Expecting a tax refund this year? The IRS has already issued 42,513,000 refunds in 2021, with an average refund of $2,967.
But if you’re hoping for a big tax refund, you may be in for a surprise. Here are some of the potential reasons your refund might be smaller than you expected.
Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act (TCJA) was the largest tax overhaul since 1986. It made some major changes to the federal tax code that won’t expire until Dec. 31, 2025.
Some of the most notable tax law updates include:
- Lowering the mortgage interest deduction: Before 2017, taxpayers could deduct interest on up to $1 million in mortgage loans. The TCJA now allows taxpayers to deduct interest on up to $750,000 in mortgage loans.
- Bulking up the standard deduction: This change allows more taxpayers to avoid the hassle of itemizing write-offs on their tax return, because the bigger standard deduction often exceeds their qualifying expenses. However, personal exemptions have been eliminated.
- Updating state and local tax deduction amounts: 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.
- Setting new restrictions on unreimbursed casualty losses: Before 2017, such losses were deductible if they exceeded $100 plus 10% of the adjusted gross income. Now, you’re only allowed to deduct such losses if they occur in a “presidentially declared disaster area.”
- Eliminating alimony deductions: Payors no longer get to deduct alimony, but the payments are tax-free for the ex-spouse who receives them.
Child support payments are not eligible for a tax deduction for payees, nor are they considered taxable income for recipients.
Tax Refunds and Itemized Deductions
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:
- Moving expenses (only members of the military can claim them now)
- Casualty and theft expenses
- Alimony payments
- Tax prep fees
- Investment advisory fees
- Job search expenses
- Unreimbursed work expenses, including travel, meals, and parking
Will tax returns be bigger if you itemize and claim charitable deductions? Maybe.
The Tax Cuts and Jobs Act raised the maximum cap on charitable contribution deductions from 50% of adjusted gross income to 60%. However, the IRS has temporarily suspended those limits, so individuals may deduct contributions up to 100% of their adjusted gross income.
Under the TCJA, you can no longer deduct interest paid on home equity loans, unless loan proceeds are used to substantially improve the property.
Increased Standard Deductions
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 the 2020 tax year, standard deduction amounts are as follows:
- $24,800 for married couples filing jointly
- $18,650 for heads of household
- $12,400 for individuals and married couples filing separately
These higher standard deduction limits are designed in part to make up for the loss of the personal exemption, previously worth $4,050. In the past, taxpayers were able to claim the exemption for themselves and their dependents, if eligible.
Consider using an online refund estimator tool to determine whether itemizing or claiming the standard deduction might yield a bigger tax refund.
Changes to Tax Brackets
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. For the 2020 tax year, personal income tax rates range from 10% to 37%, depending on your income.
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. That change, plus a higher effective tax rate, might mean you wind up with a smaller than expected tax refund.
If you received unemployment benefits for part of the year and opted not to have taxes withheld from them, your refund could also be less than expected.
Plan Ahead for Next Year
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. Here are some tips for pumping up your return or minimizing the odds of owing money for the 2021 tax year:
- 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.
- Open a traditional IRA or bump up contributions to your 401(k), both of which can reduce your taxable income.
- Increase your charitable giving efforts to take advantage of the larger deduction for those contributions.
- 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 each year to make sure you’re always getting the biggest refund possible.
If you’d rather get more money in your paychecks as opposed to getting a tax refund, update your Form W-4 with your employer to adjust your tax withholding.