Updated for tax year 2025.
Was your tax refund smaller than you expected — or smaller than last year’s? Here’s why your refund from the Internal Revenue Service (IRS) may not have matched what you anticipated, and some tips on what you can do to help 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: A raise or other compensation change could reduce your refund if the federal income tax withheld from your pay did not fully cover your increased tax liability.
- 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.
For some workers filing 2025 returns in 2026, the opposite may have happened. The IRS did not update federal withholding tables during 2025 to account for the Working Families Tax Cuts. Because some provisions applied retroactively to the beginning of 2025, withholding may have exceeded the taxpayer’s final liability, potentially resulting in a larger refund.
Your refund could still be smaller than last year 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).
Looking ahead to tax year 2026: The IRS updated federal withholding tables for 2026 to reflect the Working Families Tax Cuts changes. More of the benefit may show up in your paycheck during 2026, which can mean a smaller refund when you file your 2026 return in 2027.
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 severance, the payment generally counts as taxable compensation and may increase your tax liability. The tax withheld from severance may also differ from your final tax rate. If the payment moves part of your income into a higher tax bracket, only the income within that bracket is taxed at the higher rate.
- 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 for certain overdue debts
The U.S. Treasury may reduce a federal tax refund, in whole or in part, to collect certain legally enforceable overdue debts, such as past-due child support or certain federal and state debts. This is known as a Treasury offset.
If your refund is offset, 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 incorrectly
Federal student loans require special clarification. The Department of Education restarted involuntary collections in May 2025 but announced a temporary delay of Treasury offsets and administrative wage garnishment in Jan. 2026. Borrowers with defaulted federal student loans should check StudentAid.gov or MyEdDebt.ed.gov for the latest collection status.
An offset does not change how your refund is calculated, but it can reduce the amount you ultimately receive.
Reason 5: You didn’t claim new Working Families Tax Cuts deductions
If your refund felt smaller than OBBB headlines suggested, one possible reason is that you did not claim new deductions for which you were eligible.
The Working Families Tax Cuts added four Schedule 1-A deductions for tax year 2025:
- Qualified tips: Up to $25,000 per return for eligible tips received in qualifying occupations
- Qualified overtime: Up to $12,500, or $25,000 for joint filers, for qualifying overtime premium pay generally required by the Fair Labor Standards Act
- Qualified car loan interest: Up to $10,000 of interest on an eligible loan used to purchase a qualifying new personal-use vehicle
- Enhanced senior deduction: Up to $6,000 per eligible taxpayer age 65 or older
Each deduction has additional eligibility requirements, and all four are subject to income-based phaseouts. These deductions reduce federal taxable income; they do not necessarily eliminate Social Security, Medicare, self-employment, or state taxes on the underlying income.
For tax year 2025, the IRS did not require employers to separately report qualified tips or overtime on Form W-2 (Notice 2025-62; Notice 2025-69). The new Working Families Tax Cuts deductions do not apply automatically, as you must claim them on Schedule 1-A when you file. See the IRS guide on what you’ll need to file for tips, overtime, and other qualifying amounts. If you filed without Schedule 1-A, your refund may have been smaller than you expected, even if you qualified for deductions like no tax on tips or no tax on overtime.
Already filed? You may be able to claim missed deductions by filing an amended return (Form 1040-X). Talk to a tax professional if you’re unsure whether you qualify.
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 the Child Tax Credit (CTC), both of which have 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 were also changes to existing tax credits, including the early termination of certain clean-vehicle credits for vehicles acquired after Sept. 30, 2025. For this purpose, a vehicle was generally acquired when the taxpayer entered into a binding written contract and made a payment. A qualifying vehicle acquired by the deadline could be placed in service later.
Don’t overlook new deductions under the Working Families Tax Cuts, either. In addition to credits like the EITC and CTC, you may qualify for Schedule 1-A deductions for qualified tips, overtime, car loan interest, or the senior deduction, even if you take the standard deduction. See our One Big Beautiful Bill overview for details.
If you e-file with TaxAct®, we can help you with this. 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. Know your tax extension deadline — and what it does (and doesn’t) extend.
If you requested an extension for your 2025 return in a timely manner, you generally have until Oct. 15, 2026, to file your federal tax return. That extra time applies only to filing, as it did not extend the deadline to pay the tax owed. For most taxpayers, any 2025 tax due was still required by April 15, 2026.
If you haven’t filed yet, submit your return before the Oct. deadline. Filing late after an extension can lead to late-filing penalties on any balance due, even if you’re expecting a refund.
The IRS starts processing your refund after it accepts your return — not when you request an extension. Once your return is accepted, many refunds are issued within 21 days for accurate e-filed returns with direct deposit, but some returns require additional review and may take longer.
3. Review your contributions to a retirement account or health savings account (HSA).
Eligible contributions to traditional IRAs and health savings accounts may reduce adjusted gross income or taxable income.
The general IRA contribution limit for 2025 was $7,000, plus a $1,000 catch-up contribution for eligible taxpayers age 50 or older. Whether a traditional IRA contribution is deductible depends on factors such as income, filing status, and workplace retirement plan coverage.
For 2025, the HSA contribution limits were $4,300 for self-only coverage and $8,550 for family coverage, plus a $1,000 catch-up contribution for eligible individuals age 55 or older. Employer contributions count toward these limits, and eligibility may depend on the number of months the taxpayer had qualifying high-deductible health plan coverage.
For most taxpayers, the deadline to make a 2025 IRA or HSA contribution was April 15, 2026. Filing an extension did not extend that contribution deadline.
4. Use crypto and stock losses to your advantage.
If you sold cryptocurrency held as a capital asset, stocks, or other investments at a loss during 2025, those capital losses can generally offset capital gains. If total capital losses exceeded total capital gains, you may deduct up to $3,000 of the remaining net loss against other income, or $1,500 if married filing separately. Unused net capital losses can generally be carried forward to future tax years.
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.
The bottom line
Don’t be caught off guard by a smaller tax refund this year. Changes to your income, missing Working Families Tax Cuts deductions, and the state of the economy could all affect your refund, whether it’s smaller than last year or just smaller than you expected. Keep these factors in mind as you file or plan for next season. Eligible IRA or HSA contributions and properly reported capital losses may reduce taxable income, but the general deadline for making 2025 IRA and HSA contributions was April 15, 2026.
If you haven’t filed your 2025 federal return yet, file as soon as you can. Taxpayers who timely requested an extension generally have until Oct. 15, 2026, to file, though tax owed was generally due April 15, 2026. Filing sooner still helps you resolve any balance due and start tracking your refund sooner once the IRS accepts your return.
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.
Citations
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