Why is my federal refund over $3000 less than last year?

This actually makes perfect sense, and I can explain why your refund is so much lower this year. First, in 2023, you were on parental leave for 5 months and likely had taxes withheld as if you were going to earn that same amount all year. When you have inconsistent income like that, the withholding system often takes out too much tax, resulting in a larger refund. Second, your 401(k) contributions definitely reduce your taxable income, which is good! But they also reduce the amount of tax being withheld throughout the year, which means less "overwithholding" and thus a smaller refund. Remember, a smaller refund isn't necessarily bad - it just means you were keeping more of your money throughout the year instead of giving the government an interest-free loan. Third, and most importantly, child tax credits and other pandemic-related tax benefits have changed significantly. The expanded Child Tax Credit that was available during the pandemic years has expired, which can reduce refunds by thousands for families with children.

I went through something similar this year and found a tool that really helped me understand what was happening with my tax situation. I was completely lost about why my refund dropped by over $4K until I tried https://taxr.ai It basically analyzed my return and explained exactly what changed from last year in plain English. In my case, it was a combination of the Child Tax Credit changes and having less tax withheld throughout the year because of my new 401k contributions (similar to your situation). The tool also showed me that even though my refund was smaller, I actually paid less total tax this year - I just had better withholding! It actually walks you through how all the numbers shifted from one year to the next, which was super helpful for understanding what happened.

I tried that taxr.ai service after seeing it mentioned here, and wow - it actually cleared everything up for me! My situation was almost identical - my refund dropped from $5,800 to $2,100 this year and I couldn't figure out why. The analysis showed that the biggest factor was that I had less tax withheld throughout the year (about $2,400 less) because of my 401k contributions, plus some changes to how my employer calculated withholding. So while my refund was smaller, I actually had more money in each paycheck during the year. It also pointed out that I was affected by the reduced Child Tax Credit compared to the pandemic years. When I added everything up, it made perfect sense why my refund was lower. The service was super straightforward - just uploaded my returns and got a detailed explanation. Definitely worth it for the peace of mind!

If you're still confused after checking all the tax stuff, you might want to try calling the IRS directly. I know that sounds terrible (I used to spend HOURS on hold), but I recently used this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes instead of the usual 2+ hour wait. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I had a similar issue where my refund dropped by thousands and I couldn't figure out why. The IRS agent was able to pull up my records from both years and explain exactly what changed. Turns out in my case it was related to some education credits that I qualified for last year but not this year. Having that direct explanation from the IRS gave me peace of mind that nothing was wrong with my filing.

I have to eat my words. After posting that skeptical comment earlier, my frustration with the IRS got the better of me and I tried that Claimyr service. I honestly expected it to be a waste of money, but I was desperate after trying to call the IRS for weeks. It actually worked! Got connected to an IRS agent in about 20 minutes. The agent explained that my refund dropped this year because the Recovery Rebate Credit from last year isn't available anymore, plus some changes to the Child Tax Credit amounts. They also mentioned that my withholding pattern had changed significantly with my new job. What was really helpful is that they confirmed there weren't any red flags on my return - I was worried something was wrong when I saw such a big change in my refund. That peace of mind alone was worth it. For anyone else struggling to understand major changes in their tax situation, getting direct answers from the IRS solved it for me.

The same thing happened to me! My refund dropped from $6.2K to $2.3K this year. I freaked out thinking I did something wrong, but my tax guy explained that the biggest factors were: 1. The Child Tax Credit went back to normal after being temporarily increased during COVID years 2. I got a raise mid-year but didn't adjust my W-4, so my withholding wasn't keeping up 3. Some pandemic tax benefits expired It sounds like you've got similar factors with your increased salary plus the 401k changes. The 401k absolutely helps reduce your taxable income, but it also means less tax gets withheld from each paycheck. So you're paying less tax overall, but also getting less refunded. You might want to check if your W-4 withholding is set correctly for your current situation. Sometimes when life circumstances change (new job, 401k, etc) you need to update that form.

Is anyone else actually happier with smaller refunds? I used to get big refunds ($5K+) but after I adjusted my withholding, I now get around $500-1000 back. I'd rather have that extra $350-400 in each monthly paycheck throughout the year than wait for a big refund. I can invest it or use it when I actually need it. OP, if your refund dropped but your take-home pay increased due to 401k and different withholding, you might actually be in a better financial position overall. Just something to consider!