Why all of a sudden do I owe taxes this year?

At a Glance: All working US citizens must pay taxes on their income. If at the end of the year you find that you still owe taxes, it is because you underpayed the taxes for your tax bracket. This may have resulted from a job change, a filing change, neglegence, or other reason.

stilt.com - THIS is why you owe taxes in the U.S. [2022] - Stilt

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Ever scratched your head over a tax bill after filing instead of celebrating a generous tax refund?

You’re not the only one – “why do I owe taxes” is a common question many U.S. taxpayers ask. Often, it is the result of certain changes to their tax status. There are a few reasons why you could be looking at an unexpected tax bill. We help you unpack some of the most common reasons below.

What is Tax Withholding?

It’s vital to first understand that tax in the U.S. is governed by a self-reporting system. The government relies on taxpayers to report their own taxes to them, figuring out if they owe the government anything, or if they’re owed a refund. In turn, understanding how tax withholding works forms an important part of reporting back to the Internal Revenue Service (IRS) on your taxes. In this self-reporting system, the government wins by having to spend less time and money figuring out everyone else’s taxes. But it does come with certain drawbacks. On a political level, this puts hyperfocus on how much tax each citizen pays and could become a sore point for many when it comes to getting their paychecks and election times. On a monetary level, it also means the U.S. government only gets to collect the tax owed once in a financial year. This turns the tax money into a sort of ‘loan’ made to taxpayers that they eventually have to pay back. So, to keep the wheels of the government turning, the IRS has to do tax withholding. The IRS estimates how much money you as a salaried employee – also known as a W2 worker – would eventually owe in taxes. They then take that money straight from your paycheck in the form of income taxes each time you are paid biweekly. When tax season rolls around again, you pool the year’s paychecks together and work out what you really owed the IRS. You then compare it to what you’ve actually paid as income tax over the past year. Either yourself or the government then has to pay up the difference to the other.

Why Does the IRS Overestimate Tax Withholding?

The IRS’s system is designed to generally overestimate how much each citizen owes in taxes to the government. The IRS is essentially taking a loan from you instead of the other way around. This overestimation of taxes owed is why about 70% of U.S. taxpayers normally end up getting a refund after tax season is concluded. Some love it, as it’s seen as a forced saving. Others bemoan the fact that they’re really just being paid back their own money they didn’t need to pay in the first place.

Reasons People Owe Taxes?

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‘Why do I owe taxes then’ might be your reaction to getting slapped by a bill from the IRS instead of the much-anticipated refund. This happens when the IRS has underestimated how much tax you owe. The balance at the end of tax season ends up being in favor of the government and not you. This has especially become more common after changes were made to the IRS’s withholding tables after the Tax Cuts and Jobs Act was passed in 2018. Below are a few more reasons why you might owe the government taxes.

Job Changes

If you’ve moved to a new job, what you wrote in your Form W-4 might account for a higher tax bill. This form can change the amount of tax being withheld on each paycheck. If you opt for less tax withholding, you might end up with a bigger bill owed to the government when tax season rolls around again. You can rectify this with a new Form W-4 which you can file for the new year. Remember you need to send this form to your employer and not the IRS. If your job has turned into contract work, that can also have a major impact on your taxes. Income from contract work isn’t subject to tax withholding. You’ll have to pay all your taxes to the IRS in lump sums.

Filing Changes

Changing jobs isn’t the only life change that could impact your tax situation. Your relationship status also has an influence on your taxes. For example, you might lose deductions and tax benefits as “Head of the Household” if you’re suddenly divorced. If you’re recently married, on the other hand, it could mean possible tax advantages. Read up on the difference between married filing jointly and married filing separately to ensure you get the most out of your taxes.

Older Children

Suffering from Empty Nest Syndrome? Having children that are dependent on you allows you to claim from the generous Child Tax Credit. But once they grow up to over the age of 17 and leave the house you can no longer claim that tax benefit. However, you can still claim your over-17 child as a dependent if they are in college or you’re still looking after them at home. It’s important to note any change with your children on your forms so the IRS can tell you if you need to file differently.

Side Job

The amount of tax you owe increases the more money you earn – especially if it’s a type of income that doesn’t have tax withheld from it. This could include selling shares on the stock market or working freelance gigs for example. You might also be subjected to self-employment taxes. No one is deducting the IRS’s withholding taxes from your income each month so your taxes owed will only be added up during tax season – unless you make your quarterly tax payments.

Credit and Deduction Eligibility

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As with the Child Tax Credit, other changes in your filing status will result in you potentially losing out on tax credits and deductions you’ve previously gotten used to. For example, your salary might have enabled you to claim for the Earned Income Tax Credit. If you got a bump in your salary via a promotion or a new job, however, you might not qualify for it anymore.

How Will I Know Why I Owe Taxes?

The easiest way to keep track of your tax refund or bill and see the itemized reasons why your tax refund might have gone up or down is through a financial professional or service company. This service could either be offered through an online filing system or with an in-person chat with a tax professional who can go through your taxes with you.

Conclusion

So if you’ve undergone job or tax filing changes, have children that have left the nest, or you’re hustling income on the side, it could be a good idea to save some money to pay a potentially large tax bill later on. This will always be an ongoing task throughout your life. Keeping up-to-date with changes to your tax status is part of a healthy financial lifestyle that can only provide rewards – instead of asking yourself every tax season ‘why do I owe taxes again?’

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stilt.com - THIS is why you owe taxes in the U.S. [2022] - Stilt

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