Why is My Tax Refund So Low Compared to Last Year?

Millions of tax filers are now getting their actual tax refunds in line with the estimated IRS schedule. Payments are also being made in a much more timely fashion than was the case over the last few years.

However when they filers see their actual refund is lower than expected, common questions that come up include, “Why is my refund so small?“, “Why did it change on my transcript?” and “How can I find out more details?”

Naturally they get stressed and depressed around their refund being much lower than expected and why this changed or happened. Below are some reasons why this could be happening to you this year and what you can do about it.

Refund Payments Smaller According to the IRS

Since there were no new federal stimulus (EIPs) or expanded tax credits paid in the last year, it was always highly likely that refund payments will be much lower than in the prior few years, despite expanding tax brackets.

In particular taxpayers with dependents who claimed the advance/expanded Child Tax Credit (CTC), Dependent Care Expenses Tax Credit (CDCTC) and got the child/dependent stimulus payments last year will see lower refunds in recent years. See more in the refundable credits section below.

Tax Refund Offset Reduction

Another common reason why refund payments are actually lower than expected or provided by their e-filing tax provider is that the federal government (via the IRS) has “offset” or deducted monies from your actual tax refund to cover debts you owe other federal agencies.

The Department of Treasury’s Bureau of the Fiscal Service (BFS) manages the Treasury Offset Program (TOP) and may legally reduce your refund (overpayment) and offset it to pay for the following items:

• Past-due child support;
• Federal agency non-tax debts;
• State income tax obligations; or
• Unemployment compensation debts owed to a state

Under the law, federal payments such as tax refunds, can be reduced or offset by approved agencies via the IRS before being paid to you. 

This is known as the Treasury Offset Program (TOP) and the rules around these non-IRS debts and treatment are covered in this article for the details on how offsets get applied to your tax refund (Tax Topic 203).

You will get a formal notice from the BFS explaining this offset to your federal refund and why it differs from what was estimated in your filed return.

The notice will also contain details on the agency that requested the offset (e.g child services or your state unemployment agency) with details to contact them for more information.

The IRS will give you an opportunity to dispute this collection, but you will have to prove you had no federal obligations. If you have questions or disputes regarding the offset of your refund for the above items you will need to contact the Treasury Offset Program (TOP) or the debtor agency that initiated the offset.

On your tax transcript the non-IRS debt offsets will be referenced against transaction codes like 898 (refund applied to non IRS debt) on your transcript.

The IRS won’t be able to help you with non-IRS offset payments. However, if you are able to successfully appeal the offset you will get issued the additional refund and see this a credit on your tax transcript (Tax code 766 – Tax Offset Reversal).

Also note, if you filed a joint return with a spouse and you believe you are not responsible for your spouse’s debt and subsequent offset, you’re entitled to request your portion of the refund back from the IRS via the injured spouse form.

Federal Taxes For State Stimulus Payments and Rebates

Lots of states made one-time stimulus like payments to residents during 2022 in the form of tax credits or rebates, based on prior year filings. 1099-G or 1099-MISC forms would have been sent to recipients for these payments.

The IRS has resolved the treatment of these payments and confirmed in most cases these payments are not taxable and so not required to be included in your federal tax return.

For some states, like Massachusetts and Alaska, where 2022 tax rebates were part of existing schemes to repay excess state funds to tax payers, the payment is federally taxable, particularly for those who itemize deductions.

In this scenarios if a taxpayer has filed his or her tax return but not declared the state stimulus payment they may see their refund adjustment or offset to account for the state tax rebate/credit.

Refundable Tax Credit Adjustments (Child Tax Credit)

In the last few tax years tax refund amounts have been positively impacted by the several rounds of advance and expanded refundable tax credits.

These refundable tax credits paid you in advance against your future tax refund and in some cases if you were over paid or your tax situation changed (income, dependents, filing status etc) then the IRS could have adjust refund to cover the difference. This would result in your tax refund being lower than expected.

However this year the following tax credits will reduce significantly and become non refundable in some cases.

The Child Tax Credit (CTC) has dropped to $2,000, with only $1,600 of the credit (Additional CTC component) claimable as a refundable amount if the full CTC cannot be applied against taxable income

Another popular credit, the Child and Dependent Care Tax Credit (CDCTC), which allows you to offset qualified dependent care expenses, returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021. Income phase thresholds also returned to pre-pandemic levels.

Based on various sources and pre-pandemic figures, it is expected that the average federal tax refund will be around $2500 in the coming year. The average state tax refund will also likely be smaller this tax season.

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Advance Refund Loans – Filing and Processing Fees

Many filers take advantage of advance refund payment or refund transfer programs where they pay a fee to get their refund in advance or have the cost of their tax filing covered by their future refund payment.

In addition to the filing fee many filers are not aware that these companies charge an additional processing fee based on the size of overall filing fee, which will lower their actual refund payment. This is why its important to read the fee disclosures and fine print before using these services.

Even though this is noted, many tax filers don’t realize that the actual IRS refund payment first goes to the refund transfer or debit card company like Santa Barbara Tax Products Group (SBTPG), Emerald Prepaid (H&R Block) or Credit Karma (via TurboTax).

This allows them to recover all associated tax preparation and processing fees before the remaining refund amount is issued to the taxpayer. See the table below for some of the fees and charges around these refund advance loans. Please check the providers site for exact details.

Further, several folks have reported that these advance refund loan underwriters are holding refund payments longer (perhaps to earn more interest for themselves?). And they are then given the runaround by tax filing providers and the IRS when trying to figure out what’s happening with their issued refund payment (TC 846).

Unfortunately, filers will just need to wait for their refund loan provider to finish their fee processing, before seeing their refund payment. And, the processing fee is not refundable!

New Tax Reforms and Higher Standard Deduction

Another reason for lower refunds over the last few years is that new tax laws and reforms that took effect a few years ago cut several popular deductions (e.g. personal exemption state and local taxes capping at $10,000) for a number of Americans.

This also applies to deductions for charity, which won’t be as robust or widely claimed given that tax payers will need to itemize in their tax filing for any qualified charitable contributions.

These changes, increasing tax brackets and higher standard deductions mean people will get higher paychecks during the year, but their refund payment will likely be lower at tax time.

Smaller Refund Scenarios Due to Paycheck Withholdings

Other reasons for smaller federal refunds can be attributed to various causes related to your income, tax rate and number of withholdings claimed via your W4. Here is a sampling of scenarios based on actual reader comments that could be causing your refund to be much lower than you expected.

Scenario 1 (multiple jobs): Mary is a single person and in the past has always gotten a large refund back. However this year, Turbo Tax showed she was due a $400 tax refund. But Mary made way more last year than ever having worked for two different companies. Mary made $15,000 at one job (tax withholding was ~$1200). At her other job she made $14,800 and had a similar withholding amount. So should she have got a larger refund since she made more money?

Answer: The reason Mary is getting a much smaller refund is that her tax withholding was much lower than it should have been since it was likely calculated for each job based on her salary being the annual amount.  That is one employer thinks she earned $15,000 and withheld taxes based on that annualized income. The other place thinks she earned $14,800 and withheld taxes based on that income.

But Mary really earned $29,800 for the year and should have had more taxes withheld based on your total income. To fix this going forward she needs to adjust her W4 for the current tax year is she wants to get a larger refund the following year.

Scenario 2 (too few withholdings): I tried several tax software providers and they all come back with a federal refund of only a $95. This is the lowest I have ever got and I made the most money ever this year. I am single, own no property or anything, made around 14,000 last year ($590 federal withholdings). I claimed 2 deductions (withholding) on my paycheck as I have no dependents.

Answer: The answer for your lower refund is your deductions claimed via your W-4. Based on $14,000, your taxable income is around $4,850. Tax on that amount is $495 and with having $590 taking out, you’d get a $95 refund. You must have your deductions higher than 2 if you want more tax taken out so that you can get a higher refund next year.

Scenario 3 (making more money than last year, smaller refund):  Last year my wages were around $30,000 (withheld taxes of $2,240) and state income tax was $1,500. When I entered this info into TurboTax get a free refund estimate before filing, both of them showed my federal refund at $47.  However two years ago I made much less (around $22,000) and my return was almost $2000. What is going on? I am a single filer with no dependents and didn’t claim or get any other credits.

Answer:  The most likely reason for the smaller refund, despite the higher salary is that you are now in a higher tax bracket.  And you likely didn’t adjust your withholdings for the applicable tax year. To understand this you need to realize that your tax refund is determined by your total income, marginal tax rate and the amount of federal/state taxes that are withheld.

So since your taxable income was higher you fell into a higher tax bracket that resulted in higher taxes. But you would have got more money on a weekly basis (due to your higher salary) as well – which is better than getting a larger refund in my opinion.

At the end of the day getting a smaller refund with a higher income is not actually a bad thing in most cases. It basically means you didn’t give an interest free loan to the IRS (which is what a refund represents).

In reality you don’t want a large refund as you should get the money in your pay check when you earn it. Not a year later.

Unemployment Benefits Income Tax Exemption (Now Expired)

Due to the pandemic millions of Americans ended up relying on enhanced unemployment benefits. But many didn’t realize that unemployment benefit income is actually taxable.

So like regular income, jobless workers needed to adjust their withholdings and if they didn’t withhold enough from their unemployment pay checks they could see a lower than expected federal refund when filing their tax return or as the IRS makes adjustments based on 1099G forms that state unemployment agencies submit.

While the ARPA stimulus bill included a $10,200 unemployment income tax exclusion credit, it was only valid for the 2020 tax year.

It was not extended into future years which means pre-pandemic taxation rules were back in place. So when claiming unemployment, check your state’s unemployment website for your tax obligations.