Crop residue retention has been established as an effective conservation tillage practice for decreasing nitrogen (N) runoff losses and increasing crop production. However, the impacts on N runoff losses from annual rice-wheat rotation are not well understood, which has prevented identification of optimal straw retention practice. Herein, N dynamics and losses in the runoff, crop yields, and soil properties were assessed for two years in a rice-wheat system after implementing straw return for five consecutive years. The field experiment included six treatments—N1, WN1, RN1: recommended N application with no straw, wheat straw, and rice straw return, respectively; and SN0, SN1, and SN2: both wheat and rice straw return with zero, recommended, and custom N addition, respectively. The results showed that NH₄⁺-N and NO₃^--N were the major forms of N loads discharged during the rice and wheat season, respectively. The total N loss (TN, P < 0.001) and mean annual crop yield (rice and wheat, P < 0.01) significantly increased as the N fertilizer rate increased. With respect to crop residue retention modes, the cumulative TN loss and mean annual crop yield trends were: N1 > RN1 >WN1 >SN1 (P < 0.05) and SN1 ≥RN1 >WN1 ≈N1 (P < 0.05), respectively. During a one-year rice-wheat rotation cycle, the treatments with simultaneous incorporation of crop residue and N fertilizer reduced N runoff loss by 2.7–20.9% (P < 0.05) and increased crop yield by 8.7–16.9% (P < 0.05), of which the SN1 treatment was found to be the most effective. The straw-induced reducing effect occurred only during the base and tiller fertilization stages of the rice growing period, which was primarily regulated by soil inorganic nitrogen (SIN), soil organic carbon (SOC), and pH during the rice tiller stage. Our findings indicate that straw return decreases N runoff loss by mediating factors in soil and standing water. In order to reduce N runoff loss without jeopardizing crop yield, the practice of double seasons straw retention with recommended N application (SN1) is suggested in the rice-wheat rotation cropping system in southern China.