4 Reasons Your Tax Refund Might Disappoint You This Year — and How To Fix It
When T. S. Eliot wrote that “April is the cruelest month,” he certainly couldn’t have imagined the pleasure of getting a tax refund. Once that refund hits your account, you’re going to put extra money into your emergency fund or investment accounts. And if there’s some left over, a vacation wouldn’t hurt.
Only there’s not a lot of money left over, because your refund was much smaller than you thought. Talk about cruel. How on earth did this happen? And more importantly, how can you fix it to make April kind again?
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MoneyLion is here to help. Let’s break down four common reasons your refund can shrink — and what you can do to avoid a repeat next year.
You Didn’t Update Your W-4 After a Major Life Change
Perhaps you had a big year. You got married or bought a house. You paid back your debt or got a new job. Congratulations. Now, did you update your W-4?
According to Cody Schuiteboer, president and CEO of Best Interest Financial, after you make a major life change, you’ve got to adjust your W-4 right away. If you don’t, it could cost you a lot.
“Last month, one of my clients found out that this year she will get only $800 instead of the $3,200 she was supposed to get,” he said. “The reason for that was that she got married in April but did not bother to change her W-4 at all. As a result, she lost about $2,400 in her refund.”
You Had a Side Hustle
If you had a side hustle or freelance gig, you might also get a smaller refund than you’d like. Schuiteboer has first-hand experience watching people come to this unfortunate realization. He uses the example of one 29-year-old taxpayer who earned roughly $35,000 in freelance work.
Unfortunately, this person wasn’t aware that he needed to pay quarterly estimated taxes. Big mistake.
“While he expected around $1,200, in the end, he had to pay $4,800 to the government,” Schuiteboer said. “Such a situation can make one feel really depressed.”
If you’re freelancing, please, please, please (did we say please?) pay your quarterly estimated taxes. The IRS generally expects people with income that isn’t subject to withholding to pay estimated taxes throughout the year.
You Didn’t Realize That Interest on Some Accounts Is Taxable
Schuiteboer says that people aren’t always aware that interest on high-yield savings accounts, as well as gains in investments and crypto activity, could lead to a smaller refund. He can point to another person who learned this lesson — that interest on certain accounts can also be taxable — the hard way.
“A young lady with a high-yield savings account earning her $2,400 expected to receive a $3,100 refund based on her salary only,” he said. “However, the interest she received lowered her refund to just $600.”
In general, most interest you receive (including bank account interest) is taxable and must be reported — even if you don’t get a tax form for it.
He adds that when it comes to cryptocurrencies, taxpayers must report taxable digital-asset transactions (like selling, exchanging, receiving crypto as payment, or getting rewards) — and keeping track of your cost basis matters because it’s used to calculate gains or losses when you dispose of the asset.
Why does this happen? Let Sherman Standberry, CPA and CEO at My CPA Coach, explain:
“Taxes on these gains are usually not calculated until you file your tax return. People accustomed to paying taxes throughout the year are often surprised at how their investment gains reduce their refund,” he said. “It is because taxes were not withheld and are therefore due upon filing your tax returns.”
You No Longer Qualify for Certain Deductions and Credits
If you’re reporting more income this year, you might find that you don’t qualify for certain income-based tax deductions and credits, says Standberry.
“For example, the Child Tax Credit, Earned Income Tax Credit and student loan interest deduction are all income-based,” he said. “If you earn too much income, you may no longer qualify for the deduction.”
Since you likely don’t want to make less money, Standberry advises changing your attitude about the value of a big refund. After all, a large refund technically means you’ve been giving the government an interest-free loan.
“A smaller refund is actually a good thing. It means you didn't overpay your taxes throughout the tax year,” he said. “Instead of giving the IRS an interest-free loan, you actually had more cash in your pockets during the year that you were able to use to support your lifestyle or invest.”
'Last-Minute' Ways To Potentially Boost Your Refund
While there are some things you just can’t do differently for the sake of a tax refund — like earning less money — you can take some smart steps to increase your refund. Schuiteboer says the best solution is to make contributions to your retirement plans.
“One can make a traditional IRA contribution of up to $7,000, or $8,000 [for the 2025 tax year] if they are older than 50, before the deadline … [which can] reduce the taxes you are to pay by almost the same amount,” he said. “In February, I helped one of my clients deposit $5,000 into her traditional IRA account, saving her roughly $1,250. It means she’ll receive more money in her refund.”
He also encourages taxpayers to consider contributing to their Health Savings Accounts (HSAs), if they’re eligible, as well as reviewing their charitable donations to find additional deductions and increase their refunds.
The Bottom Line
A big tax refund isn’t always all it’s cracked up to be. Remember, you’re giving the government an interest-free loan. Certain factors can keep your refund from being what you’d like it to be.
Sometimes, there’s not much you can do to change those factors, but you can take a few smart steps — like updating your withholding after life changes, paying estimated taxes on side income, and planning for taxable interest and investment income — to help prevent refund disappointment next year.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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