Owing taxes unexpectedly can be confusing. There are a variety of reasons this can happen, including receiving unemployment income or taking on an additional job.
Some of the most common explanations for owing taxes include:
Additional income
New sources of income: If you started receiving income that’s not subject to automatic withholding, you can end up owing additional tax. Examples include collecting a pension or Social Security (no tax or low tax withheld), selling investments (no tax withheld), and starting a home business (no tax withheld).
You earned more money, but didn’t increase withholding enough: This can happen when you have multiple jobs, since each employer withholds based only on what they’re paying you, and not your total income. The tax rate goes up as your income goes up, so the tax on your total income will be more than what was calculated.
(The TurboTax W-4 Withholding Calculator is a free tool to help you find the right withholding when completing a new W-4. You can use this info to boost your refund or increase your take-home pay.)
New worker in the family: If your non-working spouse returned to work during the tax year, your family withholding may not align with the higher tax rate. Since employers withhold tax based only on the income they’re paying you, combining your income with your spouse’s income might result in neither one of you having enough withholding to pay the increased tax rate on the combined earnings.
Fewer deductions
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
- Fewer medical expense deductions
- Home mortgage interest (as you pay off your mortgage, interest decreases each year)
- State and local tax deduction (moving from a high-tax state to a low- or no-tax state may increase your federal taxes, causing you to lose the deduction for state and local taxes)
Fewer credits
You may owe additional taxes if you qualify for fewer credits this year. Some of the main credits include:
Change in filing status
Changing your filing status can have a big impact on your taxes. For instance, if you previously filed as Married Filing Jointly, and switched your status to Married Filing Separately, you’ll likely lose some tax breaks. Your income may stay the same, but the tax on that income may be higher than when you filed jointly.
FAQs
Common reasons for owing taxes include insufficient withholding, extra income, self-employment tax, life changes, and tax code changes.
Why do I owe taxes and not get a refund? ›
In a nutshell, over-withholding means you'll get a refund at tax time. 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.
Why is it saying I owe money for taxes? ›
There are several reasons why you might owe money to the IRS: if you're self-employed, if you withdrew from a retirement account or if you no longer qualify for certain tax credits, to name a few. Preparing ahead of time can help you minimize the hit.
Why do I owe taxes with 0 exemptions? ›
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.
How do I stop owing taxes? ›
The federal tax system operates on a pay-as-you-go basis. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and subsequent payment penalties when they file their return. One way to avoid owing a balance is to correctly calculate and adjust how much tax you have withheld from your wages.
Should I be worried if I owe taxes? ›
In addition to the penalties mentioned, failing to pay or to make an agreement with the IRS to pay your taxes over time can sometimes lead to more severe consequences, such as a federal tax lien on your property. The IRS could also possibly seize certain assets or garnish your wages.
Why are people owing taxes this year? ›
It may be because more people are earning income that isn't subject to the tax-withholding system, where employers automatically take tax payments out of people's paychecks before they receive them.
What is the average tax return for a single person making $60,000? ›
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.
Why is everyone owing taxes this year in 2024? ›
Under-withholding from Your Paycheck
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.
What does it mean if you owe money on tax return? ›
OVERVIEW. If you finish your tax return and are confused as to why you need to send the IRS a check, there is only one possible explanation for this: you paid less tax during the year than you owed for your income level.
Calculate last year's 'effective tax rate'
While Form W-4 can be daunting, Loyd said you can check your withholding by calculating the previous year's “effective tax rate,” or the percent of taxable income you pay in levies. This is different from your marginal tax bracket. Start by reviewing last year's tax return.
How do I know if I owe or get a refund? ›
If you are receiving a tax refund, check its status using the IRS Where's My Refund tool. You can view the status of your refund for the past 3 tax years. If you owe money or are receiving a refund, you can check your return status by signing in to view your IRS online account information.
Is it better to claim 1 or 0 if single? ›
Claiming 1 on Your Taxes
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.
Is it better to owe taxes or get a refund? ›
“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.
Why do I owe taxes if I only made 30k? ›
How much you have withheld each paycheck is a function of your earnings and what you claim on your W-4. If you owe money, it is due to not having enough withheld during the year to cover your tax liability. You can revisit your W-4 with your payroll department to adjust your withholding accordingly.
How to reduce taxes owed to the IRS? ›
8 ways to potentially lower your taxes
- Plan throughout the year for taxes.
- Contribute to your retirement accounts.
- Contribute to your HSA.
- If you're older than 70.5 years, consider a QCD.
- If you're itemizing, maximize deductions.
- Look for opportunities to leverage available tax credits.
- Consider tax-loss harvesting.
Further action with a tax lien.
If a levy is not enough to propel you into paying off your tax debt, the IRS will take further action by placing a tax lien on your property and assets. With a tax lien, you'll not be able to sell or refinance your assets and the IRS will also have authority to seize your assets.
