The tax return campaign has begun, and this year, many taxpayers are encountering a lower refund compared to previous years. To address this situation, the government has provided clarification on the IRS adjustment and why refunds might be smaller this year.
“The IRS adjustment occurs because, throughout the year, employees prepay taxes monthly through withholding at source. The actual IRS due is only determined in the following year, taking into account income, personal and family situations, and applicable deductions for each taxpayer. Once the total tax due is calculated and applicable deductions are made, the total tax owed is determined, from which the tax already paid monthly through withholding is subtracted,” the government explains in a statement.
Thus, “only in the following year (when the previous year’s income declaration is submitted and the tax settled), is this adjustment made, which depends on the specific case and can result in a refund (when more tax was withheld during the previous year than what is determined at the end) or an amount to pay (when there were no withholdings or these were lower than the tax due).”
“If the settlement (the following year) results in a tax refund to be received, this means that the taxpayer advanced too much tax to the state during the previous year through monthly withholdings, which is then refunded,” it reads.
Less Tax Paid Throughout the Year, Smaller Refund?
The government points out that in 2024, “IRS rates were reduced, resulting in a lower tax burden on family income” and “to ensure this reduction had an immediate impact (so taxpayers did not have to wait for the adjustment in 2025), new withholding tables were implemented, reducing the tax withheld monthly from salaries and pensions, so that the reduction immediately translated into more available income for families.”
“This change was particularly significant in September and October, to compensate for the IRS withheld in previous months. As a result, taxpayers began receiving a higher net income monthly, advancing significantly less tax to the state, with the benefit of better managing their family budget and savings (which indeed increased in 2024, with family savings rising),” as stated on the government’s website.
In practice, “IRS refunds correspond to a return of excess tax paid in advance, ideally paid as close as possible to the final IRS due through withholdings at source.”
“As the reduction of withholdings occurred in 2024, the final IRS adjustment will now, in most cases, be smaller. In other words, if a taxpayer withheld less tax throughout the year, there will be less excess tax paid to be refunded. In practice, families have already felt the tax reduction through increased monthly disposable income due to the reduction in withholdings. Thus, the fact that the refund might be smaller now, or that there might even be tax to pay, simply means that in 2024 they advanced less tax to the state than in previous years,” it is further explained.
