Why Is My Tax Return So Low?

Your tax refund can be a very big deal each year. If you are like most people, tax season is often a time to look forward to as you will be receiving extra cash. However, if you’re asking yourself, “Why is my tax refund so low,” fear not–there’s a reason for it. It’s most likely due to a combination of several factors that will impact your overall outcome, some of them being the tax impacts of the coronavirus pandemic. 

Reasons Why Your Tax Return May Be Lower This Year

If you are wondering why your refund is lower this year, you are not the only one. Many taxpayers filing their taxes have been wondering the same thing. 

After a volatile year economically, there are plenty of people receiving a smaller than expected tax return. Here are some of the reasons why:

Your Tax Return May Be Low if You Had Multiple Jobs

Picking up a second job will reduce your tax refund because your income tax will be calculated. At the end of the year, your combined income from both of your jobs may have placed you in a higher tax bracket than if you counted each job separately. 

For example, let’s say that your job pays $35,000 a year. Each week your boss will deduct taxes from your paycheck in order to cover the tax liability on that salary. Maybe money was a little tight, and so you picked up a second job that pays $10,000 a year as a part-time employee. Your boss at this job will also deduct taxes from your paycheck. 

The problem is this: the boss at your first job is withholding taxes on a $35,000 salary, and your boss at the second job is withholding taxes on a $10,000 salary, but you made $45,000 total. This may bump you into a higher tax bracket than either salary would be when considered on their own.

Too Few Withholdings Could Have Lowered Your Tax Return

Receiving a small tax refund because of having too few tax withholdings might actually be a good problem to have. It means that you have your withholding properly matched up to your income. Whenever you start a new job, your employer will have you fill out a W-4 form. You will inform your employer how many dependents you currently have for tax withholding on this form. 

If you are single, you will most likely claim “1” withholding exemption to account for yourself. If you are married and have a child, you will likely claim “3” to account for yourself, your spouse, and your child. The more exemptions that you take, the less taxes that your employer will take from your paycheck throughout the year. 

Increasing your deductions will decrease your tax withholding and increase the amount of your weekly paycheck. While this will put more money in your pocket during the year, it will do so by reducing your tax refund later. 

To put it another way, if you want a larger tax refund, you will need to claim fewer deductions on your W-4. 

You Made More Money, Causing a Low Return

While earning more money at your job is almost always a great thing, it can hurt a little bit when it comes to refunds. The tax law breaks income levels into tax brackets or tiers. As your income increases, you will reach a point where you move from one tier into the next, with each tier paying a higher tax rate on income—the more money you make, the more money you will pay in taxes. If you changed jobs, got a raise, or earned a promotion last year, you may have had your refund shrink. 

This may also happen if you’ve worked an unusually large amount of overtime as well. 

A Refund Offset

It’s possible that your refund could be smaller because the IRS used it to pay an existing debt. If you owe any federal government agency money, the IRS can seize your refund and use it to pay that debt, and they will not need your consent to do it. This can be a fairly common occurrence for anyone with lots of student loan debt. 

Sometimes state agencies will get a court order to do the same thing if a person is in arrears on child support payments or owe other debts. These are what’s known as an offset, and if it happens, you will know about it. The IRS will send you a letter explaining the tax offset and clarify exactly how much of your refund they took. If you believe that this offset happened in error, you will have the opportunity to dispute it. 

Unemployment Benefits

It’s estimated that nearly 60 million people have filed for unemployment since March of 2020. Unemployment benefits are subject to federal and state taxes, just like any source of income. Any state unemployment benefits that you received and the $600 a week coronavirus relief provided by the CARES Act are considered taxable income on your tax return. 

One major reason that unemployment benefits will impact your tax return is that they do not have an automatic tax withholding option. This means that anyone on unemployment would have to opt into having taxes withheld from their benefits. 

Even if you elected to have your taxes withheld, withholdings for unemployment benefits are only available at a 10% rate. This will be much lower than the traditional tax rate, so if you received unemployment benefits for most of the year, you would almost certainly owe the IRS some money come Tax Day.

Self Employed

Over the years, the influx in the gig economy has been exploding. Particularly as a result of the pandemic. There were many people self-employed for the first time and who may not be aware of the tax implication and other tax laws that would apply to them. Ridesharing, delivery drivers, consulting or coaching, making or selling craft items, becoming a dog walker, tutor, babysitter, house cleaner, landscaper, or any other various side hustle will significantly affect your tax return. While many people may wish to keep this self-employment as “under the table money,” you are legally required to report the income. 

However, there are possible benefits available to reporting it. Sometimes your investments, out-of-pocket costs, and expenses, gas and travel expenses, office supplies, phone and internet bills, or other costs could be deductible expenses that will lower your tax liability. Being self-employed will also give you the option of making quarterly estimated tax payments. Instead of once a year, you would pay taxes on April 15, June 15, September 15, and January 15.   

Ways To Boost Your Refund

If you’re wondering why your tax return is so low, there are a few things that you can do to legally boost your tax refunds next time around. It’s worthwhile looking into some options that may be specific to your taxes that could help you. Some common boosts include:

Rethinking Your Filing Status

Choosing the way that you file your tax return could affect your refund size, especially if you are married. While approximately 96% of married couples file each year jointly, a joining return might not be the best option. Married filing separately status will often require more effort, but it could save money under certain conditions. The child tax credit is also now available to separately fling spouses. The credit is $2,000 per child under 17 years of age, and it can now be claimed by a separate filer with less than $200,000 in adjusted gross income. In addition, unmarried taxpayers who claim a qualifying dependent can often cut their tax bill by filing as a head of household. A qualifying dependent can be a child you supported financially and who lived with you for more than six months or an elderly parent that you supported.

Embrace Tax Deductions

There are so many common deductions that get overlooked when people file their taxes. These deductions can make a huge difference in the amount on your refund and include:

• State sales tax
• Reinvested dividends
• Out of pocket charitable donations
• Student loan interest
• Child and dependent care
• Earned income tax credit
• State income tax paid on last year’s return
• Certain jury duty fees
• Medical miles
• Charity miles

The Takeaway on Why Your Tax Return May Be Low

There are many reasons why your tax return may be a little lower this year compared to previous returns. However, there are also a few ways that you can boost your return for next year as well. 

Getting a different job or a second one will impact your taxes. Losing your job will have a significant impact as well. Getting a promotion or raise, taking on a self-employed job, or owing a debt to the government are all reasons why you may have made less money on this return. It’s been an extraordinary year for lots of reasons, and the financial world was hit pretty hard. As things return to normal, you should take advantage of some legal ways to increase your deductions and boost your filing for next year.

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