Taxes aren’t fun, but unfortunately, they have to be done. Of course, that doesn’t mean you can’t make sure that you pay as little in taxes as possible.
Everybody loves receiving a large tax refund, but when the opposite occurs, many people find themselves in a difficult position where they’re expected to pay a large bill they aren’t prepared to pay.
If you find yourself asking, “Why do I owe so much in taxes?” every tax season, you’ve come to the right place. Today, you’ll find out the different reasons why you might owe more in taxes than you anticipated and learn some tips to help lighten your tax bill.
Reasons You May Owe So Much In Taxes
There are a number of reasons that you may owe so much in taxes on your taxable income every year, and not all of them are obvious. It takes patience and diligence to ensure you pay the right amount in taxes every year, but that doesn’t mean it’s difficult. Once you know what to look for, you’ll be able to predict how much you’ll owe in federal income taxes every year.
Here are some of the most common reasons people end up incurring more tax debt than they anticipated.
Reason #1: Not withholding enough from your paycheck.
If you’ve ever started a new job, you know that you have to fill out a W-4 form for your taxes. Although the form seems like a nuisance when you first fill it out, you’ll realize during tax season that this paper was actually quite important.
What you indicate in your W-4 determines the amount that will be taken out of your paycheck for taxes. If you overpay your taxes, you receive a refund. On the underhand, if you underpay, you may end up owing a lot back at the end of the year.
To avoid any major surprises come tax season, it’s important to fill out this form as accurately as possible.
Reason #2: Change in income
In general, the more money you make, the greater your tax burden will be.
Sometimes people end up making an additional income that’s enough to bump them into the next tax bracket, but they’re unaware of when it happens.
One of the common ways that this occurs is when someone holds a full-time job and works a part-time job as well. In this circumstance, they may be paying little to no taxes for their part-time job because they make below a certain amount and filled out their W-4 wrong. This can also happen if you receive a raise during the year or work a significant amount of overtime.
If you work a part-time job, make sure you request additional withholding to reflect what your total income will be at the end of the year. Remember, you can always fill out a new W-4 form at any time.
Reason # 3: Change in your usual deductions
Each tax deduction and tax credit can be a lifesaver while filling out your taxes, but don’t forget that you aren’t guaranteed the same amount of deductions every year. It’s possible you may not qualify for a certain tax deduction you usually do.
For example, a particular tax credit may come with an annual limit, or may only be applicable for those below a certain tax bracket. Make sure to review the eligibility for these tax credits and deductions every year to ensure you still qualify.
Reason #4: You’re self-employed
If you’re self-employed, you might already know that taxes work differently for you than someone who is employed by a company. The responsibility of figuring out how much you owe and paying that amount relies entirely on you.
Self-employed individuals have to use their estimated earnings to pay quarterly taxes. If you wrongly estimate your earnings, you may not only end up with a bigger tax bill but you might also be penalized.
At first, it may be difficult to get your quarterly estimated taxes right, but you’ll eventually estimate more accurately with experience.
Reason #5: You didn’t pay on time
You are responsible for filing your taxes every year by the deadline. When you don’t pay your taxes on time, you start to incur late charges and interest, increasing your total tax bill. The deadline to pay your annual income tax is usually April 15.
If you need to submit your taxes late one year, make sure you apply for an extension on time to avoid any late penalties.
How to Avoid Owing So Much In Taxes
No one wants to be served with a hefty tax bill. The good news is that this is avoidable if you pay more attention to your financial situation throughout the year.
Here are some tips on how to avoid owing taxes every year:
- Use the IRS Withholding Estimator to give you an idea of how much you’ll owe in taxes that year, and fill out your W-4 accordingly.
- Whenever any changes are made to your income or tax situation, fill out a new W-4 form and give it to your employer as soon as possible. Your employer may give you a significant raise, but they won’t warn you to fill out a new W-4.
- Always file your taxes on time, whether you are filing quarterly or annually.
- If you’re having trouble keeping track of your taxes, enlist the help of a tax expert, such as an accountant or financial advisor.
Pay the Right Amount In Taxes Every Year
If you owed a lot in taxes this year, hopefully, you’ve learned some helpful tips to ensure this never happens again.
Although many people fear taxes and think of them as a challenge, in reality, if you pay attention to your finances and stay prepared, there should never be any surprises come tax season.
If you do become really stressed over your taxes, consult a tax expert for advice on how to ensure you’re paying the right amount in taxes throughout the year.