Here’s why your 2024 tax refund may be less than your 2023 tax refund:

Now, some people have already filed their 2023 taxes. If your refund this year is less than last year, you’re in good company.

As of February 2, the average tax refund for this tax season was $1,395. However, at the same time last year, the average tax refund was much higher at $1,963.

To be fair, the 2024 tax filing season is only a few weeks away, so this year’s refunds may catch up to last year’s levels as more tax returns start coming in. But here are some reasons why your tax refund this year may be smaller than last year: 2023.

When your income increases

If you earned more money in 2023 than in 2022, you may receive a smaller tax refund this filing season. But that income doesn’t necessarily have to come from your job.

One interesting and positive thing that has happened in 2023 is that banks have started paying more interest on savings accounts and CDs due to a series of interest rate hikes from the Federal Reserve. However, you may not realize that your interest income is taxable.

Not only will you have to pay taxes on the interest you earn on your savings account or CD, but your regular income tax rates will also apply. This means you will be taxed at the highest possible tax rate based on your income. bracket.

Again, the U.S. tax system is a marginal system where the highest income is taxed at a higher rate than the lowest income. For example, if you are single and your income is $50,000 this year, any income over $47,151 will be taxed at a 22% rate. The lower your income, the lower your tax rate.

However, interest income is taxed as unfavorably as possible. So, if you made a lot of money on your bank account last year, you could end up with a reduced refund.

Small refunds aren’t necessarily a bad thing

The thought of reducing your tax refund can be disconcerting. But one thing to know: a smaller refund means the IRS will have less control over your money in 2023.

When you get a refund, it’s not a gift from the IRS. This simply returns the money you had previously stored away.

So, let’s say you get a $900 tax refund in 2023, and you’re only expecting a $600 tax refund in 2024. You might think you lost $300. But in reality, the IRS won’t let you keep $300 of your earnings when you were entitled to it last year.

Of course, if you’re expecting more money to cover bills, pay off debt, and more, a smaller tax refund can be a blow. In general, it’s best not to do your financial planning around tax refunds, as it can be difficult to know how much your tax refund will be. But if you’re getting less money back from the IRS this year, there are several ways to deal with it.

One option is to pick up a side job and increase your income that way. You can also take inventory from home and sell unwanted items to earn extra cash. Lastly, simply cutting back on your spending a little can free up extra funds for essential bills.

There’s no guarantee that your tax refund this year will be smaller than last year, so don’t assume it will be for you either. However, given that the average tax refund this year is already noticeably lower than last year, there is a possibility that you can prepare.

But your best bet is to file your 2023 taxes as soon as possible. This will give you a clear idea of ​​how much money you can expect to get back from the IRS. And you can adjust your financial plan accordingly.

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