Why Is My Tax Refund Smaller This Year?

Updated for tax year 2025.

Was your tax refund smaller than anticipated this year? Here’s why your refund from the Internal Revenue Service (IRS) may not be as big as last year’s, and some tips on what you can do to maximize your refund amount.

Why do you get a tax refund from the IRS?

Let’s review why we get a tax refund in the first place. What impacts the amount you receive when you file?

For many people, your tax refund is exactly what it sounds like — a refund of taxes that you overpaid during the tax year. This can be due to withholding more tax than you owe from your regular paychecks or overestimating your self-employment taxes.

Qualifying for a refundable tax credit may also contribute to your refund amount. When a refundable credit amount exceeds the tax you owe, you receive the leftover credit as a refund. For example, if you owe $400 in taxes and qualify for a $1,000 credit, you’ll receive the remaining $600 as a refund.

Reasons to get a smaller tax refund for 2025

Reason 1: Changes to your income

Changes to your income last year may play a role in receiving a smaller refund this tax season. Here are some examples:

Salary increase: If you got a salary increase last year but neglected to increase your tax withholding, this could lead to a smaller tax refund when you file.
New side income: Say you started earning side income during the tax year but neglected to make estimated tax payments on that extra income. If you didn’t pay taxes on your side hustle income throughout the year, the IRS will keep any extra tax you had withheld from your regular paychecks to cover it, leading to less money back as a tax refund.

Reason 2: More accurate tax withholding

A smaller refund isn’t always a bad thing! In some cases, it simply means your tax withholding lined up more closely with what you actually owed.

Even though the IRS didn’t update federal withholding tables this year after the Working Families Tax Cut Act passed, your refund could still be smaller if:

You updated your Form W-4 after a raise, new job, or other big life change
Your employer withheld taxes more accurately than in prior years
You chose to reduce over-withholding to increase your take-home pay

When you pay closer to the correct amount throughout the year, there’s less extra tax for the IRS to refund. While a smaller refund may feel disappointing, it often means more of your money stayed in your paycheck (instead of sitting with the government interest-free).

Reason 3: The current economic environment

Another factor that could affect your refund amount? The economy. Here are some additional things to consider:

Inflation: The IRS adjusts many figures for inflation annually, such as expanding the standard deduction or income ranges for each tax bracket. However, not all tax breaks account for inflation. A big one that may affect you this year is the capital loss deduction, which allows investors with net losses to lower their taxable income by up to $3,000 per tax year. This amount remains unchanged from previous years, despite rising prices.
Layoffs: If you were laid off in 2025 and received a severance payment, it could affect your taxes. Severance payments are taxable, so receiving one could bump you into a higher tax bracket.
The stock market: If you were forced to sell off investments last year to cover expenses, you might have to pay capital gains taxes, which can increase your tax liability (if you happened to sell the asset for a profit).

The above may have less of an impact on your tax refund, depending on your situation, but it’s still good to keep these factors in mind.

Reason 4: Refund offsets (especially for student loans)

If you’re behind on federal student loan payments, your tax refund may have been smaller (or gone entirely) due to Treasury offset.

This tax season, the federal government has resumed offsetting tax refunds as a way to collect on certain federal student loans in default. This means the U.S. Treasury can apply part or all of your refund toward your outstanding loan balance before the IRS sends any remaining amount to you.

If this happened, you should receive a notice explaining:

How much of your refund was applied to the debt
Which agency received the payment
Who to contact if you believe the offset was applied in error

This isn’t a change in how refunds are calculated, but it does affect how much money ultimately reaches your bank account. For more info on this topic, see Student Loans Debt Collection Update: What Borrowers Need to Know.

Tips to help you maximize your 2025 tax refund

So, what can you do to ensure you aren’t caught off guard with a significantly smaller refund or even an unexpected tax bill this year? Keep the following tips in mind as you file this season.

1. Know what tax credits you qualify for.

Make sure you know what tax breaks are available to you and how much each is worth this tax season.

Some of the more common tax breaks include the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), both of which increased for 2025. If you live in a state that levies state income tax, don’t forget that many states offer their own versions of these credits for further tax savings.

There have also been changes to some existing tax credits this year, such as the early expiration of the credit for purchasing certain electric vehicles.

If you e-file with TaxAct®, we can help you in this area — our interview questions are designed to pinpoint precisely what tax benefits you may qualify for, and we’ll help you fill out the necessary paperwork to claim them.

2. File your federal tax return early.

Filing as early as possible helps in two ways: You’ll get your refund faster and have more time to prepare for and pay your tax bill if you owe taxes.

If you e-file, you should get your federal tax refund within 21 days. If you end up owing taxes, you have until the filing deadline, April 15 this year, to pay any taxes due. That’s why filing early can be beneficial if you end up with an unexpected tax bill — it gives you more time to plan for and pay the cost.

3. Contribute to a retirement account or health savings account (HSA).

Another way to reduce your taxable income is to contribute to an individual retirement account (IRA) or health savings account (HSA).

Traditional IRA contributions may be deductible depending on your modified adjusted gross income (MAGI). You can contribute up to $7,000 for 2025, potentially reducing your gross income by that amount.

If you have a high-deductible health plan (HDHP), don’t forget to max out your HSA contributions as well. In 2025, you can contribute up to $4,300 for a single plan and up to $8,550 for a family plan.

You have until Tax Day, April 15, 2026, to make IRA or HSA contributions for tax year 2025.

4. Use crypto and stock losses to your advantage.

If you sold cryptocurrency or other investments at a loss last year, you could use your losses to offset any gains you might have had. If you have no gains to offset, you can still deduct up to $3,000 in losses to reduce your taxable income.

5. Use our Refund Booster to prepare for next year.

While you may not be able to change your tax situation this year, set yourself up for success next year by taking advantage of our Refund Booster¹. This tool can help you fill out your Form W-4 to get a bigger refund at tax time or put more of that refund money into your paycheck throughout the year. Either way, you’re in control.

Know what to expect from your refund.

Don’t be caught off guard by a smaller tax refund this year. Changes to your income and the state of the economy could alter your refund amount compared to last year, so keep these factors in mind when planning for your tax refund this tax filing season. To maximize your 2025 tax refund, you can try contributing to an IRA or HSA or using capital losses to lower your taxable income.

And don’t forget to file your federal income tax return early — this gives you more time to prepare for any potential tax bills on the horizon.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

¹Refund Booster may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.