Why was my tax refund so small?

Your deductions changed. A tax refund means that the government took more out of your paycheck than you actually owed. You have some measure of control over how much comes out of each paycheck, however, and changes to your deductions could lead to a smaller refund (or a bill from the IRS).

moneymanagement.org - Why is My Tax Return So Low? | MMI - Money Management International

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If you've come to rely on an infusion of cash every spring in the form of a sizable tax refund, you may be feeling a pinch recently as refunds have diminished in recent years. Someone I know paid for a vacation using credit because he expected to use his federal tax return to pay it off. He ended up owing the IRS money, leaving him to have to figure out how to pay the IRS and pay for the vacation he took.

Why is My Federal Refund So Low?

Taxes are complicated, so there are plenty of potential reasons why your refund didn't meet your expectations. Your income changed . If your income went up or down, you may have landed in a different tax bracket. If you got a raise last year, you may have earned more money, but the amount you owe in taxes may have gone up even more. . If your income went up or down, you may have landed in a different tax bracket. If you got a raise last year, you may have earned more money, but the amount you owe in taxes may have gone up even more. Your deductions changed . A tax refund means that the government took more out of your paycheck than you actually owed. You have some measure of control over how much comes out of each paycheck, however, and changes to your deductions could lead to a smaller refund (or a bill from the IRS). . A tax refund means that the government took more out of your paycheck than you actually owed. You have some measure of control over how much comes out of each paycheck, however, and changes to your deductions could lead to a smaller refund (or a bill from the IRS). Tax laws changed. Even if your income didn't change, the laws that determine how much you owe in taxes may have changed, leading to a bigger tax bill (and a smaller refund). Ultimately, a small refund just means that you didn't overpay on your taxes by very much, while a tax bill means that you underpaid on your taxes.

How to Get the Largest Tax Refund Possible

Once it's time to file your tax return, you can't do much about how much you earned or what you had taken out of your paycheck. You can, however, make some moves to reduce your tax liability. Take advantage of applicable deductions . You may qualify for more deductions than you think. There are deductions for child and dependent care, student loan interest, charitable contributions, state sales taxes, and more. You can even claim deductions for miles driven to and from volunteering. . You may qualify for more deductions than you think. There are deductions for child and dependent care, student loan interest, charitable contributions, state sales taxes, and more. You can even claim deductions for miles driven to and from volunteering. Make sure you're using the right filing status . Just because you're married doesn't mean that you have to file a joint return. While that's usually the best bet, there may be times while filing separately can actually net you a higher refund.

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. Just because you're married doesn't mean that you have to file a joint return. While that's usually the best bet, there may be times while filing separately can actually net you a higher refund. Make a last minute contribution to your IRA or HSA. If you have a traditional IRA or a health savings account (HSA), you have up until the filing deadline to max out your contribution. These contributions can help reduce your taxable income and potentially increase your refund. Consider working with a tax professional to make sure that you're getting your full refund.

Don't Panic If You End Up with a Tax Bill

A disappointingly small tax refund is one thing. An unexpected tax bill is something else entirely. If you're relying on your refund to help even out your finances, suddenly owing money to the IRS can be incredibly disruptive. Fortunately, there are things you can do to minimize the disruption and prevent future unhappy tax days.

You can set up a payment plan

If you owe the government money it’s best to start saving right away so you can pay the bill by April. But if you can’t pay the bill by tax day, don’t get too stressed about it. The IRS offers payment plans for people who cannot pay their entire tax bill at once. There are usually fees associated with a payment plan, but paying the fees is a better option (and usually cheaper) than using a loan or credit card to pay off your tax liability. These payment plans exist for a reason—to help Americans who can’t pay their bill all at once—and there are a lot of different options (including fee waivers for low-income families). The goal of tax withholding is to try to get as close to even as possible. If the government has to issue you a refund that means you overpaid them all year and got nothing for it other than your money back, which was yours to begin with. You could change your deductions and put that extra money into savings all year. In the end you will come out with the same money as you would get from a tax return, but you would have access to those funds in case of an emergency. In general, overpaying the IRS all year is not a sound financial practice. Saving money throughout the year might feel difficult at first, but the benefits are huge. Not only will have access to an emergency fund throughout the year (which will help with peace of mind) but you might even save more than you need for your tax bill and be able to pay yourself a “refund” instead of waiting for one from the government.

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Make a plan

Whether you owe money or got a smaller refund than you expected, the first step is to make a plan. In some cases, that plan might involve more than saving money or setting up a payment plan. One of our counselors at Money Management International had a call from a client that was anticipating an $8,000 tax refund and was planning to use that money towards his $12,000 debt. But after filing his taxes, he ended up owing about $200. This meant he could not pay down his debt. But even beyond that, his debt increased by $200. He couldn’t pay the debt and didn’t know what to do, so he reached out to one of our counselors. The counselor was able to work with the client's creditors to cut the client’s monthly payments by about $300 per month. These were the missing funds he needed to pay the taxes, plus this would allow all his creditors to get paid. It was a huge moment of relief for him and his wife. Even if it seems like there isn’t way to make the numbers work, there usually is. Regardless of your tax situation this year, you’ll be able to get through it and if you need us, Money Management International is always here to help. Need help working with your creditors? Begin a free, online analysis of your finances and see how much you could save with a debt management plan.

moneymanagement.org - Why is My Tax Return So Low? | MMI - Money Management International

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