Is your tax refund a little underwhelming this year compared to prior years? Do you owe the IRS instead of getting your typical tax refund? This article will help you determine which of the several reasons why your tax refund is smaller this year.
Did you have multiple jobs?
Having multiple jobs could be the reason why your tax refund is smaller this year. When you work at a job your employer will withhold taxes based on your total earnings. Typically, the more you make the higher tax bracket you will land in. This means that more tax withholding is required.
However, if you switch jobs or have multiple jobs your employer will often under-withhold. They do this becase they think you are in a lower tax bracket.
The best way to fix this is to have your employers withhold more during the year. This will account for the extra income that they aren’t considering.
Did you start a side business?
Starting a side hustle is a great way to earn some extra money throughout the year. However, if you haven’t been paying estimated taxes during the year you could see a reduced refund. You may even have to pay the IRS for any amounts due. This is because there isn’t tax withholdings on your side hustle income.
There are a couple ways that you can fix this going forwards. One way is to have your current employer withhold additional taxes from your paycheck throughout the year. Another way you can get around this is by making quarterly estimated taxes on your side hustle income.
If you did start a side business or side hustle, there are many ways to reduce your taxable income. There are many tax deductions you can utilize that will help reduce the amount of taxes you owe. Some of these include the home office deduction. You can also write off expenses like software, advertising and marketing fees, as well as travel expenses.
So, if you started a business last year, and your tax refund is smaller this year, pay quarterly tax estimates or have your current employer withhold additional funds from your paycheck. Also be sure to take advantage of all the tax deductions available to you.
Did you receive advance child tax credit payments?
Advance payments of up to half the 2021 Child Tax Credit were sent to eligible taxpayers. This means that a portion of your typical refund was advanced to you prior to this tax season. Although your tax refund is smaller, the total amount received between the advance payments and your tax refund should get you back to where you were last year.
To double check, make sure to reconcile your advance payments to your 2021 tax return. If you had a newborn in 2021 and didn’t receive an advance child tax credit, make sure to claim the total amount on your 2021 tax return. A great way to get more information about this is to look into your IRS transcripts.
Did you receive a bonus?
If your tax refund is smaller this year, it may be due to a bonus you received. If you’re a high-income earner and received a substantial bonus in 2021, there is a chance that bonus was under withheld. The supplemental withholding rate for 2021 is 22%. This means that any bonus was withheld at a flat rate of 22%. If you are in a 24%, 32%, 35% or even a 37% tax bracket there is a good chance your employer didn’t withhold enough in federal taxes.
What’s the fix for this? Well, you can have your employer withhold additional taxes on your bonuses. You can also discuss with your tax accountant what the proper withholding amount should be.
Did you take money out of your 401k?
Withdrawing money out of your 401k is a great way to borrow money fast. However, taking money out of your retirement account is generally taxable.
Additionally, taking money out of a retirement account like a 401k before you are retired will come with an additional tax bite. The IRS penalizes taxpayers for taking money out of their 401k early by slapping on an additional 10% tax. Even if you had withholding on these distributions, its often not enough to cover the additional 10% penalty.
There are several exceptions to the 10% penalty if you withdrew part or all the money for certain qualified reasons:
- Medical expenses
- $10,000 for qualified first-time homebuyers
- Death or disability
This means that if you needed money for one of the specific reasons listed above, you will not be subject to the 10% penalty.
Consult Your Tax Advisor
If your tax refund is smaller this year make sure to reach out to your tax advisor for an explanation. If you’re doing your taxes on your own and noticed you have an amount due or have a reduced refund make sure to seek out a professional. An accountant or CPA will be able to ensure you’re taking advantage of all tax breaks and credits available to you and your family.
Why Your Tax Refund is Smaller This Year – Summary
There are many reasons why your tax refund is smaller this year compared to previous years. If you have multiples jobs, or if you started a side hustle, you could have additional taxes to pay. If you received an advance on the child tax credit payments, received a bonus, or withdrew funds from a retirement account, your tax refund will probably be smaller than previous years.
While getting a tax refund is something to look forwards to, your goal should be to receive or owe nothing. Getting a big tax refund is actually a bad thing. This means that you did not over or under pay your taxes. Also, this means that you were not giving the IRS free money and that you were able to use more of your money throughout the year.