Why do I owe taxes?

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Why do I owe taxes?

Owing taxes unexpectedly can be pretty confusing, but there are a variety of reasons why this has happened, including receiving unemployment income or taking on an additional job.  

Some of the most common explanations for owing taxes include: 

New sources of income: If you started receiving income that’s not subject to automatic withholding, you can end up owing additional tax. Examples include a pension or social security (no tax or low tax withheld), selling investments (no tax withheld), and starting a home business (no tax withheld). 

You earned more money, but didn’t increase withholding enough: This can happen when you have multiple jobs, since each employer withholds based only on what they’re paying you and not your total income. The tax rate goes up as your income goes up, so the tax on your total income will be more than what was calculated. 

(The IRS has a free tool to help you find the right withholding when completing a new W-4, which you can use to boost your refund or increase your take-home pay.) 

New worker in the family: If your non-working spouse returned to work during the tax year, your family withholding may not align with the higher tax rate. Since employers withhold tax based only on the income they’re paying you, combining your income with your spouse’s income might result in neither one of you having enough withholding to pay the increased tax rate on the combined earnings. 

If you owe more than you did in the previous tax year, it may be because you elected fewer deductions. 

Some examples include: 

  • Skipping an IRA contribution
  • Fewer charitable contributions 
  • Fewer medical expense deductions 
  • Home mortgage interest (as you pay off your mortgage, interest decreases each year)
  • State and local tax deduction (moving from a high-tax state to a low- or no-tax state may increase your federal taxes, causing you to lose the deduction for state and local taxes) 

You may owe additional taxes if you qualify for fewer credits this year. Some of the main credits include: 

  • Earned income credit (it’s lowered or disappears   as your income increases, and as the number of qualifying children goes down with age)
  • American opportunity tax credit (only good for four years and has income limits, which go down as education expenses drop)
  • Lifetime learning credit the (has income limits, which go down as education expenses drop) 
  • Child and dependent care tax credit (goes away as your income increases and the qualifying children get older)
  • Child tax credit (disappears as your income increases and the qualifying children get older)
  • The savers tax credit? (saving less may cause you to lose this credit. It’s also limited by income)

Changing your filing status can have a big impact on your taxes. For instance, if you previously filed as Married, Filing Jointly, and switched your status to Married, Filing Separately, you’ll likely lose some tax breaks. Your income may stay the same, but the tax on that income may be higher than when you filed jointly. 

Note: Additionally, owing unexpected taxes might have something to do with shifts in the economy due to COVID-19. For instance, collecting unemployment benefits through Pandemic Unemployment Assistance and Federal Pandemic Unemployment Compensation are taxable at the federal level and in many states. For more info on how COVID-19 impacts your taxes, go here

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