The next tax season is ahead of us and there are surely going to be some questions such as why is your refund so low in 2021? There are a couple of answers to this question but since everyone’s situation is going to be different, you will need to do the work yourself.
First and foremost, we suggest taking a deep look at your tax return. If you don’t have your tax return, request tax transcripts from the IRS. Take a look at what’s possibly caused you to get a lower tax refund this year. In most cases, lost deductions and credits cause a tax refund to be lower since they have a direct impact. Especially if you didn’t file a new Form W-4 after the deductions and credits have changed.
Lost Deductions and Taxes Withheld
If you’re an employee, your employer withholds tax from your income to pay for your federal income tax. If you did not file a new Form W-4 to adjust taxes withheld and realizing now that you’ve lost deductions, it will have an impact on taxes withheld.
Generally, the higher the anticipated deduction, the less tax is going to be withheld from your paycheck and vice versa. Having said that, make sure you are up on your taxes if you’re expecting to lose deductions and credits and file a new Form W-4 so the taxes withheld is large enough to maintain your tax refund.
Those who are self-employed have a different situation. Self-employed individuals estimate taxes and pay the IRS. If the estimated taxes are wrong, it may cause them to pay less or more than needed. This inevitably will have a direct impact on their tax refunds. To avoid such occurrences, make sure to pay taxes at an accurate rate.
In conclusion, if you’re a worker and pay taxes through the taxes withheld by your employer, make sure to file Form W-4 if you’re expecting changes on your tax return. This is the only way to adjust taxes withheld after the changes.
Obtain Tax Transcripts From the IRS
What better way to see what went wrong on your tax refund than seeing your tax return? The Internal Revenue Service allows taxpayers to obtain their tax transcripts on the Get Transcript tool. This tool allows you to see tax returns up to a number of years. Generally, you should be able to see tax transcripts of not only last year but as early as the late 2000s.
Read the instructions below to obtain your tax transcripts. Use them to see what caused you to have a low tax refund this year.
- Go to IRS Get Transcript
- Click on Get Transcript Online
- Log In or Create Account (If you are a PTIN or FIRE user, you will need to create a separate account for Get Transcript)
- Upon logging in successfully, you will see what year tax transcripts are available. For the 2021 tax season, select your 2020 tax return and see the details.
We suggest getting tax transcripts three years prior to 2020 to compare your tax returns. This will allow you to better picture what went wrong on your tax return causing you to receive a lower tax refund.