For some households, an annual tax refund is a much-needed infusion of cash that allows them to pay off debt or invest in home or car repairs. For others, a refund is a nice bonus part-way through the year.
The potential to get a refund can make the tax filing process a little less painful. A smaller-than-expected refund or owing money can be an unpleasant surprise to deal with, though.
Here’s what you could do if your tax refund was smaller than expected.
(PS If you have not yet done your taxes, do not worry! We have a guide on How to DIY Your Taxes—with ways to do it for free.)
Figure out why your tax situation changed
If you’re surprised by your return (or lack of one), you may want to try and figure out what changed from last year.
Major life events, such as getting married or divorced, having a child, or buying a home, can have a significant impact on your tax situation — and that might explain the change.
However, the Tax Cuts and Jobs Act of 2017 (the new tax bill) is behind many people’s new tax situation. Substantial changes were made to the tax code and the new law:
- Got rid of personal exemptions
- Increased the standard deduction
- Made changes to child credits
- Removed potential itemizable deductions
- Capped the deduction for state and local taxes
The IRS has a basic overview for individuals and families that can give you a more in-depth understanding of the changes and how they could have impacted your return.
It’s also important to note that getting a smaller refund or owing taxes when you file isn’t the same thing as paying more in taxes overall. Some taxpayers may have received slightly more money each paycheck, which is why their refund shrunk.
Adjust your withholdings
If you’d prefer to get a larger refund or owe less money next year, you could make adjustments based to your withholdings — the amount of money that’s taken out of each paycheck to pay taxes.
Figuring out withholdings can be difficult, particularly if you have more than one job or both you and your spouse work. The IRS’s withholding calculator can help you fill out your W-4, the form that your employer uses to help determine your withholding amount.
You can update your W-4 at any time, and you can choose to have a specific amount of money taken out of each paycheck by writing in that amount in box 6 of your W-4.
Options if you owe
Owing additional taxes can feel extra burdensome when you were expecting a refund. However, it’s best to deal with the situation head-on. Here are a few options to consider:
File now and pay later. If it’s before April 15, you can file your tax return and wait until the 15th to pay. If it’s easier to budget, you could also make partial payments when you file and up until the tax filing deadline.
Pay now and ask for an extension. Filing late can result in a failure-to-file penalty, so it’s best to file on-time or ask for an extension rather than put off filing altogether. However, the filing extension doesn’t give you more time to pay your taxes. You still need to make the payments on time or you could be charged a failure-to-pay penalty plus interest. (Read more about IRS penalties.)
Sign up for a payment plan. If you know you won’t be able to pay your full tax bill by the payment deadline, you could apply for an IRS payment plan. The plan is free if you agree to pay the entire amount within 120 days (longer plans may have a setup fee), but you’ll still have to pay interest on the unpaid amount.
To refund or not to refund?
There’s often a debate about what’s best — owing nothing or getting a refund.
Some argue that getting a refund means you gave the government an interest-free loan because the government kept your money until you got your refund. Others point out that it can be easier to save up money when you don’t have access to it. There are merits to both sides as the “best” option could depend on an individual’s money personality and spending habits.
Whether you’d prefer to build your savings in a high-interest savings account or get a refund when you file your tax return, you may need to act now to understand your tax situation and alter your withholdings. A little effort now could lead to a big change next tax season.
Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.
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