Why do I owe taxes?
Owing taxes unexpectedly can be confusing. There are several reasons this can happen, including receiving unemployment income or taking on an additional job.
Some of the most common explanations for owing taxes include:
Additional income
New sources of income: If you start receiving income that’s not subject to automatic withholding, you can end up owing additional taxes. Examples include collecting a pension or Social Security (no tax or low tax withheld), selling investments (no tax withheld), and starting a home business (no tax withheld).
Not withholding enough: If you've earned more money but didn't increase your withholding enough, you may also owe additional taxes. 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 TurboTax W-4 Withholding Calculator is a free tool to help you find the right withholding when completing a new W-4. You can use this info 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.
Fewer deductions
If you owe more than you did in the previous tax year, it may be because you claimed 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)
Fewer credits
You may owe additional taxes if you qualify for fewer credits this year. Some of the main credits include:
Adoption tax credit (This credit doesn’t happen every year.)
Earned Income Credit (It’s lowered or disappears as your income increases, and as the number of qualifying children decreases with age.)
American Opportunity Tax Credit (Only good for four years and has income limits, which decrease as education expenses drop.)
Lifetime Learning Credit (Has income limits, which decreases as education expenses drop.)
Child and Dependent Care Credit (Decreases as your income increases and the qualifying children get older.)
Child Tax Credit (Decreases as your income increases and qualifying children get older.)
The Savers tax credit (Saving less may cause you to lose this credit. It’s also limited by income.)
Change in filing status
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.
