the IRS to redirect refunds to cover unpaid federal student loans, child support arrears, and past-due state income taxes.
Federal student loan collections were paused for several years, but as of 2023, offsets for defaulted loans have resumed. Similarly, unpaid court-ordered child support can result in an intercepted refund. Taxpayers can check for potential offsets by contacting the Bureau of the Fiscal Service or reviewing IRS notices before filing.
Underpayment Penalties
If too little tax was paid throughout the year, the IRS may impose underpayment penalties, further reducing any refund. Taxpayers must pay at least 90% of their current year’s tax liability or 100% of the prior year’s liability (110% for higher-income individuals) through withholding or estimated payments. Falling short of these thresholds results in penalties based on the amount underpaid and the duration of the shortfall.
Self-employed individuals, gig workers, and those with significant investment income are particularly at risk for underpayment penalties if they do not make sufficient quarterly estimated tax payments. The penalty rate is determined by the federal short-term interest rate plus 3%, fluctuating quarterly. Taxpayers can request a waiver if the underpayment resulted from unusual circumstances, such as a natural disaster, or use the annualized income installment method if income was uneven throughout the year.