It’s tax time and a common question for many people every year is: “Why is my refund so small?” While we highly recommend that you contact a tax advisor for any questions you have about your taxes, here are some answers to your common tax refund questions:
Why is my refund so small?
There’s no secret to withholding. You tell the IRS factors about your life, your employer holds money back to estimate how much you’ll pay in income taxes, and then, whatever has been withheld, is paid to the IRS for covering your annual income tax burden. If, in fact, you’ve withheld more during the year than you need to pay, the IRS will pay you back any extra income you’ve withheld.
If your tax refund is smaller than you expect, then you didn’t withhold enough money to cover your tax bill. If the amount is surprising because it doesn’t look like last year’s refund, then you probably had something different happen this year.
- Did you pick up extra income?
- Did a child move out?
- Did you stop paying the interest on your mortgage or student loans?
Knowing this, if you’re looking for a reason why your refund was smaller, start with the changes in your life.
If you still can’t figure it out, look at how much you made this year as well as your total withholding. If you made significantly more than last year while withholding the same amount, that could be the reason. For more specific answers, take your information to a tax preparation professional.
So, should I withhold more?
It’s not a good idea to withhold more money so you can have a bigger refund. Here’s why. Imagine that your withholding is like a savings account, except the exact opposite in every way: you can’t access your money and you don’t earn interest on it. So even if you receive a large tax refund, you basically deposited it in a savings account for someone else. Don’t give Uncle Sam free use of your excess money for a year. Instead, look into one of our savings options to park your money – and earn some interest along the way!
And remember, when in doubt, contact a tax professional for questions you have.