Home » Why Do I Owe Taxes This Year? The 10 Most Common Reasons
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Uh oh. You owe taxes? Discovering that you owe money to the IRS is never a welcome surprise. Here’s a look at 10 common events that could leave you without a refund:
Under-withholding is the #1 reason individuals owe taxes. This occurs when not enough tax is taken out of your paychecks throughout the year. If you haven’t updated your W-4 form after a major life change, income adjustment, or second job, you might find yourself in this situation. Submit a new W-4 and be sure to check the multiple jobs worksheet or the IRS Tax Estimator if you or your spouse have more than one job.
2. Freelance or Gig Income
Freelancers and gig economy workers are responsible for paying their own taxes. The trouble is those wages (which are reported in a 1099) are not taxed in advance. What’s more, those who expect to owe $1,000 or more must pay estimated taxes quarterly. If you underpay your quarterly taxes, you will owe the IRS the remaining balance when filing your annual tax return. If you freelance or do gig work, it’s wise to set up a savings account with an automatic deposit to set aside funds for quarterly or annual taxes.
3. Self-Employment Tax
If you are an independent contractor or own a small business, you’ll also need to pay quarterly estimated taxes to avoid a big tax bill come April. In addition to that, you may owe self-employment tax (which also applies to freelancers). Self-employment tax covers your Medicare and Social Security taxes. If you were a W-2 employee, these taxes would be withheld for you. If you are self-employed, you’ll need to pay them yourself.
4. Unreported or Underreported Income
All income, including wages, tips, and earnings from investments, must be reported on your tax return. Forgetting to include some sources of income, such as earnings from a side job or interest from savings accounts, can result in owed taxes.
If you got a pay bump in the previous year (congratulations!), that pay raise could put you in a higher tax bracket. That means your tax liability could go up. If you don’t adjust your tax withholding, you could end up with a bigger tax bill at the end of the year. That bigger paycheck could also disqualify you for the Earned Income Tax Credit (EITC)—but more on that in a minute.
6. Changes in Tax Laws or Loss of Deductions
Tax laws evolve, and deductions or credits you counted on in previous years may be reduced or eliminated. For instance, if your salary increases and your Adjusted Gross Income (AGI) is too high, you may not qualify for the EITC. Or, if your child is now over the age of 17, you may no longer qualify for the child tax credit.
7. Capital Gains
Selling investments or property for a profit generates capital gains, which are taxable. If you’ve sold stocks, real estate, or other assets at a gain and didn’t set aside money for taxes, you might face a tax bill.
8. Withdrawals from Retirement Accounts
Early withdrawals from retirement accounts, such as an IRA or 401(k), are taxable. Occasionally, those withdrawals also incur additional penalties. Some exceptions allow for penalty-free withdrawals, but you still have to pay taxes on that income.
Unemployment benefits are considered taxable and you can choose to have taxes withheld from your unemployment check. If you opt not to, you may be hit with a big bill once you file your return in the spring.
10. FSA or HSA Changes or Contributions
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are valuable tools for managing healthcare expenses, but changes in contributions or usage can impact your tax situation. If you recently reduced the amount you contribute to one of those accounts, that will increase your taxable income. Additionally, if you’ve made non-qualified withdrawals from your HSA or used FSA funds for ineligible expenses, you could face tax consequences.
What to Do if You Owe Taxes
Unfortunately, if you owe taxes, you need to pay them. Failure to pay can result in some hefty penalties. If you can’t afford to pay, it is still important to file your taxes by the April 15, 2024, deadline. If you don’t, you’ll be hit with failure to file penalties—which could cost you a lot more than late payment fees. When you file, you can apply for a short-term or long-term payment plan to help spread out the cost. And—just a reminder—an extension only provides you additional time to submit your return. Any taxes you owe are still due on tax day.
Paying taxes is never pleasant. To avoid issues in the future, stay up to date with tax laws and monitor your tax liability and withholding—especially if you experience major life changes. If necessary, adjust your withholding. If you need to make quarterly tax payments or expect to pay a lot in the coming year, consider setting up a high-yield savings account. High-yield savings accounts—like a money market account—are perfect for short-term savings goals because they offer liquidity. You can also set up automatic transfers from your checking account to streamline your contributions so you don’t have to think about it later.
It could be one big change or several changes that made an impact: Filing changes – But big life changes, such as marriage, divorce, retirement or adding a dependent (having a baby, adopting) can affect the your tax situation such as the filing status for which you are eligible and other aspects of how you are taxed.
It could be one big change or several changes that made an impact: Filing changes – But big life changes, such as marriage, divorce, retirement or adding a dependent (having a baby, adopting) can affect the your tax situation such as the filing status for which you are eligible and other aspects of how you are taxed.
One common reason for owing taxes is inadequate withholding throughout the year. Review your W-4 form and consider adjusting your withholding allowances by contacting your employer.
If you claimed 0 and still owe taxes, chances are you added “married” to your W4 form. When you claim 0 in allowances, it seems as if you are the only one who earns and that your spouse does not. Then, when both of you earn, and the amount reaches the 25% tax bracket, the amount of tax sent is not enough.
Typically, you can avoid a penalty and any applicable interest by paying at least 90 percent of your taxes during the year. Checking and then adjusting tax withholding can help make sure you: Don't owe more tax than you are expecting; Don't get a surprise tax bill, and possibly a penalty, when filing next year; or.
If you make $60,000 a year living in the region of California, USA, you will be taxed $13,653. That means that your net pay will be $46,347 per year, or $3,862 per month.
“The best strategy is breaking even, owing the IRS an amount you can easily pay, or getting a small refund,” Clare J. Fazackerley, CPA, CFP, told Finance Buzz. “You don't want to owe more than $1,000 because you'll have an underpayment penalty of 5% interest, which is more than you can make investing the money.
The taxpayer's total tax payments already made, which includes refundable credits, appears on the appli- cable line of Form 1040. If the payments made exceed the amount of tax liability, the amount of the overpayment is shown on the applicable line in the Refund section of the Form 1040.
Claiming more allowances will lower the amount of income tax that's taken out of your check. Conversely, if the total number of allowances you're claiming is zero, that means you'll have the most income tax withheld from your take-home pay.
Sounds like you have self-employment tax for the consulting income. That is for Social Security and Medicare. You have self-employment income for which you will pay self-employment tax for Social Security and Medicare.
Under-withholding means you'll owe. Many people try to get as close as possible to even so they get more money in their paychecks during the year, but don't owe a lot or get a bigger refund at tax time. The key is managing your withholding to get the result you are looking for.
If your personal or financial circ*mstances have changed, you may end up owing taxes to the IRS when you usually get a refund. Common reasons include underpaying quarterly taxes if you're self-employed or not updating your withholding as a W-2 employee.
Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time. Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
If you owe more than you did in the previous tax year, it may be because you elected to take fewer deductions. Some examples include: Skipping an IRA contribution. Fewer charitable contributions.
It just depends on your situation. If you are single, have one job, and have no dependents, claiming 1 may be a good option. If you are single, have no dependents, and have 2 jobs, you could claim both positions on one W-4 and 0 on the other.
If a taxpayer refund isn't what is expected, it may be due to changes made by the IRS. These changes could include corrections to the Child Tax Credit or EITC amounts or an offset from all or part of the refund amount to pay past-due tax or debts. More information about reduced refunds is available on IRS.gov.
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