Have you ever wondered, “Why do I owe taxes?” It’s a question many people ask, especially when tax time comes around. Taxes can be confusing, but they’re an important part of how our country works.
Sometimes, when you do your taxes, you might find out you owe money. Even if you don’t owe federal taxes, you may still owe state taxes. This can be surprising and even a little scary. There are many reasons why this can happen, and it’s more common than you might think.
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
- What to do if you owe taxes
- How to avoid owing taxes
- Work with tax experts
Common reasons for owing taxes
There are many different reasons you may owe taxes. Some of these reasons are because of your job, some are due to your family, and others are about your earnings. 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.
Employment changes
When you begin a new job, your employer usually has you fill out a W-4 form. A W-4, also known as an “Employee’s Withholding Allowance Certificate,” is a form used to calculate how much of your wages should be withheld to pay income tax. The W-4 form is a complex document requiring different types of information, so you may accidentally fill it out incorrectly. This can result in you paying too little taxes over the course of the year and owing taxes.
Child Tax Credit
The Child Tax Credit is a type of tax credit available to some parents if they have children they can claim as dependents. It’s designed to help parents pay for the extra expenses of having children or dependents. You may owe taxes if you no longer qualify for the Child and Dependent Care tax credit but you still received money for it or received more money than what you’re for.
Self-employment income
If you’re wondering, “Why do I owe money on my tax return?”, consider your employment status. 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.
Capital gains taxes
Sometimes, people buy things that can go up in value, such as stocks, houses, or even digital money called cryptocurrency. When you sell these things and earn income, you may have to pay a special tax called capital gains tax. This tax only applies to the extra money you made, not on all the money you got from selling.
If you sell something soon after buying it (within one year), you might pay more taxes than if you keep or “hold” it for a long time. This can make you owe taxes if you didn’t plan for it. Typically, you’re taxed less on items you hold for longer, also known as long-term capital gains. If you only have the item for a year or less, you’ll pay short-term capital gains, which can be more costly and are taxed as regular income.
Fewer tax deductions
Tax deductions allow you to reduce the amount of income that is considered taxable. If you qualify for deductions, they can decrease how much you will owe in taxes.
Think of tax deductions like special discounts on your taxes. One year, you might get several of these discounts. But the next year, you might not get as many. This can make you owe more taxes than you expected.
For example, if you paid student loan interest one year but have since paid off your loans, you won’t get the student loan interest deduction. This increases your taxable income, which means you might owe money on your taxes. The higher your taxable income, the more money is taxed, so you could owe more.
Student loan repayment
If you borrowed money for school but are lucky enough to get student loan forgiveness, the loans forgiven may count as income. Increasing your income will ultimately increase how much you owe in taxes.
If you’re still repaying your student loans, you may be able to reduce your taxes. The student loan interest deduction lets you subtract up to $2,500 from your taxes.
Additionally, if you paid off your student loans in the last year or so, you may owe more in taxes because you’re no longer eligible for the student loan interest deduction. This means potentially losing a $2,500 deduction when you do your taxes, which increases how much you’ll owe.
Filing status change
Your filing status is how you tell the government about your family when you do taxes. If you get married or divorced or have a baby, your filing status might change. This can affect how much tax you owe.
There are typically more tax benefits available to those who are married and filing together and those with children. However, we recommend always consulting a tax specialist to help you decide which filing status is best for you.
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 if you owe taxes
While finding out you owe taxes you weren’t expecting can be stressful, there are several things you can do to handle the situation. 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 6 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 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 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.
How to avoid owing taxes
Nobody likes surprises, especially if that surprise is a big tax bill. The good news is 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
Talk with a tax professional to ensure you receive all 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.
Work with tax experts
While there are many reasons why you may owe taxes, there are also many ways you can reduce the amount that you owe. 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!
