Reasons You Owe on Taxes This Year
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Many taxpayers expect a refund when filing their taxes, only to find out they owe money instead. This unexpected bill can be frustrating, but it often comes down to changes in income, deductions, or tax withholding. Several factors could be at play if you’re self-employed, had investment gains, or didn’t withhold enough throughout the year.
1. Changes in Withholding
If your employer doesn’t withhold enough taxes from your paycheck, you may end up owing at tax time. This often happens when you adjust your W-4 form to increase take-home pay but don’t account for the tax impact. A job change, raise, or switching from a salaried position to contract work can also affect withholding.
Additionally, if you claimed too many allowances or failed to update your W-4 after a life change—such as getting married or having a child—you might not have had enough taxes deducted throughout the year, leading to a balance due.
2. Self-Employment and Gig Work
When you work as a freelancer, independent contractor, or gig worker, taxes aren’t automatically withheld from your income like they are for traditional employees. Instead, you’re responsible for paying estimated taxes throughout the year, covering income and self-employment taxes, including Social Security and Medicare.
If you don’t set aside enough money or fail to make quarterly payments, you could end up with a large tax bill when you file. Many self-employed individuals also overlook deductions that could lower their taxable income, further increasing what they owe.
3. Additional Income Without Withholding
Extra income from side jobs, rental properties, or investments can increase your tax liability if no taxes were withheld. Unlike wages from a traditional job, where employers automatically deduct taxes, freelance work, rental income, dividends, and stock sales often don’t come with automatic withholding.
If you don’t make estimated tax payments or adjust your W-4 to account for additional income, you may owe a significant amount at tax time. Even small sources of income, like online sales or hobby earnings, can add up and push you into a higher tax bracket, increasing your overall tax bill.
4. Fewer Tax Deductions
If you previously relied on tax deductions to lower your taxable income, losing them can lead to a higher tax bill. This often happens when personal circumstances change. Such changes include paying off a student loan and no longer qualifying for the student loan interest deduction, refinancing a mortgage, and reducing deductible interest payments.
Changes in standard and itemized deduction limits or no longer qualifying for business-related deductions can also impact your overall tax liability. If you can’t deduct as much as in previous years, your taxable income increases, which can lead to owing more when you file.
5. Reduced Tax Credits
Tax credits directly reduce the amount of tax you owe, so losing them can lead to a higher bill. If your income increased, you may no longer qualify for credits like the Child Tax Credit (CTC), Earned Income Tax Credit (EITC), or education credits, which phase out at higher income levels.
Changes in family status, such as a child aging out of eligibility or custody changes, can also impact these credits. Unlike deductions, which lower taxable income, tax credits provide a dollar-for-dollar reduction in taxes owed, so losing them can significantly increase your tax liability.
6. Capital Gains from Investments
Selling stocks, real estate, or other investments for a profit can trigger capital gains taxes, increasing what you owe. The tax rate depends on how long you held the asset. Short-term capital gains (on assets held for a year or less) are taxed at the same rate as ordinary income, which can be significantly higher than long-term capital gains, which have lower tax rates.
If you didn’t set aside money to cover these taxes, your final bill might be larger than expected. Additionally, selling assets in a high-income year could push you into a higher tax bracket, further increasing your tax burden.
7. Early Retirement Withdrawals
Taking money out of a 401(k), IRA, or other retirement account before age 59½ often results in both income taxes and penalties. The IRS generally imposes a 10% early withdrawal penalty on top of regular income tax, making these withdrawals more costly.
Many taxpayers don’t realize that the default withholding on early distributions may not cover the full tax liability, leaving them with a balance due when they file. Unless the withdrawal qualifies for an exemption, tapping into retirement savings early can significantly increase the amount of taxes owed.
8. Underpayment Penalties
Failing to pay enough in taxes throughout the year can result in an underpayment penalty from the IRS. This often affects self-employed individuals, freelancers, and investors who don’t make estimated tax payments or employees who don’t withhold enough from their paychecks.
The IRS generally expects taxpayers to pay at least 90% of their total tax liability throughout the year, either through withholding or estimated payments. If you fall short, penalties and interest can be added to your tax bill, making what you owe even higher.
9. Tax Law Changes
Tax laws and regulations change regularly, sometimes increasing tax liability for certain taxpayers. Adjustments to tax brackets, deduction limits, and credit eligibility can result in owing more if you didn’t adjust your withholdings accordingly.
For example, if the standard deduction increased but certain itemized deductions were reduced, you might not be able to lower your taxable income as much as in previous years. Tax law changes can also affect business deductions, child tax credits, and retirement contribution rules, which may lead to an unexpected tax bill for those unaware of the updates.
10. Marriage or Divorce
A change in filing status due to marriage or divorce can have a major impact on your tax situation. If you get married, your combined income may push you into a higher tax bracket, especially if both spouses earn high wages.
On the other hand, divorce can lead to losing valuable tax benefits, such as the married filing jointly status, dependent-related credits, or the ability to claim deductions like mortgage interest on a shared home. Spousal or child support payments may also affect your tax liability, depending on recent tax law changes. Without adjusting withholdings or estimated payments, these changes can lead to an unexpected tax bill.
Your Options
If you owe on taxes this year you may want to consider professional assistance to see if you may have missed any changes in the tax code that can reduce your tax burden.
Another option you may want to consider is seeking professional services to find out what options you have to help you deal with your tax liability. If you owe a significant amount to the IRS there are programs available to help you potentially reduce your tax bill. You will want to make sure you are seeking the assistance from a reliable and reputable company if you decide to pursue this route.
Conclusion
Owing taxes can be frustrating, but understanding the reasons behind it allows for better financial planning. Whether it’s insufficient withholding, self-employment income, lost deductions, or tax law changes, being proactive can help you avoid surprises. Adjusting your W-4, making estimated payments, and keeping up with tax law updates can reduce your chances of owing next year.
If you owe on taxes this year you may want to consider professional assistance to see what options are available to you.
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