Why You Didn't Get a Bigger Tax Refund This Year

Some taxpayers expecting a bigger refund may be disappointed.

Tax Refund Gift Card

Tetra Images/Getty Images

If you expected a financial windfall while filing your taxes this year, you're not alone. The IRS issued nearly 112 million refunds, averaging $2,899 each for the 2018 filing season, and expects a similar tally for the 2019 filing season.

However, you may not be able to bank on getting a bigger tax refund compared to past years. Through February 15, 2019, the average tax refund was $2,640, a year over year drop of nearly 17%.

So if your tax refund this year turned out to be smaller than expected––or worse, you owe money to IRS––here are three possible reasons why.

The 2017 Tax Cuts and Jobs Act made some major changes to the federal tax code. In early 2018, the Internal Revenue Service and the Treasury Department updated the income-tax withholding tables to reflect the updates prompted by tax reform. If you didn't adjust your withholding at work by updating your W-4, however, you may see your tax refund shrink or your tax bill increase.

A report from the Government Accountability Office (GAO) suggests that nearly 30 million Americans––roughly 21% of all taxpayers––didn't withhold enough in taxes from their paycheck in 2018. There is some good news, though. The GAO estimates that three-quarters of taxpayers actually withheld too much in 2018 and will get a refund.

If you're one of those who received a smaller tax refund this year, there's something you can do to avoid that same scenario next year. Using the IRS W-4 Calculator as a guide, update your W-4 information with your employer to make sure you're withholding the right amount in taxes based on your income, number of dependents and filing status.

Itemizing deductions is one way to snag a bigger tax refund if you're able to substantially reduce your taxable income for the year. Tax reform, however, eliminated certain deductions that you might have claimed previously, including:

  • Home equity loan interest (excluding loans used exclusively for home improvement)
  • Moving Expenses
  • Casualty and theft expenses
  • Alimony you pay
  • Tax prep fees
  • Investment advisory fees
  • Job search expenses
  • Unreimbursed work expenses, including travel, meals and parking

Tax reform also reduced certain deductions, including the deduction for state and local property taxes. The so-called SALT deductions are now capped at $10,000, which could decrease your chances of seeing a bigger tax refund if your state and local tax payments are well above that amount.

At the same time, tax reform raised the standard deduction limits. Depending on your expenses, itemizing may lose some of its luster if your itemized deductions no longer exceed the standard deduction. For 2019, standard deduction amounts are as follows:

  • $12,200 for single filers and married couples filing separately
  • $18,350 for heads of household
  • $24,400 for married couples filing jointly

These higher standard deduction limits are designed in part to make up for the loss of the personal exemption, previously worth $4,050. Taxpayers were able to claim the exemption for themselves and their dependents, if eligible.

Another key change of tax reform involved the tax brackets. The tax code kept seven brackets but changed the marginal tax rates within each of those brackets. Tax rates decreased for 2018 but the range of incomes each bracket covered was higher. If you saw your income jump substantially in 2018 that could have resulted in a bump in your tax bracket.

Making more money--and having fewer deductions you could claim--could be a double whammy if it results in having more taxable income for the year. Subsequently, having a higher effective tax rate might mean a small, rather than bigger, tax refund.

If you were disappointed at not getting a bigger tax refund this year, it's never too soon to consider your tax planning efforts for next year. In addition to adjusting your withholding, some of the other things you can do to pump up your return or minimize the odds of owing money include:

  • Contribute to a Health Savings Account (HSA) if you have a high deductible health plan, since those contributions lower your taxable income. Funnel tax-free money into your Flexible Spending Account (FSA) if you have one of those instead.
  • Increase your charitable giving efforts. The IRS now allows you to deduct charitable donations, up to 60% of your adjusted gross income.
  • Use the IRS EITC Assistant tool to determine if you're eligible for the Earned Income Credit.
  • Harvest losses in your taxable investment account to offset any taxable capital gains.

Keep in mind that the changes enacted under tax reform are only effective through 2025. It's a good idea to revisit your tax strategy year over year to make sure you're always getting the biggest refund possible.