Key Takeaways
- You may owe taxes if your W-4 is filled out incorrectly, leading to too little money being withheld from your paychecks throughout the year.
- Untaxed income from freelance work, investments, or unemployment benefits can increase your total tax bill at filing time.
- Losing a tax credit or deduction you had in a previous year—like the Child Tax Credit—can result in owing money on your tax return.
- Life changes, such as getting married, having a child, or earning more income, can shift your filing status and change what you owe.
- If you owe taxes, you have options, including IRS payment plans, extensions, and professional tax help.
Have you ever wondered, “Why do I owe taxes?” You may owe taxes because the amount withheld from your paychecks or paid through quarterly estimates didn’t cover your full tax bill for the year. Changes in income, filing status, lost deductions, or untaxed earnings can all cause a balance due.
For many people, this may come as a surprise during tax season. And if you don’t owe federal taxes, you may still owe state taxes, even if your situation hasn’t changed much.
In this article, we’ll look at different reasons people owe money on their tax returns and tips for what to do if you owe taxes. So, how do you end up owing taxes? We’ve got the answers for you!
- Common Reasons for Owing Taxes Instead of Receiving a Refund
- What to do Now if You Owe Taxes
- How to Avoid Owing Taxes Next Year
- Frequently Asked Questions About Owing Taxes
- Take Control of Your Taxes
Common Reasons for Owing Taxes Instead of Receiving a Refund
If you’re asking yourself, “Why would I owe taxes?” or “Why do I owe so much in taxes?”, let’s explore some of the most common reasons people owe money on their tax returns.
Underwithholding
A W-4, also known as an “Employee’s Withholding Allowance Certificate,” is a form that tells your employer how much to take out of your paycheck for taxes. If your W-4 doesn’t reflect your actual tax situation, you could end up paying too little throughout the year and owing taxes when you file.
There are a few common W-4 mistakes that lead to underwithholding:
- Incorrect filing status. Choosing the wrong status (such as single vs. head of household) changes how much is withheld from each paycheck.
- Claiming too many dependents. Listing more dependents than you actually qualify for reduces your withholding too much.
- Not updating after life changes. Events like getting married, buying a home, or picking up a second job can change your tax situation, and your W-4 should be updated to match.
Untaxed income
Not all income has taxes taken out before you receive it. If you earned taxable income that wasn’t subject to automatic withholding, you may owe taxes on those earnings when you file. This is a common reason people ask, “Why do I owe federal taxes this year?” Here are a few types of untaxed income that can lead to a surprise tax bill:
- Capital gains. When you sell stocks, real estate, or cryptocurrency for more than you paid, the profit is subject to capital gains tax. Items sold within a year of purchase are taxed at your regular income rate (short-term), while items held longer than a year are taxed at a lower long-term rate.
- Investment income. Dividends, interest from savings accounts, and distributions from retirement accounts are all taxable. If you didn’t have taxes withheld from these earnings, the balance will be due when you file.
- Unemployment benefits. Unemployment payments are considered taxable income by the federal government. Many people don’t opt into having taxes withheld from these payments, which can result in owing money at tax time.
Self-employment or side hustle income
If you work for yourself, you might owe taxes. When you’re self-employed, no one takes taxes out of your pay before you get it. This means you have to save money to pay taxes later. If you don’t save enough, you might owe taxes when it’s time to file.
Self-employed individuals pay quarterly taxes. If your quarterly taxes don’t add up to your total tax burden for that year, you’ll owe taxes. It’s important to keep track of how much money you make and set some aside for taxes every quarter. Paying taxes four times a year can help you avoid a large bill at the end of the year.
Loss of tax credits or deductions
Tax credits and deductions don’t last forever. You can phase out of them if your income goes up, your family situation changes, or you no longer meet the eligibility requirements. This is a common reason people owe taxes when nothing has changed. Here are a few ways this can happen:
- Child Tax Credit. The Child and Dependent Care Tax Credit is available to parents who claim qualifying children as dependents. Once a child ages out of eligibility, that credit goes away. If you still received advance payments for it, you may owe money back.
- Student loan interest deduction. If you paid off your student loans, you’re no longer eligible for this deduction, which can subtract up to $2,500 from your taxable income. You may also owe more if you received student loan forgiveness, since forgiven loans can count as income.
- Income-based phase-outs. Many credits and deductions have income limits. If your earnings increased—even slightly—you may no longer qualify for credits you received in previous years, which increases your total tax bill.
Filing status or income changes
Your filing status is how you tell the government about your family when you do taxes. The filing status for couples is much different from that of single filers or heads of household. If you get married or divorced, or have a baby, your filing status might change. This can affect how much tax you owe.
Income changes also play a role. A raise, a new job, or a spouse entering the workforce can push you into a higher tax bracket, meaning more of your income is taxed at a higher rate.
Updates to tax codes
Sometimes, the government changes the rules about taxes. These new codes might mean you’ll owe more taxes than before. It’s important to stay up-to-date on these changes or ask a tax professional if you’re ever confused.
For example, the government may change how much money you can earn before you have to pay taxes. Or, they might change the rules about what you can use deductions for. These updates can be confusing, but they can make a huge difference in whether you owe taxes or not.
What to do Now if You Owe Taxes
If you owe money instead of getting a refund, let’s look at some ways to deal with owing taxes. Remember, it’s important to take action and not ignore the problem.
Review your tax return
Looking over your tax return can help you find mistakes. Understand what you need to file taxes, including all tax forms. Sometimes, people put in the wrong numbers or forget to claim deductions they’re allowed to have. Checking your return carefully can help you find errors that could lower the amount you owe.
If you’re not sure how to do this, we recommend working with a tax expert.
Apply for an IRS payment plan
An IRS payment plan can help you repay your taxes over time instead of a lump sum. If you can’t pay all at once, this option can be especially helpful. You can choose to pay it all within 120 days (that’s about 4 months), or you can pay a little bit each month for a longer time. This way, you don’t have to worry about paying your taxes right away.
Request an extension
Asking for more time to pay can help if you need extra time to get the money together. An extension gives you more time to file your taxes, usually about six months. But remember, you’ll still need to pay what you think you owe by the original due date. An extension just gives you more time to make sure all your paperwork is correct.
Consider an offer in compromise
This is an agreement with the IRS to settle your bill for less than you owe. An offer in compromise can be a great way to pay less in taxes, but it’s not easy to get approved. You must show the IRS that you can’t pay the full amount within a reasonable timeframe. If they approve the offer in compromise, you may be able to pay less than what you owe.
Get a loan
Getting a loan to pay your taxes can help in some cases. It allows you to borrow money from a bank to pay the IRS. This can be good because the interest rate on a loan might be lower than what the IRS charges for late payments.
But be careful—you’ll have to pay back the loan, so make sure you can afford the payments before you make this decision. The good news is that personal loans and tax implications are straightforward; you typically won’t pay taxes on any personal loans.
Consult a tax professional
Talking to someone who knows a lot about taxes can help whether you owe taxes or not. A tax professional can look at your situation and give you advice about the best way to handle owing taxes. They might find tax write-offs or deductions you didn’t know about or help you understand which payment option is best for you. They can also make sure you don’t make the same mistakes next year.
Each option above comes with advantages and disadvantages—the best choice will vary based on your personal situation.
Amend your tax return
If you realize you made an error after filing, you can submit an amended return to correct mistakes that may lower the amount you owe. Common reasons to amend your tax return include:
- Forgetting to claim a deduction
- Reporting the wrong filing status
- Leaving out a source of income
You’ll need to file Form 1040-X, which you can submit electronically or by mail.
How to Avoid Owing Taxes Next Year
Nobody likes surprises, especially if that surprise is a big tax bill. The good news is that there are things you can do to avoid owing taxes. Let’s look at some ways to help ensure you don’t owe more money when tax time comes around.
Fill out your W-4 correctly
Carefully fill out your W-4 forms and update them whenever your tax situation changes. This form tells your job how much money to take out of your paycheck for taxes. If you fill it out wrong, you might not pay enough taxes during the year. Then, you could owe money when you do your taxes.
It’s a good idea to check your W-4 every year. If something big changes in your life, like you get married or have a baby, you should update your W-4. This helps ensure you’re paying the right amount of taxes all year.
Know how much you’ll owe
It’s wise to try to figure out how much you’ll owe in taxes before the end of the year. You can use an online calculator or ask a tax professional to help you. This way, you can see if you’re paying enough taxes from your paycheck. If you’re self-employed, this process ensures you’re paying enough every quarter.
If you’re not paying enough, you might be able to ask your employer to take out a little more money each time you get paid. If you’re self-employed, you can simply pay a bit more in quarterly taxes. This can help you avoid a large tax bill at the end of the year.
Understand the deductions you qualify for
There are many different types of deductions, and it can be hard to know which ones you can use. A tax professional can help you figure this out. They might find deductions you didn’t know about, like those for work expenses or donating to charity.
Using all the deductions you qualify for can lower the amount of taxes you have to pay. This can help you avoid owing money or even get money back when you do your taxes.
Pay taxes quarterly
If you freelance or have side income, set aside money for taxes each quarter and pay estimated taxes to the IRS four times a year. This helps you avoid a large balance due at filing time. Quarterly payments are typically due in April, June, September, and January. You can use IRS Form 1040-ES to calculate your estimated payments based on your expected income for the year.
Frequently Asked Questions About Owing Taxes
Why do I owe taxes if my income didn’t change?
Even if your income stays the same, changes to tax laws, the loss of a credit or deduction, or a shift in your filing status can all change what you owe.
Why do I owe taxes after getting a raise or bonus?
A raise or bonus increases your total income, which can push you into a higher tax bracket. If your withholding wasn’t adjusted, you may not have paid enough throughout the year.
Why do freelancers or 1099 contractors often owe taxes?
Freelancers and 1099 contractors don’t have taxes withheld from their pay. If they don’t make quarterly estimated payments or underestimate what they owe, they’ll have a balance due at tax time.
Why did I owe more taxes after my child turned 17?
The Child Tax Credit has age limits. Once your child ages out, you lose that credit, which increases your tax bill.
How do IRS withholding updates affect my refund?
If the IRS adjusts withholding tables or you change your W-4, the amount taken from your paycheck changes. Less withholding during the year means a smaller refund or balance owed.
What should I do if I can’t afford my tax bill?
If you can’t afford your tax bill, you can apply for an IRS payment plan, request an extension, or look into an offer in compromise. An offer in compromise is an agreement with the IRS that lets you settle your tax debt for less than the full amount you owe. It’s not easy to qualify for, but it can be an option if you’re unable to pay within a reasonable timeframe. A tax professional can help you figure out the best option.
How can I check if I owe taxes to the IRS?
You can check if you owe taxes by logging into your online account on IRS.gov, calling the IRS directly, or reviewing your most recent tax return. A tax professional can also help you determine your status.
Take Control of Your Taxes
While there are many reasons why you may owe taxes, there are also many ways you can reduce the amount that you owe. Reviewing your W-4, staying on top of life changes, understanding your deductions, and paying quarterly taxes if you’re self-employed can all help you avoid a surprise bill next year.
With over two decades of tax preparation experience, our tax professionals can help you with the filing process and provide peace of mind. Learn more about Sun Loan’s tax prep services and get filing today!
