Latest Facts and News:
- The IRS processed over 168 million individual tax returns in 2023.
- The IRS has collected $1.3 billion from high-wealth tax dodgers since last fall.
- New IRS initiatives target high-income individuals who have failed to pay recognized tax debt.
Why Do I Owe Federal Taxes?
It’s a question no one wants to ask, yet many find themselves facing an unexpected tax bill.
Owing federal taxes is not something too unusual, but not knowing the reason is what makes it troubling. That uncertainty can leave you questioning what went wrong—was it a simple mistake, or is there a bigger issue at play?
Some reasons are quite easy to resolve, like a small miscalculation or an unexpected change in income. But others can have serious consequences, potentially costing you your savings or even putting your property at risk. That’s why it’s important to understand why you owe.
And that’s exactly why we created this blog post: to help you uncover the possible reasons behind your tax bill so you can take action before it becomes a consequence.
Common Reasons for Owing Federal Taxes
Filing your return can come with the surprise of owing taxes. This section breaks down the most common reasons for addressing the question, “Why do I owe federal taxes?”
Changes in Income and Withholding
- Job Changes: Changing jobs during the year can affect your tax liability. A higher income can push you into a higher tax bracket, increasing the amount you owe. A lower income can sometimes result in less tax being withheld, leading to a balance due at tax time.
- Multiple Jobs: If you have more than one job, each employer withholds taxes based only on the wages they pay you. Since they don’t account for your total income from all jobs combined, you may end up with too little tax withheld, leading to a balance due at tax time.
Increased Income from Side Hustles
- Gig Work and Freelancing: Side hustle income, such as gig work or freelancing, usually doesn’t have taxes withheld. If you don’t make estimated tax payments, you could owe more at tax time.
- New Reporting Rules: Platforms like PayPal and Venmo now issue 1099-K forms for transactions over $5,000, meaning you must report this income on your tax return.
Unemployment Compensation
- Taxable Benefits: Unemployment benefits are considered taxable income, even though taxes are not automatically withheld in most cases.
- Estimated Payments: If you didn’t choose to withhold or make quarterly estimated tax payments, you might owe taxes on the benefits when filing your return.
Retirement Distributions
- Taxable Withdrawals: Money withdrawn from traditional retirement accounts, like a 401(k), is subject to income tax.
- Early Withdrawal Penalty: If you withdraw funds early (before age 59½), you may face an additional 10% penalty on top of regular income taxes.
Changes in Deductions and Credits
- Expired Benefits: IRS benefits implemented due to the coronavirus, such as the Child Tax Credit, have been phased out. This may lead to a higher tax profile as far as the previous years are concerned.
- Eligibility Loss: A change in job, income, or marital status can affect tax credits like the Earned Income Tax Credit, potentially reducing your refund or increasing what you owe.
Also Read→ Facing Tax Consequences: Jail Time for Non-Payment and Non-Filing
Life Changes Affecting Your Tax Situation
Major life events that may seem unrelated to taxes can significantly impact your tax credits, deductions, and overall liability—sometimes in ways you wouldn’t expect. These changes often help answer the question, “Why do I owe federal taxes?”
Here are some key life changes that could affect your tax situation:
1. Marriage or Divorce
- Combining or Dividing Assets: Marriage or divorce can shift your tax status, potentially placing you in a different tax bracket.
- Filing Status: Be sure to update your filing status on your W-4 to reflect your new situation. This helps adjust your withholding to match your updated income.
2. Selling a Home
- Tax Exclusion: If you meet the ownership and use test (living in the home for at least two of the last five years), you can exclude up to $250,000 (single) or $500,000 (married filing jointly) of the gain from your taxable income.
- Taxable Gains: If you don’t meet these conditions, the profit from your home sale may be subject to capital gains tax.
3. Selling Investments
- Capital Gains Taxes: Profits from selling stocks, bonds, cryptocurrency, mutual funds, ETFs, or other investments are taxable. The tax rate depends on how long you hold the asset and your total reported income.
- Capital Losses: Investment losses can offset gains, reducing the amount of taxes you owe.
If you understand how life changes affect your taxes, you can take appropriate steps to reduce your taxes or claim all of the possible deductions.
Final Thoughts!
Now that we’ve explored and answered your question, “Why do I owe federal taxes?” It’s clear that understanding your tax situation is the key to avoiding surprises in the future. Adjusting your withholding or exploring payment options are proactive steps you can take to regain control.
Hopkins CPA Firm helps taxpayers pinpoint the causes of their tax bills and helps with IRS payment plans when needed based on the situation they are in. If they have hardship, the best course of action can be an offer in compromise; if paying in full is not possible, an installment agreement is the best possible option, and for those facing penalties due to late payments or filing, penalty abatement can help reduce or eliminate the additional charge. With a focus on actionable advice, we ensure you’re ready for a smoother tax season ahead.
Also Know About→ What Does Tax Delinquency Mean?
FAQ's
Can I adjust my tax withholding mid-year?
Of course, federal tax withholding within a calendar year is changeable. All withholdings for an ongoing paycheck can only be amended by filling out a new W-4 form from your employer. If you want to change the withholdings for any pension, annuity, or individual retirement account (IRA) payment, you must complete Form W-4P and submit it to the organization making the payments on your behalf.
What should I do if I can't pay my federal tax bill in full?
If you are unable to pay the full amount of tax, there are some options available. The IRS provides one with an opportunity to pay on a monthly basis through a procedure known as the installment agreement. These plans can be filed online on the site of the Internal Revenue Service or direct contact.
If you’re unsure of the approach to adopt or what to do further, do not hesitate to contact us at Hopkins CPA Firm. We can assist you to overcome it or we can also give you the available courses of action and then tell you the right thing to do in your situation.
Are there penalties for underpaying estimated taxes?
Indeed, the IRS imposes penalties for tax underestimation, whether through withholding or estimated taxes. This is usually the position if the individual owes the government over $1000 when preparing the return.
To avoid penalties, make sure you pay at least:
- 90% of your current year’s taxes, OR
- 100% of your previous year’s tax bill.
The penalty depends on how much you underpaid and how long it remained unpaid. If you’re unsure how much to pay, Hopkins CPA Firm can help you calculate your estimated taxes and make adjustments to avoid penalties.
How can I estimate my tax liability for the upcoming year?
One way to estimate your tax liability is to take an account of your income, deductions, and credits, then check on a tax calculator or IRS tool. Do keep in mind that life events such as new jobs or large expenses can also affect the amount withheld. If unsure, visit professional tax preparers like Hopkins CPA Firm to help you with effective calculation and planning.
