April 15th is approaching and as usual, people are getting anxious about their taxes. For many, it’s the dreadful time when they wait to find out if they owe or will be getting a refund. But why is it that some of us find ourselves owing taxes each year? It’s not uncommon to feel like you’re doing something wrong, but the truth is, there could be a number of reasons why you find yourself owing taxes, and it’s important to start understanding them.
Maybe it’s the first time you’ve owed taxes, or maybe it seems to be recurring year after year. Regardless of the reason, understanding why you owe taxes could help you better handle your finances and avoid owing in the future. One thing you should keep in mind is that there are different factors at play that could be causing you to pay more in taxes than you anticipated. Understanding these factors will give you a clearer picture of why you’re owing taxes this year.
In this article, we’ll explore some of the reasons why you might be owing taxes this year. We’ll go beyond the usual suspects, such as not withholding enough taxes or neglecting to report certain income sources. Instead, we’ll take a closer look at some of the lesser-known reasons why your taxes may have gone up this year. From unexpected life changes to changes in the tax code, we’ll take a deep dive and leave you with a better understanding of why things are the way they are. So, grab a cup of coffee and let’s get started.
Common Reasons for Owing Taxes
As the tax season approaches, many Americans find themselves wondering why they owe taxes this year. There are a few common reasons for owing taxes that taxpayers should be aware of.
- Insufficient Withholding: Most Americans are required to pay taxes throughout the year by having their taxes withheld from their paychecks. However, if a taxpayer doesn’t have enough taxes withheld from their paychecks, they may owe additional taxes when they file their return. This can happen if a taxpayer has multiple sources of income or if they claimed too many allowances when they filled out their W-4 form.
- Self-Employment: If you are self-employed, you are responsible for paying your taxes throughout the year. This means that you need to make estimated tax payments on a quarterly basis. If you don’t pay enough taxes throughout the year, you may owe additional taxes when you file your return.
- Unreported Income: If you received income that wasn’t reported on your W-2 or 1099 form, you may owe additional taxes when you file your return. This can happen if you receive tips or if you have income from a side gig that you didn’t report.
If you find that you owe taxes this year, don’t panic. The most important thing is to understand why you owe taxes and to take steps to ensure that you don’t owe taxes in the future. If you’re not sure why you owe taxes, it’s a good idea to consult with a tax professional who can help you understand your tax situation and develop a plan to ensure that you are withholding or paying enough in taxes throughout the year.
Changes in Tax Law
Tax laws can change every year, and these changes can greatly affect your tax refund or the amount you owe. This year, several significant changes were made to the tax law. One of the major changes was the increase to the standard deduction. This means that fewer people will be able to itemize their deductions, resulting in a higher taxable income.
- Another change made to the tax law was the reduction of tax rates. While this may seem like a good thing, it can actually have the opposite effect for some taxpayers. The lowering of the tax rates is accompanied by an elimination of some deductions and exemptions, which can result in a higher taxable income and ultimately lead to owing more taxes.
- Changes were also made to the personal exemption, which has been eliminated. This can have a big impact on larger families who previously claimed multiple exemptions.
- The tax law also made changes to the alternative minimum tax (AMT) threshold and the child tax credit. The AMT threshold has been increased, which means fewer taxpayers will be subject to the tax. The child tax credit has also been increased, which can be a benefit for families with dependent children.
It’s important to stay informed about changes to the tax law and how they may affect you. The best way to do this is to consult with a tax professional or do research on reputable websites. By staying ahead of the changes, you can better prepare for your tax season and potentially avoid owing taxes at the end of the year.
Here’s a table summarizing the major tax changes for the 2019 tax year:
| Tax Change | Effect |
|---|---|
| Increased standard deduction | Fewer people itemize deductions |
| Lowered tax rates | May result in higher taxable income for some |
| Elimination of personal exemption | Bigger impact on larger families |
| Increase to child tax credit | Benefit for families with dependent children |
| Increased AMT threshold | Less taxpayers subject to the tax |
Overall, keeping up with changes to the tax law can be complex, but understanding how they affect you can prevent any unwanted surprises when it comes to filing your taxes.
Failure to Adjust Withholdings
One of the biggest reasons why you may owe taxes this year is because you failed to adjust your withholdings. Withholdings are the amount of money that your employer deducts from your paycheck and sends directly to the government to cover your estimated tax liability. Many people don’t realize that they need to adjust their withholdings throughout the year, especially if there have been changes in their financial situation.
If you’ve had a significant increase in income, your withholding may not have been enough to cover your tax liability. On the other hand, if you’ve had a decrease in income or if you’ve added a dependent, you may have overpaid your taxes and could be entitled to a refund.
If you’re not sure whether your withholdings are accurate, it’s a good idea to use the IRS’s withholding calculator. This tool can help you determine how much you should be withholding based on your income, filing status, and other factors.
Common Mistakes
- Not adjusting your withholdings when you start a new job or if you change jobs during the year
- Not considering additional sources of income, such as freelance work or investment income
- Forgetting to update your withholdings after a major life change, such as getting married, having a child, or buying a home
What to Do If You Owe Taxes
If you owe taxes this year, it’s important to take action as soon as possible. The longer you wait, the more you’ll owe in penalties and interest. Here are some steps you can take:
- File your tax return on time, even if you can’t pay the full amount you owe. You’ll avoid a late filing penalty, which is more severe than a late payment penalty.
- Contact the IRS to set up a payment plan. You may be able to pay your taxes over time, rather than all at once.
- Consider adjusting your withholdings for next year to avoid owing taxes again. Use the IRS’s withholding calculator to determine the correct amount to withhold.
Tax Penalties
If you owe taxes and don’t pay them on time, you may be subject to penalties and interest. Here are some common penalties you may face:
| Penalty | Description | Percentage |
|---|---|---|
| Late filing penalty | Charged for not filing your tax return by the due date | 5% per month, up to a maximum of 25% |
| Late payment penalty | Charged for not paying your taxes on time | 0.5% per month, up to a maximum of 25% |
| Accuracy-related penalty | Charged for underpaying your taxes due to negligence or a substantial understatement of income | 20% |
To avoid these penalties, it’s important to file your tax return on time and pay your taxes by the due date. If you can’t pay the full amount, contact the IRS to set up a payment plan.
Freelance or Self-Employment Income
Working freelance or being self-employed can be an incredibly liberating experience. You get to be your own boss and set your own schedule. It’s a great way to maximize your earning potential and can be particularly appealing if you have skills that are in high demand. However, there is a downside that many freelancers and self-employed individuals tend to overlook – taxes.
When you’re working for someone else, your employer handles most of your tax obligations. This is not the case when you’re working for yourself. As a self-employed individual, you are responsible for managing your own taxes. This means that you must keep track of all your earnings and expenses throughout the year and file a tax return come tax season. Failure to do so can result in hefty penalties and interest charges.
What Can You Do?
- Make estimated tax payments throughout the year to avoid a large tax bill at the end of the year.
- Keep accurate records of all your income and expenses. This will make it easier to file your taxes and claim any deductions you’re entitled to.
- Consider hiring a tax professional to help you navigate the complicated world of self-employment taxes.
Self-Employment Tax Rate
One of the most significant financial costs of self-employment taxes is the self-employment tax. Unfortunately, many people are unaware of this tax or don’t know how it works. The self-employment tax is a tax that covers the Social Security and Medicare taxes for self-employed individuals. In 2021, the self-employment tax rate is 15.3% of net earnings from self-employment. However, there is a cap on the amount of net earnings that are subject to this tax. In 2021, this cap is $142,800.
| Year | Self-Employment Tax Rate | Self-Employment Tax Cap |
|---|---|---|
| 2020 | 15.3% | $137,700 |
| 2021 | 15.3% | $142,800 |
It’s important to note that the self-employment tax is in addition to your federal and state income taxes. When you’re self-employed, you must pay all three taxes, which can quickly add up. That’s why it’s essential to plan ahead and make sure you’re saving enough money throughout the year to pay for your tax obligations come tax season.
Benefits Received Can Increase Taxable Income
One thing that many people don’t realize is that certain benefits received can increase taxable income. This is because most forms of benefits are considered as income by the IRS, and as a result, they must be reported on tax returns. Some examples of benefits that can increase taxable income include:
- Social Security Benefits: Social Security Benefits are generally not taxable, however, if you earn enough income or have a high enough combined income with your spouse, up to 85% of your benefits may be taxed.
- Unemployment Compensation: Unemployment benefits are generally taxable and must be reported on your tax return.
- Disability Income: Disability income that you receive may or may not be taxed, depending on the source of the funds. If it was paid for by your employer, it is taxable. However, if it was purchased with after-tax dollars, it is usually tax-free.
Taxable Fringe Benefits
In addition to the benefits listed above, certain fringe benefits may also be taxable. These benefits include:
- Company car usage
- Gift cards and gifts from employers
- Health care reimbursements and flexible spending accounts (FSAs) that exceed the IRS limits
Reporting Benefits on Your Tax Return
Reporting benefits on your tax return can be complicated, especially if you have received multiple types of benefits throughout the year. To ensure that you accurately report your income, it is important to keep track of all of the benefits that you received and consult with a tax professional if you have any questions or concerns.
Table of Taxable and Nontaxable Benefits
| Benefit | Taxable | Nontaxable |
|---|---|---|
| Social Security Benefits | Up to 85% | 85% or less |
| Unemployment Compensation | Yes | No |
| Disability Income | Depends on source | Depends on source |
| Company car usage | Yes | No |
| Gift cards and gifts from employers | Yes | No |
| Health care reimbursements and flexible spending accounts (FSAs) | If exceeds IRS limits | If within IRS limits |
Remember, benefits received can increase taxable income, so it’s important to understand which benefits are taxable and which are not. Keeping accurate records and consulting with a tax professional can help ensure that you report your income accurately and avoid any potential IRS issues.
Deductions and Credits Not Applied
One of the most common reasons why you may owe taxes this year is that you did not take advantage of all the deductions and credits available to you. Deductions and credits are a great way to reduce your taxable income and potentially lower the amount of taxes you owe.
Here are some deductions and credits that you may have overlooked:
- Charitable deductions – if you donated to a qualified charity, you may be able to deduct the value of your charitable contributions.
- Educational expenses – if you or your dependents attended college or a vocational school, you may be eligible for the American Opportunity Credit or the Lifetime Learning Credit.
- State and local taxes – if you paid state income taxes or property taxes, you may be able to deduct them from your federal taxes.
If you did not take advantage of these deductions and credits, you may be paying more in taxes than you actually owe.
It is also important to note that some deductions and/or credits have income limits, so even if you qualify for them, you may not be able to claim the full amount. Make sure to thoroughly research and understand the eligibility requirements and limitations before filing your taxes.
Here is a table summarizing some common deductions and credits:
| Deductions | Credits |
|---|---|
| Charitable contributions | American Opportunity Credit |
| Mortgage interest | Lifetime Learning Credit |
| Medical expenses | Child and Dependent Care Credit |
| State and local taxes | Retirement Savings Contributions Credit |
By taking advantage of these deductions and credits, you may be able to lower your taxable income and reduce the amount of taxes you owe.
Not paying estimated taxes throughout the year
If you are an independent contractor, freelancer, or self-employed, you are responsible for paying estimated taxes throughout the year, rather than just once a year at tax time. Estimated taxes are payments made to the IRS every quarter to cover your income tax and self-employment tax. Failing to make these payments throughout the year can result in owing a large tax bill at the end of the year.
Here are a few reasons why you might not have paid estimated taxes:
- You did not know you were required to pay estimated taxes.
- You were not sure how much to pay in estimated taxes.
- You did not have the money to pay estimated taxes.
- You forgot to make the payments throughout the year.
It is important to know that the IRS can penalize you for not paying estimated taxes, even if you end up owing less than $1,000 at the end of the year. The penalty is calculated based on how much you owe and how long you waited to pay. The longer you wait to pay, the higher the penalty will be.
| Owed Amount | Penalty Percentage |
|---|---|
| Less than $1,000 | No Penalty |
| $1,000 to $4,999 | Underpayment interest rate (currently 3%) |
| $5,000 or more | Underpayment interest rate plus penalty (typically 5% of the owed amount) |
To avoid penalties for not paying estimated taxes, it is important to estimate your tax liability correctly and make payments throughout the year. You can use the IRS Form 1040-ES to help you estimate and make payments.
FAQs: Why Am I Owning Taxes This Year?
Q: Why am I owing taxes this year?
A: There may be several reasons why you owe taxes this year, including changes in your income, tax law updates, or adjustments in your deductions.
Q: Can I avoid owing taxes as a freelancer?
A: As a freelancer, you may owe more taxes than if you were a salaried employee. However, proper tax planning and deductions can help reduce your tax liability.
Q: Should I adjust my tax withholding?
A: If you owe taxes this year, you may consider adjusting your tax withholding for the upcoming year to avoid another unexpected bill.
Q: What is the penalty for not paying taxes owed?
A: If you do not pay the taxes owed by the due date, you may be subject to penalties and interest charges.
Q: Can I make payment arrangements with the IRS?
A: The IRS offers various payment options, including installment agreements and offers in compromise, to help taxpayers pay their tax bills.
Q: How can I prevent owing taxes next year?
A: To avoid owing taxes next year, consider increasing your tax payments, adjusting your tax withholdings, or consulting a tax professional for guidance.
Closing: Thanks for Stopping By!
Thanks for reading our article on why you may owe taxes this year. We hope our FAQs have provided useful information and guidance to help you better understand your tax situation. Remember to visit us again for more valuable tips and resources to help you stay on top of your finances!