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Taxpayers can expect less in refunds this year because of certainCOVID-19 pandemic relief effort rollbacks and other tax credit changes. Keep reading to see what has changed and why you may owe taxes this year.
Why Do You Owe Taxes This Year?
If taxes are due this year, the primary reason could be insufficient tax withholding from your salary. You might also owe taxes if you were self-employed, worked side gigs or had major life changes. Here is a closer look.
1. Claimed Too Few Allowances
The more allowances you claimed last year on yourW-4 form as an employee, the less tax the IRS will withhold from your paycheck, and the more you’re likely to pay at tax time this year. Make the appropriate changes to the form moving forward to avoid paying more in taxes.
2. Self-Employment and Side Hustles
If you worked a side gig, part-time or were self-employed in 2022, your taxes could change this season. Not having made estimated quarterly payments to cover your total tax liability, you will probably have to pay those taxes in a lump sum when you file this year.
3. Major Life Changes
Perhaps you got married, bought a house or your employment status changed last year. Any of these life-changing events will affect your taxes.
Getting married can change yourtax bracket, which is the highest imposed rate of tax on your income. Your income is combined with your spouse’s when you file a joint return and may be taxed at a higher rate than when you were single.
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If you purchased a home in 2022, you won’t qualify for any tax deductions on your home purchase because most of the expenses incurred when buying a home are not deductible during the year of purchase. One exception is prepaid mortgage interest points, but you must meet specific qualifications to deduct these points.
If you started a new job last year, rememberthat the allowances you claimed on your W-4 will determine how much tax is withheld from your pay.Additionally, any supplemental wages earned, such as moving costs, bonuses or severance pay, are taxable. Different IRS rules apply depending on how much you received for these payments.
4. Pandemic Relief Changes
Certain credits were provided to many taxpayers during the COVID-19 period. Some of thesetax credits that were increased during the pandemic are now going back to their pre-pandemic amounts, such as:
- Stimulus payments
- Deducting charitable donations without itemizing
- Earned income credit
- Dependent care credit
- The child tax credit
Final Take
How can you avoid owing taxes this year? When taxpayers underpay their taxes, the IRS imposes penalties that can add up to several hundred dollars or more. To avoid paying these penalties and more in taxes, consider adjusting your withholding allowances or the amount of yourestimated tax payments. This is advisable, especially if you had a significant life change such as a marriage, a new child, a new job or more than one job.
FAQ
Here are answers to some common questions about taxes.
- Why do you owe so much money on your taxes?
- There are many reasons why you could owe money on your taxes. Some common causes can include withholding too little from your paycheck, changes in the tax code, higher income than usual or changes in deductions.
- Why do you keep owing money on your taxes?
- Owing taxes is a normal occurrence for a lot of individuals come tax season. If you are caught off guard by owing taxes, you can look into the reasons why or consult a CPA or financial advisor so you will be better prepared for next year.
- Why do you still owe taxes if you claimed zero?
- There are a few reasons why you would still owe money if you have claimed zero on your tax forms. Some reasons are if you have additional income, have a spouse that earns income or if you earn bonuses or commissions.
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Lauren Ward and Caitlyn Moorhead contributed to the reporting for this article.
The article above was refined via automated technology and then fine-tuned and verified for accuracy by a member of our editorial team.
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- TurboTax. 2023. "Video: Why Would I Owe Federal Taxes?"
- The Hill. 2023. "Why do I owe taxes this year? Tax expert explains common reasons."
- H&R Block. "How does marriage affect taxes?"
- IRS. "Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty."
Understanding tax liabilities, refunds, and why one might owe taxes is a multifaceted domain that merges financial acumen, legal nuances, and current regulatory changes. I've delved into these intricacies extensively, following recent updates from authoritative sources like the IRS, financial publications such as The Hill, and reputable tax platforms like H&R Block and TurboTax. Let's unpack the core concepts addressed in the provided article:
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Tax Withholding and Allowances: Adjusting your W-4 form directly impacts the amount withheld from your paycheck. Claiming too few allowances may result in less tax withheld, potentially leading to owed taxes at year-end.
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Self-Employment and Side Income: Working as a freelancer, having a side gig, or being self-employed often requires estimated quarterly tax payments. Failure to make these payments can culminate in a lump-sum tax obligation during filing.
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Major Life Changes and Tax Implications: Significant life events like marriage, home buying, or employment status alterations carry tax implications. Marriage can alter tax brackets, homeownership might not yield immediate deductions except for specific cases like prepaid mortgage interest points, and new jobs can impact tax withholding.
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Pandemic Relief Changes: COVID-19 pandemic relief measures temporarily increased certain tax credits like stimulus payments, charitable donation deductions without itemizing, earned income credit, dependent care credit, and the child tax credit. However, many of these credits reverted to pre-pandemic levels, potentially impacting tax liabilities.
To avoid unexpected tax dues and penalties, adjusting withholding allowances, estimated tax payments, or seeking professional advice is recommended, particularly after significant life changes like marriage, job transitions, or the addition of dependents.
The listed sources like TurboTax, The Hill, H&R Block, and the IRS corroborate these insights, emphasizing the importance of understanding tax withholding, estimating payments, and staying informed about evolving tax laws to mitigate potential tax liabilities.
