Every year you sit down to compute your taxes. You hope that the IRS has deducted too much this year and owes you a refund. Sadly, sometimes, instead of a refund, you owe taxes. You feel downcast because you have to fork out money to settle your taxes, and you might not even have that much money. Then you ask yourself, “Why Do I Owe Taxes?”.
Why Do I Owe Taxes?
In this case, the IRS has underestimated the taxes you owe. The reason is that some changes have occurred and influenced your tax position. Those changes include a new job, higher income, and capital gains. Sometimes we ignore these changes. Then our taxes grow beyond expectations.
New Job
A new job means you have to fill out a Form W-4. What you fill out will determine how much of your earnings your employer withholds for taxes. If you decide you want less withheld from your paycheck, you might have to pay the government more taxes. Having a contract job means there are no withholdings from your paycheck. You’ll have to pay all your taxes yourself.
Capital Gains Tax
If you got involved in stocks or cryptocurrency and made a killing, you might be owing some taxes. You are to report every capital gain and loss. The profit you make is capital gains, and the IRS taxes them. There are no withholdings on your capital gains which means you will owe.
Child Tax Credit
The government made Child Tax Credit payments in 2021 in advance. Your income in 2020 determined the amount of credit you received. If your income increased above a certain threshold in 2021, you might have received too much credit. You’ll have to pay the excess back.
If you share custody of your kid, you can’t claim the Child Tax Credit until it’s your turn to take care of the dependent. You also can’t claim Child Tax Credit when your kid or kids grow up. Those are part of the reasons you might owe taxes.
Side Job
Income from side hustles is also taxed. Without an employer withholding income from your side hustle, your tax can grow to be very high. If you expect your taxes to be over $1,000, the IRS demands that you pay estimated taxes quarterly. Refusing that means you’ll be penalized for underpaying your taxes when they are over $1,000 at the end of the year. Your tax bill could be very high without estimated taxes or withholding taxes.
Higher Income
If you worked overtime frequently or got pay raise, there’s a possibility you might owe taxes. The reason is that an addition to your earnings could propel you to a higher tax bracket. Moving to a higher tax bracket without a corresponding change in your payroll withholdings means you’ll owe more taxes than usual.
How To Avoid Owning Taxes Next Time?
- These extra bills are unpleasant, and you have to find ways to stop them. Here are some tips you can try.
- Estimate your taxes with the IRS Tax Withholding Estimator.
- Make frequent adjustments to your W-4 to accommodate increases in your tax liability.
- File early returns or make quarterly payments if you are self-employed to avoid penalties for underpayments.
- Consult a tax expert or financial advisor.
What Can You Do When You Can’t Afford The Taxes You Owe?
When you find that your tax bills are more than you can afford at the moment, there are some steps you can take to avoid penalties. Some include signing up for an IRS installment plan, applying for a short-term or long-term payment plan, and taking a loan. Put some thoughts into whatever option you choose to avoid regrets.
How Do You Know The Amount Of Taxes You Owe?
You can actively keep track of changes that influence your tax status, but this can be tough at times. It’s easier if you can find an expert to assist you. You can hire a tax professional or use an online filing system.
Conclusion
A side job, higher pay, capital gains, and more could be the reason you owe taxes. You can avoid being caught unawares by constantly keeping up with changes that can affect your tax position. This way, you won’t owe the government taxes or give them an interest-free loan when you overpay your taxes. That money could have gone into some investments.
Frequently Asked Questions
- How little do I have to earn to not pay taxes?
The minimum for filing taxes varies. Your marital status, age, and more are considered when determining the minimum income. For example, if you are married, file jointly, you and your spouse are under 65 years and make less than $25,100 yearly, you don’t have to file taxes.
- What does 1 or 0 mean on the W-4?
1 means that you want less tax to be withheld from your pay, while 0 means you want the highest amount to be withheld from your pay.
