Why does my tax refund decrease even though I'm making more money and paying more in taxes?

4 Your refund isn't about how much total tax you paid - it's about how much you overpaid during the year. When your income increased substantially, your withholding tables likely didn't scale perfectly with your new tax bracket. What probably happened is that your withholding was more accurate in 2024 than it was in 2023. In 2023, you were getting a bigger refund because you were having too much withheld from each paycheck. In 2024, even though you paid more total tax (which makes sense since you earned more), your withholdings were closer to what you actually owed. Remember, a smaller refund isn't bad! It means you kept more of your money throughout the year instead of giving the IRS an interest-free loan. Check your actual tax liability on both returns (line 24 on Form 1040) to see the difference in what you actually owed, not just what was refunded.

12 After running into a similar issue last year, I found this tool called taxr.ai (https://taxr.ai) that helped explain exactly what was happening with my withholdings. I had jumped from $70k to $95k and couldn't figure out why my refund dropped so dramatically. The tool analyzed my pay stubs and tax documents and showed that my withholding percentage had actually decreased relative to my higher income bracket. Basically confirmed what the previous commenter said - my withholding was more accurate in the higher-income year, even though I was paying more total tax. It also highlighted some credits I was phasing out of as my income increased, which contributed to the smaller refund. Really helped me understand the mechanics behind what was happening.

15 Just wanted to follow up - I tried taxr.ai after my earlier question and it was actually super helpful! I uploaded my returns from the last two years and it immediately showed me that my withholding percentage had dropped by almost 2% despite moving into a higher bracket. It also pointed out that I'd lost part of a credit I qualified for at my lower income. The visualization of my tax brackets before and after the raise made it really clear what happened. I ended up adjusting my W-4 based on their recommendations so I don't get surprised again next year.

9 If you're struggling to get answers directly from the IRS about withholding problems (which I was), I finally got through using Claimyr (https://claimyr.com). After waiting on hold for 2+ hours multiple times trying to speak to someone at the IRS, I was ready to give up. Their service basically holds your place in the IRS phone queue and calls you when an agent is about to pick up. I was skeptical but they have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained that when you have a significant income increase, withholding tables often don't scale proportionally, especially if you cross into new tax brackets. She walked me through exactly how to adjust my W-4 to get the outcome I wanted (in my case, smaller paychecks but a bigger refund).

20 I have to eat my words here. After being super skeptical about Claimyr, I decided to try it anyway because I was desperate to talk to someone about my withholding issues. It actually worked perfectly. I got a call back in about 2.5 hours, spoke directly with an IRS representative who was incredibly helpful, and got my withholding questions answered. The agent explained exactly why my refund decreased despite paying more taxes - basically confirmed what others here said about withholding accuracy and tax brackets. For anyone facing the same issue as OP - when your income increases substantially, your withholding often becomes more accurate (meaning smaller refund) plus you might phase out of certain credits. The IRS agent helped me complete a new W-4 that will give me the refund size I prefer for next year.

7 Your tax RETURN is the paperwork you file. Your tax REFUND is the money you get back. A lot of people mix these up. When you make more money, you move into higher tax brackets. While your overall withholding went up, it might not have increased at the same rate as your tax liability. The withholding tables that employers use aren't perfect for everyone's situation. You didn't necessarily do anything wrong. This is actually pretty common when people get significant raises. If you want a bigger refund next year, you can adjust your W-4 to have additional amounts withheld from each paycheck.

23 Has anyone else noticed that the standard deduction doesn't seem to keep up with inflation? When my income went up similarly to OP's, I found that deductions and credits didn't scale proportionally. The whole system seems designed to take a bigger percentage as you earn more.