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Why Do I Owe Taxes
Every year, millions of Americans file their taxes, have the IRS assess how much they owe in taxes and pay their tax obligation.
There are many reasons why taxpayers pay taxes to the IRS every year.
Some people file their taxes and get a refund while others end up having to pay more taxes.
You are wondering why you owe more taxes to the IRS.
Keep reading as I will break down the most common reasons why people owe taxes.
One common reason why you owe taxes to the IRS this year is because of a change in your employment status.
Typically, employers are required to withhold a certain amount of income taxes on their employees’ paychecks.
If you were withheld more taxes than your total tax liability for the year, you get a refund.
However, if you did not have enough taxes withheld on your paychecks, you will owe taxes.
You’ll need to complete your W-4 Form and choose 0 if you want the most amount of taxes to be withheld or 1 to have less taxes withheld.
You may owe more taxes to the IRS as you may have earned some extra income on which you are required to pay taxes.
For example, if you invested in stocks and you made a profit, you will be taxed on your gains.
Taxpayers are required to pay taxes on their income from “all sources”.
So if you have an employment income and other sources of income, you’ll need to pay taxes on all of it!
Anyone who is self-employed or running a side hustle will be required to pay taxes on their net earnings.
Typically, self-employed individuals can deduct their business expenses from their revenues and pay taxes on the net.
If you were self-employed and did not make quarterly estimated tax payments, you are most likely going to pay taxes to the IRS at year-end.
Child Tax Credits
You may have to reimburse the IRS some money because you received more child tax credits than you were entitled to.
Typically, child tax credits are paid based on your prior year’s return.
If your income changes during the year or a child are no longer entitled to a benefit, you will be asked to reimburse the amounts that you were paid.
Changes In Deductions
Another reason why you are required to pay taxes even though you did not think so is due to the deductions that you are eligible to receive.
A tax deduction allows you to reduce your overall taxable income leading to a lower tax bill.
If you are not able to claim the same amount of tax deduction as in the past, your taxable income may be higher and lead to greater tax liability.
A reason why people owe taxes that is relatively new is because of cryptocurrency gains.
If you made profits on cryptocurrency, you are required to report those gains and pay your share of taxes.
Buying cryptocurrency does not trigger your obligation to pay taxes.
However, if you sell cryptocurrency, you’ll need to report it.
Change In Tax Code
Another reason that could explain why you are asked to pay more taxes is because of changes to the tax code.
The tax code is a constantly evolving piece of legislation and the government makes changes to it all the time.
In some cases, the changes can lead to a lower tax liability for you but in other cases, it may mean that you must pay more taxes.
Recommended article: Understanding income tax
What To Do If You Owe Taxes
If you owe taxes this year but you would like to find ways to avoid having to pay more taxes next year, here are some things you can consider doing.
If you’re an employee and earn most of your income from your employer, the solution can be as simple as having your employer withhold more taxes on each of your paychecks.
By paying a bit more on every paycheck, you will be able to finish the year with a larger income tax contribution that will help pay off your tax liability for the year and earn you a refund (hopefully!).
You’ll need to complete a new W-4 Form with your employer.
If you are earning income as a self-employed, side hustle, or gig, you should estimate how much net income you will earn in the year and set aside the right amount of money to cover your tax bill.
You should also consider remitting estimated taxes on an estimated basis so you won’t have to disburse a big amount at the end of the year.
If you earn an income from other sources, like investments, non-wage income, or others, you should calculate how much you earn from these sources and how much you may have to pay in taxes.
For example, if you received unemployment benefits during the year, you will still have to pay taxes but you can have up to 10% of it withheld for taxes.
Properly planning your taxes is crucial to avoid any undesirable surprises.
Recommended article: Form 1040 overview
You Owe Taxes But Can’t Pay
Life is filled with unexpected events.
You were not planning to pay more taxes this year and now you’re hit with a big tax bill that you can’t afford to pay.
There are different payment options that you can consider with the IRS.
The first option that the IRS offers is to give you an extension of 10 days to pay your taxes from the moment they are due.
If that delay is too short, you can negotiate a short-term payment plan to pay your federal taxes within 11 to 120 days.
If that’s still not enough and you need more time, you can negotiate an installment agreement with the IRS where you will pay your balance on a monthly basis just like other bills.
If you owe taxes and you can’t pay, it’s important that you work out an arrangement with the IRS.
Don’t forget that the IRS has different strategies to compel taxpayers to pay, such as levying interest charges and penalties, garnishing wages, enforcing tax liens, and so on.
If you have a specific set of circumstances and need to better understand your rights and obligations, it may be best to speak with a tax attorney.
Recommended article: How to file taxes
So there you have it folks!
Why do you owe taxes to the IRS this year?
In a nutshell, there could be many reasons why you may owe taxes to the IRS.
Although everyone’s situation is different and the reasons can be different, here are some of the most common reasons why you may have a bigger tax bill:
- You changed job
- You do not qualify for some tax credits
- You cannot make certain tax deductions
- You had a side job
- You earned money from other sources
- You sold shares, bonds, securities, or cryptocurrency
- You cannot get the same amount of child tax credits
- Your employer did not withhold enough on your paycheck
- There was a change in the tax code
There could be many other reasons why you owe money to the tax authorities but I wanted to cover the most common ones.
If you have a legal question or need to assess your tax obligations, be sure to consult with a tax professional or tax attorney.
I hope you enjoyed this article on Why Do I Owe Taxes! Be sure to check out more articles on my blog. Enjoy!
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