Why is my tax refund so much lower than last year?

Many of my clients have asked me this question. The truth is that this can come from many different reasons. So here is the best answer I can give you in a one size fit all way:

1. The Child Tax Credit (CTC) is no longer a refundable credit. You may be asking what I mean by refundable? Well surprise!; not all tax credits will give you cash. So, what exactly do they give you? Well, they act sort of like a coupon in the store. Most of the coupons you use in stores have “No Cash Value” written in the fine print. Non-refundable tax credits have no cash value either, they can be used to reduce the amount of tax you owe for the year allowing your withholding to be refunded back to you. But the truth is that most lower income Americans usually get most of their federal tax withheld back anyway. Prior to 2022, we have become accustomed to getting some of the withholding plus the child tax credit back in a refund. But now, if you do not owe a tax you most likely will not receive any child tax credit on your return. Keep in mind, you can call your State Representative on Capitol Hill and demand he/she make the child tax credit refundable again. Let them know how it helped you and your children. The House of Representative switch board can be reached here: 1-(202) 224-3121.

2. You may have made more money and you’re no longer eligible for the Earned Income Tax Credit (EITC) anymore. The earned income credit is the United States’ most popular credit amongst low to middle income families with children. This credit that was started in 1975 and has been helping American families ever since. It has also been the subject of most of the IRS fraud cases (but let’s save that topic for a different blog post). Most of us, were happy when we were finally able to but our 1st child on our tax return and draw a check for a few thousand dollars but suddenly you have 3 children now and you must pay the IRS every year now! I GET IT! The truth is the EITC was designed for those working persons who get paid lower wages. Nowadays we need to make so much more money just to fight inflation and many of the companies are paying higher wages that most of us no longer qualify for the earned income tax credit EITC anymore. If you are an unmarried person with no children and you earn over $16,450 you no longer qualify for EITC. If you are unmarried with 1 child and earn more than $43,450 you no longer qualify for EITC.

Another reason most people fail to qualify for earned income credit is marital status. In fact, according to Oxford University, American marriages are in a “… long decline [that] started in the 1970s. Since 1972, marriage rates in the US have fallen by almost 50% and are currently at the lowest point in recorded history.” There can be a number of reasons people are refusing to marry, but I’m sure if taxes are the reason, you have been misinformed. The truth is married couples qualify for the earn income tax credit for their families until their income reaches over $46,750. So please get married if it’s just for tax reasons!

1. You may have switched jobs to become a GIG-Worker (1099-NEC). Finally, there are all of you who received a 1099 from a money making self-employed/independent contractor job. These are the most complicated to explain because you need to pay both income taxes and self-employment taxes. Now you may feel that this is not fair and that you are getting double taxed but the truth is that all Americans pay more than one tax out of their paychecks. All Americans who work must pay 3 different taxes:

   1. Income Tax: a tax placed on every working individual by both the Federal government and the State government. In some cities you much also pay local income taxes.

   2. Social Security Tax: Every working American, regardless of how they are employed, must pay social security taxes.

   3. Medicare Tax: Every working American, regardless of how they are employed, must pay Medicare taxes.

Social Security and Medicare taxes usually total 15.3% of your income so Self-employment Tax usually equals 15.3% of your net profit. You must pay this on top of your usual income tax. Since gig-workers do not have any taxes taken from their pay they are required to pay it all out of your pocket.

These are the main reasons many tax returns came in lower than expected. It is very important that you have a tax professional who understands how all these things affect your refund so that they can not only help you understand but also help you plan for the upcoming.

We here are Whitfield-Watkins Consulting understand your situation and would like to help you plan for a better refund in the future.

Schedule a consultation here