Many taxpayers were surprised to see a smaller refund when filing their most recent federal income tax return. This isn’t necessarily due to a mistake or miscalculation, it often results from changes in income, tax laws, economic circumstances, or how taxes were paid throughout the year.
Getting a refund means you overpaid taxes during the tax year, typically through paycheck withholdings or estimated payments. The IRS then returns the excess amount when you file. If your financial or employment situation changed during the year, it could easily alter the balance between what you paid and what you owed. This series takes a closer look at how your income and the broader economy may have affected your refund in 2024.
The Basics of Tax Refunds
A tax refund is not a bonus or extra money gifted by the government, it’s the amount by which your tax payments exceed your actual tax liability. Each paycheck usually has a portion withheld for federal taxes. If the total withheld exceeds what you owed for the year after accounting for deductions and credits, the IRS issues a refund.
Refunds can also result from refundable credits. These are unique because they can generate a refund even if you owe no taxes. For instance, if you qualify for a refundable credit worth more than your tax bill, the difference is refunded to you. Understanding this foundation is key to figuring out why your refund amount may have changed. As we’ll explore next, both personal and external factors can lead to a lower refund.
Changes in Your Income
Your income is one of the biggest variables that influence your tax refund. Even relatively small changes in earnings can move you into a different tax bracket or disqualify you from credits you previously relied on.
Higher Salary Without Updated Withholding
A raise is a good thing, but if you didn’t adjust your Form W-4 after getting one, your employer may have continued withholding taxes at a lower rate than necessary. As a result, less tax was paid throughout the year, which could mean you didn’t overpay enough to receive a substantial refund—or you may even owe money.
Increased income can also affect your eligibility for certain credits. For example, higher earnings might phase you out of tax benefits like the Earned Income Tax Credit or the Child Tax Credit. This reduction in credits often translates into a smaller refund or an unexpected tax bill.
Side Income or Self-Employment
Many people supplement their income through freelance work, consulting, or gig economy jobs. Unlike regular employment, this type of income does not come with automatic tax withholding. If you didn’t make estimated tax payments or increase your primary job’s withholding to cover this additional income, your refund would naturally shrink.
In some cases, taxpayers rely on the excess withheld from their main job to cover taxes on their side income. But if that amount is insufficient, the IRS will use your refund to cover the shortfall, reducing or even eliminating the amount returned to you.
Dual-Income Households
Changes in household income can also create tax surprises. If your spouse started working or took on a higher-paying role, your combined income may push you into a higher marginal tax bracket. This can reduce your eligibility for deductions and credits, ultimately shrinking your refund.
Sometimes, the issue is not higher income but the timing of income. If one spouse earns a seasonal or variable income, it can be harder to estimate taxes accurately, making it more likely you’ll underpay during the year and receive a smaller refund.
Employment Changes
Your refund can also be affected by changes to your employment situation, especially if they result in nonstandard types of income.
Severance Pay and Bonuses
If you were laid off and received a severance package, that money counts as taxable income. Many severance agreements do not have adequate tax withholding, meaning they can unexpectedly increase your total income for the year. This could result in a higher tax liability, reducing your refund or increasing the amount owed.
Bonuses work in a similar way. They are taxed as ordinary income and may push you into a higher tax bracket if you receive a large bonus at the end of the year. The withholding on bonuses is often at a flat rate, which may be too low for your situation.
Unemployment Benefits
Unemployment income is also taxable. In past years, temporary provisions excluded a portion of unemployment benefits from federal taxes, but those exclusions have since expired. If you collected unemployment and did not opt for voluntary withholding, you may have underpaid taxes for the year. This shortfall will reduce or eliminate your refund.
Role of Economic Conditions
Even if your income remained stable, broader economic trends could still impact your refund. Inflation, interest rates, and market volatility all have a role to play.
Inflation and Static Tax Provisions
The IRS adjusts many tax parameters for inflation, such as standard deductions and tax brackets. These adjustments are meant to prevent taxpayers from paying more simply because of rising wages. However, not all parts of the tax code are updated in the same way.
A notable example is the capital loss deduction limit. Taxpayers with investment losses can offset capital gains and deduct up to $3,000 per year against ordinary income. This limit has remained unchanged for years, despite inflation and increased market activity. If you had significant investment losses in 2024, you may not be able to deduct all of them, limiting your ability to reduce your taxable income.
Investment Income and Capital Gains
In times of economic uncertainty, many individuals are forced to sell investments to cover expenses. If you sold stocks, mutual funds, or cryptocurrency and made a profit, those gains are subject to capital gains tax. Short-term gains (on assets held for one year or less) are taxed at ordinary income rates, while long-term gains are taxed at reduced rates depending on your income.
Selling investments at a gain increases your taxable income and may bump you into a higher tax bracket or reduce your eligibility for certain credits. This effect can be subtle but impactful when it comes time to calculate your refund.
Real Estate and Property Sales
If you sold property in 2024, even your primary residence, it could affect your refund. The IRS allows exclusions on capital gains from the sale of a home, but only if you meet specific conditions. If you didn’t live in the home for at least two of the last five years or if your gains exceeded the exclusion limits, part of the profit is taxable.
Like other gains, this income can increase your tax liability, reduce your overpayments, and leave you with a smaller refund than anticipated.
Impact of Withholding and Estimated Payments
A key factor that influences your refund is how accurately your withholding matches your final tax liability. Withholding too little leads to a tax bill, while withholding too much results in a refund. But changes in income, household size, or deductions can throw off this balance.
Outdated Withholding Forms
Many taxpayers never update their Form W-4 after starting a job. If your personal or financial situation changes, that original form may no longer reflect how much tax you should be paying. For example, if you originally filed as single but later got married or had children, the default withholding may no longer suit your needs.
Updating your W-4 can help you avoid both underpayment penalties and disappointing refunds. The form allows you to adjust withholding by claiming dependents, entering other sources of income, and even specifying an additional amount to withhold from each paycheck.
Missing or Late Estimated Payments
Self-employed individuals, gig workers, and those with irregular income often need to make quarterly estimated payments to the IRS. If these payments are missed or underpaid, the IRS may assess penalties and apply any expected refund toward the tax due.
The same principle applies to taxpayers who earn interest, dividends, rental income, or other forms of income that aren’t subject to withholding. Without proper planning, these earnings can reduce or eliminate any refund you thought you were getting.
Credits and Deductions That May Have Changed
Taxpayers often rely on credits and deductions to boost their refunds. But eligibility for many of these tax breaks is tied to income levels, dependents, and filing status. If any of these changed in 2024, your refund may have taken a hit.
Loss of Dependents
If your child turns 18 or no longer qualifies for the Child Tax Credit due to age or support rules, you will not be able to claim this benefit anymore. The loss of this credit alone can reduce your refund by up to $2,000 per child. In addition, the phaseout range for this credit is based on income, so even modest earnings increases can affect how much you receive.
Changes in Credit Eligibility
Some credits, like the Earned Income Tax Credit or Saver’s Credit, are specifically designed for low- to moderate-income households. If your income went up in 2024, you may have become ineligible or qualified for a smaller amount. Even without realizing it, this change can significantly reduce the refund you expected.
Smart Strategies to Boost Your Refund
If you found yourself disappointed by a smaller tax refund this year, you may be wondering what you can do to change the outcome next time. The good news is that there are plenty of proactive steps you can take to increase your refund or reduce your tax liability.
These strategies involve knowing which tax credits apply to you, using deductions to lower taxable income, timing contributions wisely, and adjusting your withholding to better match your tax situation. We explored practical ways to improve your refund moving forward by making informed decisions throughout the year and during tax season.
Knowing Which Credits You Qualify For
Tax credits can significantly increase your refund, especially if they are refundable. Understanding which ones you may qualify for—and how life changes affect your eligibility—is one of the most powerful tools available to you.
Earned Income Tax Credit
The Earned Income Tax Credit is a refundable credit designed to benefit low- to moderate-income earners. Eligibility is based on income, filing status, and number of qualifying children. The credit amount increases with each additional qualifying child but is also available to some filers without children.
Because it is refundable, this credit can give you money back even if you don’t owe taxes. However, the income limits for eligibility are strict and phase out as your income rises. If you received this credit in previous years but had a raise or additional household income in 2024, you may not have qualified this time. On the other hand, if your income dropped or your family size increased, you might now be eligible when you weren’t before.
Child Tax Credit
The Child Tax Credit is another major factor affecting refunds. It provides a per-child benefit for children under the age of 17, subject to income thresholds. This credit was temporarily increased in prior years but has since returned to pre-pandemic levels.
If your child aged out of eligibility or your income increased beyond the phaseout threshold, your refund would naturally be smaller. Conversely, if you added a new dependent or saw your income drop, your eligibility for this credit may increase.
Education Credits
If you or your dependent paid qualified education expenses in 2024, you may be eligible for education-related credits. The American Opportunity Credit and the Lifetime Learning Credit are the most common. These credits can reduce the amount of tax you owe or, in the case of the American Opportunity Credit, increase your refund if you qualify for the refundable portion.
Make sure to claim tuition, required fees, and other qualified education expenses when filing. Even part-time students may qualify, provided the educational institution is accredited.
Energy and Vehicle Credits
There have been several updates to credits available for environmentally friendly purchases. If you purchased a qualified electric vehicle in 2024, you may be entitled to a tax credit, depending on the make, model, and your income. Additionally, credits for installing solar panels or making energy-efficient home improvements can also reduce your tax bill or increase your refund.
These credits are sometimes nonrefundable, meaning they can only reduce the amount of tax you owe to zero, but not below. Still, they are worth pursuing if you’ve made qualifying purchases.
Making Pre-Tax Contributions to Lower Taxable Income
Another way to increase your refund is by reducing your taxable income through contributions to qualified accounts. These include retirement accounts and health savings accounts, which offer tax-deferred benefits.
Traditional IRA Contributions
Contributing to a traditional IRA can reduce your taxable income, potentially lowering your tax bracket or increasing the number of credits you qualify for. For tax year 2024, you can contribute up to $7,000 if you’re under age 50, and up to $8,000 if you’re 50 or older.
Whether your contribution is fully deductible depends on your income and whether you or your spouse are covered by a workplace retirement plan. Even if you aren’t eligible for a full deduction, a partial deduction can still lower your tax burden.
You have until the tax filing deadline, typically April 15 of the following year, to make IRA contributions for the prior year. This means you can make a 2024 contribution all the way up until April 15, 2025, and still count it on your 2024 return.
Health Savings Accounts
If you’re enrolled in a high-deductible health plan, contributing to a Health Savings Account can yield significant tax advantages. For 2024, the contribution limits are $4,150 for individuals and $7,750 for families. An additional $1,000 can be contributed if you are 55 or older.
HSA contributions are deductible, reduce your taxable income, and grow tax-free. Withdrawals used for qualified medical expenses are also tax-free, making HSAs one of the most powerful tax tools available.
Employer-Sponsored Retirement Plans
If your employer offers a 401(k) or similar retirement plan, contributing to it reduces your taxable income directly through payroll deductions. For 2024, you can contribute up to $23,000 if under age 50, and $30,500 if age 50 or older. Increasing your contributions not only supports your retirement goals but also reduces the income on which you are taxed.
Many people are unaware that increasing these contributions—even late in the year—can improve their tax position. Consider reviewing your year-end pay stubs to estimate how close you are to the annual limit and adjust accordingly.
Timing Income and Expenses
Strategic timing of income and expenses can make a notable difference in your refund, especially if you’re near a tax bracket threshold or are borderline for credit eligibility.
Deferring Income
If you’re self-employed or receive a year-end bonus, you may be able to defer some income into the next year. For example, delaying client invoicing from December to January shifts that income to the next tax year, lowering your current year’s taxable income.
This method is most effective if your income fluctuates or you expect to be in a lower tax bracket next year. However, it should be used carefully, especially if delaying income would affect cash flow or eligibility for financial aid or loan applications.
Accelerating Deductions
On the flip side, if you can accelerate deductible expenses into the current year, you may benefit by reducing your taxable income. Examples include making an extra mortgage payment, paying property taxes early, or making charitable donations before year-end.
Keep in mind that to itemize deductions, your total itemized amount must exceed the standard deduction, which for 2024 is $14,600 for single filers and $29,200 for married filing jointly. If your itemized deductions fall short of these thresholds, accelerating deductions may not have the desired effect.
Optimizing Withholding and Estimated Payments
Your tax refund is directly tied to the accuracy of your withholding and any estimated tax payments made throughout the year. The more closely your payments match your tax liability, the smaller your refund or bill will be. However, if you’re seeking a larger refund as a form of forced savings, strategic withholding adjustments can help.
Updating Your Form W-4
If your financial circumstances changed in 2024 and you didn’t adjust your Form W-4 with your employer, it may have led to inaccurate withholding. The W-4 allows you to claim dependents, include multiple sources of income, and add extra withholding amounts.
The IRS provides an online withholding estimator that can help you fill out your W-4 accurately. Regularly reviewing and updating this form can help ensure the right amount is being withheld, which reduces surprises at tax time.
Making Estimated Tax Payments
If you receive income not subject to withholding—such as self-employment earnings, rental income, or investment gains—you’re generally expected to make quarterly estimated tax payments. Failing to make these payments may result in underpayment penalties, and the IRS will apply your refund toward any outstanding liability.
By making timely estimated payments, you can avoid penalties and reduce the risk of an unexpectedly small refund. Use IRS Form 1040-ES to calculate and submit these payments throughout the year.
Utilizing Capital Losses Effectively
If you sold investments for a loss during the year, you can use those losses to reduce your taxable income and increase your refund potential.
Offsetting Gains
Capital losses can be used to offset capital gains in full. If you had gains from one investment and losses from another, subtracting the losses from the gains reduces your overall taxable profit. This not only reduces the amount of tax owed on gains but also may push you into a more favorable tax bracket.
Deducting Losses Against Ordinary Income
If your total capital losses exceed your capital gains, you can use up to $3,000 of those losses to offset ordinary income. This includes wages, self-employment income, and other taxable earnings. Any unused losses can be carried forward to future years until fully utilized.
Many taxpayers forget to report losses from cryptocurrency sales or short-term stock positions. Including these losses can make a noticeable difference in your final tax calculation.
Long-Term Strategies to Improve Future Refunds
Receiving a smaller tax refund than expected can be frustrating, especially when you’ve relied on that money for large expenses, savings, or debt repayment. However, treating your refund as a financial planning tool—rather than a once-a-year surprise—can lead to better outcomes next time you file. Effective long-term strategies don’t just improve refund amounts; they help you avoid underpayment penalties and reduce your overall tax burden.
This article outlines key practices that go beyond quick fixes, covering year-round planning, adjustments based on life events, tax-efficient savings, and preparation techniques to help you enter the next tax season with confidence.
Reviewing Your Tax Situation Annually
One of the most important things you can do to improve your future refunds is to schedule an annual review of your tax profile. Your income, deductions, credits, and filing status can all change over time, and regular review helps ensure that your tax withholding and estimated payments align with your financial reality.
Income and Withholding Reassessment
Each time your income changes, whether due to a raise, job change, or side income, your tax situation is affected. A common mistake is to increase income but leave withholding rates the same. If too little is withheld, you risk a tax bill. If too much is withheld, you’re essentially giving the government an interest-free loan.
Revisiting your withholding annually allows you to make strategic adjustments that either increase your refund or give you more take-home pay during the year. Consider using a withholding estimator tool in the early part of the year, when there’s still time to make corrections before the next filing season.
Accounting for Investment and Passive Income
Investment income—such as dividends, interest, and capital gains—is often overlooked during tax planning. Yet, this income can significantly affect your tax liability. Passive income sources like rental properties, royalties, and business dividends should also be factored into your planning.
If these income streams are growing, be proactive about adjusting your estimated payments or payroll withholding. Remember that even small capital gains can push you over certain credit thresholds, reduce deductions, or increase Medicare surtaxes.
Planning for Life Events
Major life events can dramatically change your tax profile. Failing to account for these changes ahead of time may result in unexpected outcomes when you file.
Marriage or Divorce
Getting married or divorced has a direct impact on your filing status, tax brackets, and eligibility for credits. If you get married and both spouses work, your combined income may place you in a higher bracket, sometimes called the marriage penalty. Filing jointly can result in a lower tax rate, but it can also reduce or eliminate some credits if your income exceeds the allowed threshold.
After a divorce, you may need to shift to head-of-household or single filing status. You should also clarify who will claim dependents and any applicable credits to avoid IRS issues. Whenever your marital status changes, revisit your Form W-4 with your employer to ensure proper withholding.
Adding or Losing Dependents
Having a child, adopting, or taking care of an aging parent can make you eligible for tax credits and dependent exemptions. Likewise, if a child ages out of eligibility or moves out, you may no longer qualify for certain credits like the Child Tax Credit or education credits.
Keep records of dependents’ support levels, health insurance coverage, and school enrollment if they are students. The IRS may require documentation, and advanced planning can prevent refund delays or audit concerns.
Buying or Selling a Home
Homeownership can open up deductions for mortgage interest and property taxes, while also triggering capital gains considerations if you sell. To qualify for the home sale exclusion, you must meet both the ownership and residency tests. If you do not qualify, any gain on the sale of your primary residence could increase your tax liability.
Track all home improvements, as these can increase your basis and reduce taxable gains upon sale. Also review escrow statements at year-end, which often contain deductible property tax payments you can include when itemizing.
Using Tax-Advantaged Accounts Effectively
Long-term financial planning should always involve the use of tax-advantaged accounts. These accounts not only help with retirement, healthcare, or education savings, but they also offer immediate tax benefits that may improve your refund or lower your balance due.
Retirement Contributions
Maximizing contributions to retirement accounts is one of the most effective ways to reduce taxable income. Traditional IRAs, 401(k)s, 403(b)s, and similar plans allow for pre-tax contributions, which lower your taxable income for the year.
Self-employed individuals can contribute to SEP IRAs or solo 401(k) plans, which have higher contribution limits than traditional IRAs. These plans allow significant income deferral, especially useful if your business had an unusually profitable year. Ensure your contributions are properly recorded, especially if you contribute after December but before the tax filing deadline, as these late contributions can still apply to the previous tax year.
Health Savings Accounts
Health Savings Accounts provide a triple tax advantage: contributions are deductible, growth is tax-free, and withdrawals for qualified expenses are tax-exempt. If you’re enrolled in a high-deductible health plan, using an HSA not only helps with medical expenses but can reduce your tax bill significantly.
Unlike flexible spending accounts, HSA balances roll over indefinitely, allowing you to build up a reserve for future healthcare needs. Consider maximizing your contributions by year-end or before the tax filing deadline to capture the deduction.
Education Savings Plans
Though not deductible on federal returns, contributions to 529 education savings plans may offer state tax deductions or credits. These plans grow tax-free and can be withdrawn tax-free when used for qualified education expenses.
Using a 529 plan can help lower your state tax liability and allow you to grow savings more efficiently. Keep track of contribution limits and avoid making excess contributions that could result in penalties or taxes.
Organizing and Tracking Tax Documents
Even the most sophisticated tax planning is only as good as the recordkeeping that supports it. Organizing tax documents throughout the year can save time, reduce errors, and ensure you don’t miss deductions or credits that you’re eligible to claim.
Setting Up a Tax Filing System
Create a dedicated space—physical or digital—where you collect documents like W-2s, 1099s, mortgage interest statements, property tax receipts, medical bills, and charitable donation receipts. Categorizing documents as you receive them avoids the rush to gather everything during tax season.
Use a spreadsheet or tax journal to record major transactions, including investment sales, business purchases, estimated payments, and any relevant notes about eligibility for credits.
Documenting Deductible Expenses
Deductions can reduce your taxable income significantly, but they require accurate documentation. Maintain records of deductible expenses such as student loan interest, tuition payments, unreimbursed medical expenses, qualified charitable contributions, and business expenses.
For charitable giving, save receipts, acknowledgment letters, or bank records that show proof of donation. Non-cash contributions require fair market value documentation and may need additional forms, such as Form 8283, if the value exceeds certain thresholds.
Monitoring Estimated Payments and Refund Applications
If you make quarterly estimated payments or apply for a prior year’s refund toward this year’s taxes, keep clear records. Misreporting these amounts is a common reason for IRS adjustments or refund delays.
Reconcile payments against IRS records regularly to catch discrepancies early. Many taxpayers overpay estimated taxes to avoid penalties but then forget to account for these payments when filing.
Preparing for IRS Changes and Legislative Updates
The tax code changes regularly, and staying informed helps you adapt and plan effectively. Understanding upcoming changes allows you to make smart choices about timing income, claiming deductions, or adjusting withholding.
Following IRS Inflation Adjustments
Each year, the IRS adjusts key thresholds to reflect inflation. These include standard deductions, tax bracket ranges, contribution limits, and earned income thresholds for certain credits. Reviewing these adjustments at the start of each tax year helps you understand how much room you have to maneuver.
Even a modest inflation adjustment can change your eligibility for credits or how much you can save tax-deferred. Stay up to date by reviewing IRS bulletins, tax planning guides, or speaking with a financial professional.
Watching for Legislative Changes
Changes to tax law can have major implications for your refund. For example, temporary expansions of tax credits, stimulus payments, or emergency relief measures often have eligibility rules that phase in or out quickly.
Keeping an eye on legislation can help you act quickly—whether that means making a deductible contribution before a rule expires or claiming a credit while it’s available.
Conclusion
Experiencing a smaller tax refund than expected can come as an unwelcome surprise, especially when you rely on that money for essential expenses or financial goals. But rather than treating it as a setback, it can serve as a valuable wake-up call — a chance to better understand your financial picture and take control of your tax situation moving forward.
As we’ve explored across the series, several factors may explain why your tax refund was reduced this year. From changes in income, side earnings, and economic pressures like inflation or capital gains, to adjustments in tax law and credit eligibility, your refund is the product of many interconnected variables.
In the short term, you can boost your refund by identifying the tax credits you’re eligible for, filing early, and making deductible contributions to retirement or health savings accounts. For those with investment losses, leveraging capital loss deductions can also offset taxable gains and reduce your income subject to tax.
Beyond immediate tactics, long-term planning plays an even more critical role. Reviewing your tax withholding annually, adjusting for life events such as marriage or homeownership, and organizing key financial documents year-round can lead to more predictable and rewarding outcomes. Leveraging tax-advantaged accounts and tracking your eligibility for credits over time not only improves your refund potential but supports broader financial stability.
A smaller refund does not always mean you’re in a worse financial position. In fact, a lower refund might mean that you paid closer to what you actually owed during the year leaving you with more take-home pay throughout. The goal should not always be a bigger refund but rather a smarter, more balanced tax strategy that aligns with your income, goals, and lifestyle. Ultimately, tax season should not be a once-a-year rush. It’s an opportunity to evaluate, adjust, and build habits that support your long-term financial well-being. With a proactive approach and thoughtful planning, you can feel more confident heading into each new tax year no matter the size of your refund.