Although most types of income are taxed, there are several reasons why you might owe the Internal Revenue Service, despite having money withheld from your paycheck all year. Explore some of the most common explanations for owing taxes and how you can avoid making underpayments in the future.
Read: 3 Ways Smart People Save Money When Filing Their Taxes
5 Reasons Why You Might Owe Taxes This Year
Why do you owe taxes this year? Since everyone’s situation is unique, there are many reasons why you could owe money on your taxes. Here’s a look at five common reasons for owing taxes.
Withholding too little from your paycheck.
Failure to file.
Changes in the tax code.
Higher income than usual.
Changes in deductions.
1. Withholding Too Little From Your Paycheck
The amount taken out of your paycheck throughout the year is an estimate of what you’ll owe when it comes time to file your taxes. If you overpay, you’ll receive a tax refund. But if you don’t pay enough throughout the year, you’ll end up with a bill come tax season.
2. Failure To File
Another potential issue resulting in owed taxes is the failure to file them on time. State tax due dates may vary. When you file late and don’t apply for an extension on time, you could incur late fees and interest that make your tax bill higher. If you’re wondering why you owe taxes this year, the reason might be that you submitted your tax return after the due date.
3. Changes in Tax Code
There have been several changes in the tax code in recent years that could significantly impact how much you pay in taxes. Even if you typically expect a refund, this may not be the case with new tax laws. When the IRS updated its tax brackets, it may have impacted you and put you in a new category.
4. Higher Income Than Usual
Earning more means you’re taxed more. Whether you earned a salary raise or worked a lot of overtime while getting paid hourly, you could have been bumped into a higher tax bracket.
5. Changes in Deductions
You might also owe taxes this year if you didn’t qualify for the deductions and credits you’ve come to expect. The earned income tax credit, for example, comes with annual limits. If you made more than you earned the previous tax year, you might not qualify anymore. Similarly, many parents take advantage of the child tax credit, which can significantly reduce the amount of taxes they owe. This credit also comes with income limits and age restrictions.
What To Do If You Owe Taxes
If you can’t pay your entire tax bill when it’s due, there are a number of options available to help you avoid serious consequences. Some involve working out payments directly with the IRS, while others involve finding alternative ways to pay your taxes.
Here are some payment options to consider:
Apply for a full-payment agreement if you can pay your taxes within 120 days.
Sign up for an IRS installment plan.
Make an offer in compromise.
Consider a loan or other financing to make a tax payment.
Each of these options comes with different eligibility requirements and consequences. This is especially true when you think about taking out a personal loan, home equity loan or another type of financing to take care of your tax bill.
What Happens If You Don’t Pay Your Taxes?
Unfortunately, not paying your taxes doesn’t make this debt go away. Assuming you didn’t file for an extension, if you don’t pay your taxes by the due date, you’ll end up owing back taxes. Whether it’s intentional or not, prioritize paying your back taxes as soon as you realize that you owe them. Make sure to take action by filing online or seeking the help of a tax professional.
What Is Withholding Tax?
From a federal perspective, withholding tax is the amount taken out of your paycheck and paid directly to the government before you even see it. In most cases, you’ll pay a withholding tax for your state taxes as well, although there are a few states that don’t charge income tax. For example, if you claim zero or file as a zero when filling out your tax forms for your employer, you are indicating that you want the most amount of tax taken out of your pay each pay period.
Your employer will base the withholding amount on how much money you earn, as well as other important details you provide on your W-4 tax form. If you don’t fill out this form correctly, you could have too little taken out of your paycheck each pay period, ultimately resulting in underpaying your taxes.
How To Avoid Owing Taxes in the Future
It’s important to research ways to avoid owing taxes in the future. Here are some ways to get started, so next year you won’t have to wonder if you going to owe taxes.
Update your W-4 annually or when anything changes your tax situation.
File your taxes early to avoid underpayment and other penalties.
Speak to a CPA and a financial advisor to get the big picture of your finances and make sure you’re maximizing your deductions.
Use the IRS Tax Withholding Estimator to estimate how much you’ll owe next year.
Following these steps each year can help you make sure you’re withholding the correct amount in each of your paychecks so you won’t get caught off guard when you file your taxes.
Final Take
Even if you owe taxes this year, use it as a learning opportunity to understand your finances better for the future. Keep track of how much you earn, what methods you use to earn money and how your life changes over time. It’s also smart to stay on top of tax-related news so you know about major changes that might affect you. Of course, anytime you’re in doubt about how much you owe or what your payment options may be, talk to a professional. It’s the best way to protect yourself and keep the IRS happy.
FAQ
Here are answers to some common questions about taxes.Why do I owe money on my taxes?
There are many reasons why you could owe money on your taxes. Some common causes can include withholding too little from your paycheck, failure to file, changes in the tax code, higher income than usual or changes in deductions.
Is it normal to owe taxes?
Owing taxes is a normal occurrence for a lot of individuals come tax season. If you are caught off guard by owing taxes, you can look into the reasons why or consult a CPA or financial advisor so you will be better prepared for next year.
Why do I still owe taxes if I claim zero?
There are a few reasons why you would still owe money if you have claimed zero on your tax forms. Some reasons are if you have additional income, have a spouse that earns income or if you earn bonuses or commissions.
Caitlyn Moorhead contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: Common Reasons Why You Might Owe Taxes This Year
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