Why is my tax refund so low?

A tax refund is the amount of money returned to you by the Australian Taxation Office (ATO) if you’ve paid more tax throughout the year than necessary. It’s often seen as a small bonus or an extra financial boost, especially if you’ve had large tax withholdings from your salary or other income. The purpose of a tax refund is to correct the balance between what you owe in taxes and what’s already been paid on your behalf.

However, it can be frustrating when your tax refund is lower than expected or even if you owe money instead. There are several reasons why this might happen, such as incorrect tax withholding, missed deductions, or changes in your financial situation throughout the year. If you’ve been asking yourself, "Why is my tax refund so low?" this article will help explain the common causes behind a smaller refund and provide you with tips on how to manage your taxes more effectively in the future.

Common Reasons for a Low Tax Refund

1. No Estimated Taxes with Gig Income

If you earn income from gig work, freelancing, or side jobs, taxes are often not automatically withheld. This can lead to a smaller refund because you haven’t paid taxes on that income throughout the year. To avoid this, it’s crucial to set aside a portion of your gig earnings for taxes and make estimated tax payments. Failing to do this can result in either a smaller tax refund or a tax bill when you file your return.

2. Not Accounting for Withholding Across Multiple Jobs

When you have multiple jobs, each employer may not withhold enough tax, assuming you're only working for one. If you don’t adjust your withholding at each job, it could lead to insufficient tax deductions. This may cause you to owe tax when you file, or it could reduce your refund because your total income might push you into a higher tax bracket.

3. Not Factoring Eligibility Changes for Tax Credits and Deductions

Your eligibility for tax credits and deductions can change year by year. For example, you may no longer qualify for certain credits, like the Low-Income Tax Offset, or deductions for work-related expenses. If you don’t take these changes into account when filing your taxes, it could result in a smaller refund, as you may not be claiming the same benefits as you did in previous years.

4. Unpaid Debts

If you have any outstanding debts, including taxes owed to the Australian Taxation Office (ATO), your tax refund may be reduced or offset to cover those debts. The ATO can use your refund to pay off overdue taxes or other government-related debts, which means your refund could be much lower than expected.

What Should You Do If Your Tax Refund Is Low?

If your tax refund is lower than expected, don’t worry. There are steps you can take to understand why and make improvements for next year.

1. Review Your Tax Return

It’s important to carefully check your tax return to make sure everything is correct. Even small mistakes, like entering the wrong income amount or missing a deduction, can affect your refund.

• Double-check your details: Make sure your income, expenses, and personal details are correctly entered.

• Look for missing deductions: You may be able to claim work-related expenses, donations, medical costs, or investment-related deductions.

• Check for tax offsets: Some people qualify for tax offsets that can reduce the amount of tax they owe.

• Seek professional help: If you’re not sure, a tax agent or accountant can review your return and find any missed opportunities to save money.

Fixing errors or claiming missing deductions can sometimes result in a higher refund or reduce how much tax you owe.

2. Adjust Tax Withholding

Your tax refund depends on how much tax is taken out of your pay throughout the year. If too little tax was withheld from your salary, your refund will be smaller or you may even owe tax.

• Check your withholding amount: Look at your pay slips or tax return to see how much tax was deducted.

• Use the ATO’s withholding calculator: The Australian Taxation Office (ATO) provides tools to help you estimate the right amount of tax to be taken out of your income.

• Update your withholding settings: If needed, you can fill out a new tax declaration form with your employer to adjust how much tax is deducted.

By making sure the right amount of tax is withheld, you can avoid unexpected tax bills and ensure a more accurate refund next year.

Maximize Your Tax Refund with the Right Approach

Want a bigger tax refund? You just need to plan ahead and take advantage of all the tax breaks available. Here are some simple ways to increase your refund and keep more money in your pocket.

1. Adjust Your W-4 Form

Your W-4 form tells your employer how much tax to take from your paycheck. If too little is taken out, you might owe money at tax time. If too much is taken, you’ll get a refund, but it means you’ve been giving the government extra money all year. To get the right balance, check your W-4 and adjust it if needed. You can use the IRS Withholding Calculator to help. If you’ve had a big life change like getting married or having a child, update your W-4 so your taxes match your situation.

2. Use Every Tax Credit You Can

Tax credits are great because they directly reduce how much tax you owe. Some credits can even give you money back! The Earned Income Tax Credit (EITC) helps people with low or moderate incomes. The Child Tax Credit gives parents up to $2,000 per child. If you’re paying for school, the American Opportunity Credit and the Lifetime Learning Credit can lower your tax bill. Even saving for retirement can give you a tax break through the Saver’s Credit. Make sure you check which credits you qualify for before filing your taxes.

3. Claim All Possible Deductions

Deductions reduce your taxable income, which means you pay less in taxes. Some common deductions include mortgage interest, student loan interest, and medical expenses. If you donate to charity, you can deduct those contributions, but you need to keep records of them. If you pay state and local taxes, you may be able to deduct up to $10,000 of those payments. Keeping track of all your eligible deductions can help lower your tax bill and increase your refund.

4. Save Money in Special Accounts

Putting money into certain savings accounts can lower your taxable income, meaning you owe less in taxes and might get a bigger refund. If your job offers a 401(k), putting money into it can reduce your taxable income. Contributing to an IRA can also help lower your tax bill. If you have a high-deductible health insurance plan, a Health Savings Account (HSA) lets you save money tax-free for medical expenses. Flexible Spending Accounts (FSA) also allow you to use pre-tax money for healthcare or dependent care costs. These accounts not only help you save for the future but also lower your tax bill.

5. Deduct Work-Related Expenses If You’re Self-Employed

If you run your own business or do freelance work, you can deduct many work-related expenses. This includes things like a home office, internet, phone bills, travel costs, and equipment. If you drive for work, you can deduct mileage at the IRS-approved rate. Keeping good records of your business expenses helps you reduce your taxable income and increase your refund.

6. File Your Taxes Early

Filing your taxes as soon as possible has several benefits. It reduces the risk of someone stealing your identity and filing a fake return in your name. It also gives you time to correct any mistakes before the tax deadline. Plus, if you’re expecting a refund, filing early means you’ll get your money back sooner. The IRS processes early returns faster, especially if you choose direct deposit.

Conclusion

A low tax refund can happen for many reasons, like errors in your tax return, missing deductions, or not enough tax being withheld from your pay. At Hello Ledger, we help our clients understand their tax situation and take the right steps to improve their refund. By reviewing your tax return carefully and adjusting your tax withholding, you can avoid surprises and keep more of your hard-earned money.

We believe in staying on top of your finances all year round. Keeping good records, staying informed about tax laws, and making smart financial choices can make a big difference. If you're unsure about your tax return, our team is here to help.

Don’t wait until tax season—get ahead now! Let us handle the hard work so you can focus on what matters most. Contact us today, and let’s maximize your refund together!