Why Do I Owe Taxes This Year? Understanding The Causes
Filing taxes is rarely a fun task, but it’s usually worth it when you get a refund. That is, unless you end up owing money.
If you’re surprised to find out you owe for your federal or state return, you may find yourself scrambling to figure out why, with questions like “Why do I owe so much in taxes this year?”
While it’s definitely frustrating to owe money, it’s not the end of the world. There are many reasons why you may have underpaid taxes during the year, ranging from changes in your financial and personal situation to shifting tax laws. Understanding why you owe can help you avoid the same issue in the future.
Below are reasons you might owe taxes this year.
1. Changes In Income And Withholding
Insufficient Withholding:
Changing jobs during the year can have tax implications. If your new job pays more and pushes you into a higher tax bracket, you may owe more when tax season comes around. But even if your income drops, you could still owe. For instance, if you move from a job earning $25,000 per year to a job paying $12,000, and you don’t adjust your Form W-4, your new employer might not withhold federal taxes. This means that while your first job withheld taxes on your income, no taxes were taken from the second job’s pay, potentially leaving you with a tax bill for that unpaid amount.
Employers typically only withhold taxes based on the income from that specific job, which means multiple income sources can push you into a higher tax bracket than you expect.
Increased Income:
Side gigs are another common reason people owe taxes. Many side hustles don’t withhold taxes like traditional jobs. If you make more than $10,000 from a side hustle through platforms like Venmo or PayPal, you should receive a Form 1099-K to report your earnings. Starting in 2024, these forms will be issued for any payments over $5,000 for goods and services.
Unemployment Benefits:
Unemployment compensation is taxable, but most states don’t automatically withhold taxes. You can choose to have taxes withheld or pay estimated taxes, but if you didn’t, you might owe money when you file your tax return. Expect to receive Form 1099-G to report your benefits.
Retirement Distributions:
Withdrawals from traditional retirement accounts like 401(k)s are taxable. While many plans withhold 20%, this may not be enough to cover your tax liability, especially if it’s an early withdrawal. As a result, you could owe more taxes when you file.
2. Changes In Deductions And Credits
Expired Or Reduced Tax Benefits:
During the pandemic, the government enhanced certain tax benefits, such as stimulus checks, the expanded Child Tax Credit, and a $300 charitable deduction. But many of these benefits have expired, which could impact your tax bill if your income stayed the same or increased.
Loss Of Eligibility For Credits Or Deductions:
Changes in your income or marital status could make you ineligible for certain credits or deductions. For example, the Earned Income Tax Credit is only available to non-parents with incomes between $18,591 and $25,511 (for single filers) for 2024, an increase from $17,640 to $24,210 for 2023. Be sure to check the current income limits for credits and deductions before filing to avoid surprises.
3. Life Events And Tax Implications
Marriage Or Divorce:
Getting married or divorced can change your tax situation, especially when it comes to filing status and income adjustments. Make sure you update your W-4 accordingly to reflect any changes.
Selling A Home:
If you sold your home for a profit, you may qualify to exclude up to $250,000 of the gain ($500,000 for married couples filing jointly), as long as you meet the ownership and residency requirements. If you don’t qualify, you may have to pay taxes on the gain.
Selling Investments:
If you sold investments like stocks or cryptocurrency and made a profit, you may owe capital gains taxes. However, if you have capital losses that exceed your gains, you may not owe taxes on the profit, as your losses will offset the gains.
4. Other Factors
Estimated Tax Payments:
If you’re self-employed, you’re responsible for paying quarterly estimated taxes. Failing to pay them or underpaying can result in a tax bill at the end of the year, along with penalties and interest. Additionally, self-employed individuals must pay both the employee and employer portions of Social Security and Medicare taxes, though they can deduct the employer-equivalent portion when figuring their adjusted gross income.
Errors Or Omissions:
Mistakes on your tax return, like forgetting to report income or missing a deduction, can lead to owing money. Even if you’re using tax software, it’s sometimes helpful to get a second opinion from a professional who can review your return for errors. If you discover a mistake after filing, file an amended return to correct it.
In conclusion, owing taxes can be frustrating, but understanding the reasons behind it can help you avoid it in the future. Whether it’s due to a change in income, deductions, or life events, keeping track of your finances and tax situation throughout the year can help prevent any surprises when it’s time to file.
Source: Business Insider
