Why Is My Tax Return Lower Than Last Year?

A smaller tax refund can be frustrating, especially if you were expecting a similar amount to last year. Tax laws change regularly, and even small adjustments in income, deductions, or credits can impact your final refund. Understanding why your return is lower can help you plan better for next year and avoid surprises.

Adjusted Tax Brackets

Each year, the IRS adjusts tax brackets for inflation, which can affect how much tax is withheld from your paycheck. For 2024, the brackets increased slightly, meaning more of your income may have been taxed at a lower rate. While this reduces your overall tax burden, it can also lower the amount withheld from your paycheck, leading to a smaller refund.

For example, if you earned $50,000 in both 2023 and 2024, more of your income may have been taxed at a lower rate in 2024. This means less tax was withheld from each paycheck, effectively spreading your refund throughout the year in the form of slightly higher take-home pay. Many taxpayers don’t notice these small increases until they see a lower refund.

The standard deduction also increased for 2024—$14,600 for single filers and $29,200 for married couples filing jointly—reducing taxable income. While this benefits most taxpayers, it can also result in less tax being withheld. If you previously itemized deductions but now take the higher standard deduction, the change in withholding calculations could further impact your final refund.

Reduced Credits or Deductions

Tax credits and deductions directly affect the amount of tax owed, and any reductions can lead to a lower refund. Some credits phase out as income increases, while others change due to new legislation.

The Child Tax Credit (CTC) remains at a maximum of $2,000 per qualifying child for 2024, but only $1,600 is refundable. If you previously received a larger refundable portion, this adjustment could explain a smaller refund. Income limits for the Earned Income Tax Credit (EITC) and the Saver’s Credit have also been updated, which may reduce eligibility or the amount received.

Deductions have also shifted, particularly for those who itemize. The medical expense deduction threshold remains at 7.5% of adjusted gross income (AGI), but if your medical costs were lower in 2024, you may not have exceeded this threshold. The deduction for state and local taxes (SALT) is still capped at $10,000, limiting the benefit for taxpayers in high-tax states. Additionally, if you’ve paid down your mortgage or refinanced at a lower rate, you may have paid less interest, reducing your mortgage interest deduction.

Withholding Changes

The amount of tax withheld from each paycheck plays a major role in whether you receive a refund or owe money at tax time. If your refund is smaller this year, it could be due to adjustments in withholding, either from employer changes, IRS updates, or modifications you made to your W-4 form.

Employers use IRS withholding tables to determine how much tax to deduct from wages. These tables are updated periodically to reflect tax law changes and inflation. If your employer adopted new withholding calculations that reduced the amount taken out of each paycheck, you may have received more money throughout the year instead of as a lump sum refund.

If you switched jobs or your company changed payroll providers, your withholding may have changed as well. Some employers default to standard withholding settings unless employees adjust them. If your previous employer withheld at a higher rate and your new one applies a lower rate, this could explain a smaller refund.

Filing Status Variations

Your filing status affects tax rates, standard deductions, and eligibility for various benefits. If your status changed—due to marriage, divorce, or other life events—it could impact your refund.

For example, switching from “Married Filing Jointly” to “Single” or “Head of Household” after a separation may result in a higher tax burden if your income remains similar but you lose access to beneficial tax brackets or deductions. The Head of Household status offers better tax rates than Single filers, but you must meet strict qualifications, including maintaining a home for a dependent.

Marriage can also lead to withholding discrepancies if both spouses work. The IRS tax tables assume a single-income household when calculating withholding, so two working spouses may find themselves under-withheld unless they adjust their W-4 forms. This can reduce the likelihood of a large refund, especially if both partners earn similar incomes, pushing them into a higher tax bracket.

Income from New Sources

Changes in income sources can significantly impact your tax return, even if your overall earnings remain similar. Different types of income are taxed at varying rates, and some may not have taxes withheld at the same rate as traditional wages.

Self-employment income, freelance work, or gig economy earnings are subject to self-employment tax, which covers Social Security and Medicare contributions. Unlike W-2 wages, these earnings typically do not have taxes withheld automatically, requiring individuals to make estimated tax payments throughout the year. If these payments were insufficient, it could result in a lower refund or even a tax bill.

Investment income, such as dividends, capital gains, or rental income, can also affect tax liability. Long-term capital gains are taxed at preferential rates, but short-term gains are taxed as ordinary income, potentially pushing taxpayers into a higher bracket. Additionally, taxable interest from savings accounts or bonds may increase overall tax obligations.

Unemployment benefits are considered taxable income, and if taxes were not withheld, they can reduce a refund. Some taxpayers opt out of withholding on unemployment payments, assuming their overall tax burden will be low, only to find that they owe more than expected when filing. Similarly, distributions from retirement accounts, such as a 401(k) or IRA, may be subject to income tax, and early withdrawals before age 59½ can incur an additional 10% penalty.

Repayment of Prior Liabilities

If you owed taxes in a previous year and set up a payment plan with the IRS, any refund you were expecting this year may have been applied toward that outstanding balance. The IRS can offset refunds to cover unpaid federal or state taxes, student loans in default, or past-due child support.

Taxpayers enrolled in an installment agreement may not realize that any future refunds are automatically applied to their remaining balance. This can be frustrating, especially if you were counting on the refund for other expenses, but it does reduce the total amount owed.

State tax agencies can also intercept refunds to cover unpaid state taxes or other government debts. If you received a notice from the Treasury Offset Program (TOP), it means your refund was used to satisfy an outstanding obligation. Checking your tax transcripts or contacting the IRS can clarify whether an offset occurred and help you plan for future tax years to avoid unexpected reductions in your refund.