Your tax refund may look smaller this year — here's why

If you've already filed your tax return this year, you may have experienced the shock of receiving a smaller-than-usual tax refund. IRS data so far this tax season shows the average refund has actually jumped 15% — to nearly $3,500 compared with the previous year's amounts — so what could be causing Americans to see smaller refund checks overall?

Select investigates the reasons behind why this may be happening and details how you can make sure you tax refund is maximized this year.

The 2021 tax year presented many challenges for taxpayers. While government initiatives put more money in Americans' pockets during the pandemic, they also paved the way for fewer tax write offs, making things difficult for the many working Americans who rely on their tax refund to provide a boost to their finances.

A recent H&R Block survey suggests that while 73% of people who struggle financially intend to save some or all of their tax refund each year, only 44% of them end up putting that money away because of unexpected expenses. If you're unsure as to why your tax refund may be smaller than usual, it may have been because you encountered or received one or more of the following during last year:

Frozen student loan debt

When the pandemic shutdowns went into effect, the U.S. Department of Education froze all public student loan payments and stopped interest from accruing on student loan accounts. While this has been a great benefit to those who were struggling to pay them, it also means the $2,500 above-the-line deduction has been rendered worthless during the freeze. As a result, consumers have had more taxable income remain in their pockets, which, in turn, has led to them receiving a smaller tax refund.

That said, if you've been paying private student loans through services like SoFi® Private Student Loans or KeyBank, your payments and interest haven't actually stopped, so if you fall into this category, be sure to utilize this deduction on your tax return.

Advance child tax credit payments

When the American Rescue Plan went into effect in March 2021, it provided financial relief to millions of families, increasing the 2021 child tax credit from $2,000 to $3,000 per child age 17 and under and adding an extra $600 for children under six years old.

Anecdotally, this has been a major reason why many Americans are disappointed by their tax refunds this year. Eric Bronnenkant, Head of Tax at Betterment, discusses the different scenarios many people are now finding themselves in.

"The advance of child tax credits during the year may end up reducing an individual's refund when they file," Bronnenkant tells Select. "Other people may have received too much of an advance credit but [are] not qualifying at all when filing their tax return, which resulted in a significant decrease in their refund."

Consider the following example: if you had a $3,600 child tax credit write-off but received $1,800 as an advance last year, you're only allowed to write off $1,800. Only being able to write off this smaller amount leads to having a smaller refund.

It's also likely many Americans have been reporting incorrect numbers because of the advance. TurboTax CPA and tax expert Lisa Greene-Lewis tells Select that if tax filers don't report this information correctly, they could "see an adjustment in their return" from the IRS. She urges consumers to refer to their Child Tax Credit Letter 6419 to verify how much they actually received in 2021 so they'll know exactly how much to claim.

Unemployment assistance

In 2020, the federal government waived federal taxes on all unemployment income. For the 2021 tax year, however, that is no longer the case.

If you collected unemployment assistance at any time during 2021, it's considered taxable income. With millions of Americans collecting unemployment benefits at one point or another last year, it's another reason why so many are seeing lower refunds this year.

When someone is approved for unemployment assistance, they can choose whether or not they want to have their taxes withheld. For those who chose not to, back taxes will be owed.

To claim unemployment income on your tax return, you should have received a 1099-G form from your state's unemployment agency. This form contains all the numbers you need to correctly input this information into your tax return.

With all these potential line items in your tax return to consider, how should you maximize your tax return this season to ensure you're getting the best refund possible? Let's dig in.

As you prepare to file your taxes this year, note that it may be beneficial to enlist the help of reputable tax software or even hire a professional accountant. There are so many ways to potentially make a mistake on your tax return and contacting the IRS seems like an impossible task. As you collect your documents to meet the April 18th deadline, keep these three points in mind:

File your taxes securely

While the vast majority of Americans file their taxes online or through a trusted tax professional, there is still a subset that sends in their taxes by mail each year. Not only do you run the risk of your personal information being lost or stolen in-transit, the IRS states on its website that "due to staffing issues, processing paper tax returns could take several weeks longer. Taxpayers and tax professionals are encouraged to file electronically."

To ensure your tax return is delivered securely, consider filing it through a reliable online service or with a licensed tax professional.

Consider using reputable tax software

According to a 2020 TaxAct survey, 44% of people admit to making a mistake on their tax filings at least once in their lifetime. By using reputable tax software like TurboTax or H&R Block, you'll minimize the chances of that happening — these programs were created to guide you through the entire process, maximize your deductions and tell you exactly what your tax refund amount will be.

Once you receive your return, pay off high-interest debt first

A tax refund can provide a welcome boost to your spring budget. However, it's important to use your refund to help eliminate any big financial concerns, especially if you've any high-interest debt such as student loans, credit card debt or medical bills you're trying to pay off.

If the debt you owe has an interest rate over 5%, it would behoove you to throw your refund at that first. For anything less than that interest rate you'd be better off putting your refund toward an investment for the future, possibly by purchasing investments inside an IRA, Roth IRA or taxable brokerage account. If you do have a significant amount of high-interest debt, consider the benefits of debt consolidation, which would turn what you owe into a lower-interest personal loan and may end up saving you a significant amount in interest charges.

If your tax refund was smaller than you anticipated it would be this year, you might be feeling a bit defeated. If you still haven't filed yet, be aware that your refund may not be as large as it normally is. Before you take on your taxes, consider using reputable tax software or hiring a professional to ensure you're calculating everything correctly. Because once you file your taxes, there's no way to retract them.

Make sure to file your tax return by the April 18 deadline, or at least file for an extension if you can't. Paying your taxes late can result in fines and penalties, while not filing them at all could result in even more severe consequences.

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