Video: Why Do I Owe On My Tax Return
OVERVIEW
If you finish your tax return and are confused as to why you need to send the IRS a check, there is only one possible explanation for this: you paid less tax during the year than you owed for your income level. Watch this video to find out more about why you may owe money of your tax return.
Beginning in 2018, dependent exemptions are no longer taken as a deduction from your income.
Refigure Your Tax Liability
Okay, so heres the math part. You need to calculate your tax withholding. This is kind of a two-step process. First, find out how much federal taxes are withheld from your paycheckjust income tax. Ignore Social Security and Medicare taxes. You can find this info on your W-2 or on a paystub. If youre using a tax total from a paystub, youll need to multiply that number by the number of pay periods per year to get your total tax withholding.
For example, lets say youre single and make $50,000 a year. You get paid twice a month , and your income tax withholding is $150 per check. That means your total withholding is $3,600.
Next, youll need to estimate your tax liability, or the amount of taxes youre responsible for paying. The IRS also has an online tax withholding estimator to help you with this. Or, if you just did your taxes and have the forms handy, you can see your tax liability there.
Then, just take your tax liability and subtract your withholding to see how much you underpaid your taxes. Once again, if you just filled out your taxes and wound up owing money to the IRS, you should know that number without having to do any math.
Lets go back to our example. Say your tax liability is $4,300. If you subtract your $3,600 withholding from your $4,300 liability, that means you underpaid your taxes by $700.
You Did Not Factor Local Taxes
If you forget that states charge some forms of tax, you may end up asking, Why do I owe money in state taxes?
When you live and do business in certain states, they may charge you income and payroll taxes. You may also be expected to pay sales and excise taxes. In addition, you may end up having to pay taxes on gifts and earnings from the assets you inherit.
It would be a mistake to ignore the state and municipal taxes for those reasons. And if you do so, you may owe money after filing taxes.
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Why Do I Owe If I Didnt Owe Last Year
If you owe taxes that you didnt owe last year, it may be due to some changes in your life, such as:
Older Children A change that was made in the tax reform was the Child Tax Credit increase. It is $2,000 for children who qualify. Nevertheless, only children who were less than 17 years old at the end of the year will be able to claim the credit. Otherwise, you can only claim a $500 credit for the other dependents.
Job Changes Has there been any job change for you or your spouse? If so, a new Form W-4 should have been completed. If you made some changes in how you filed it, it may be why it affected your situation.
Side Job If you are a contract worker or freelancer, then you will have to pay quarterly taxes too. You will be responsible for keeping up with payments since you have no paycheck withholding. You may owe taxes to the IRS if you are a freelancer and you havent been paying the estimated quarterly taxes.
Income changes or students who were previously able to claim the American Opportunity Credit, yet became ineligible due to an enrollment status change may also affect the tax situation.
Filling Changes If you went through a divorce, marriage or you got a dependent, the filing status for which you are eligible and the way youre taxed can change. This might affect your tax bracket thats why you might owe taxes now.
You Sold Stock Or Cryptocurrency
Finally, if you sell investments in a non-retirement account and earn a profit, you could be on the hook for capital gains taxes. These investments include things like stocks, cryptocurrency, mutual funds, and exchange-traded funds .
Any stock or crypto gains should be reported on your tax return. You’ll be taxed on the difference between your basis and the proceeds from the sale. The amount you’re taxed will depend on how long you owned the investment before selling it and your total income for the year.
While taxpayers usually have to pay capital gains taxes on profits received from investments, Allec says there are exceptions, like if you have capital losses that equal or exceed your capital gains for the year.
“If this is the case, you’ll owe no capital gains taxes on your stock or crypto you sold at a gain because your capital losses will have wiped them out,” he says.
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Use A Tax Withholding Estimator
The tax withholding estimator on the Internal Revenue Service website is particularly useful for people with more complex tax situations. This tool is more time-consuming than a simple calculator, but also more accurate.
It will ask about factors like your eligibility for child and dependent care tax credits, whether and how much you contribute to a tax-deferred retirement plan or Health Savings Account, and how much federal income tax you had withheld from your most recent paycheck.
Based on your answers, it will tell you your estimated tax obligation for the year, how much you will have paid through withholding by years end, and your expected overpayment or underpayment.
What Is Tax Withholding
Its vital to first understand that tax in the U.S. is governed by a self-reporting system. The government relies on taxpayers to report their own taxes to them, figuring out if they owe the government anything, or if theyre owed a refund.
In turn, understanding how tax withholding works forms an important part of reporting back to the Internal Revenue Service on your taxes. In this self-reporting system, the government wins by having to spend less time and money figuring out everyone elses taxes. But it does come with certain drawbacks.
On a political level, this puts hyperfocus on how much tax each citizen pays and could become a sore point for many when it comes to getting their paychecks and election times.
On a monetary level, it also means the U.S. government only gets to collect the tax owed once in a financial year. This turns the tax money into a sort of loan made to taxpayers that they eventually have to pay back.
So, to keep the wheels of the government turning, the IRS has to do tax withholding. The IRS estimates how much money you as a salaried employee also known as a W2 worker would eventually owe in taxes. They then take that money straight from your paycheck in the form of income taxes each time you are paid biweekly.
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Base Your Tax Payments On The Earnings Of The Previous Year
The IRS will not penalize you if you can show you made the same payment as the previous year. Simply find how much you paid the previous year by looking at your tax return. Divide this total figure by four and pay that amount to the IRS as a quarterly payment.
Lets say your taxes amounted to $6,000 in the last financial year. You would make quarterly payments of $1,500 to the IRS. You would only pay an extra $1,000 without any penalties if your tax turns out to be $7,000.
What The Irs Will Do
In any of the above circumstances, if the IRS thinks you owe past due taxes, they’re not shy about getting hold of you.
Usually, the IRS sends you a bill via mail, but they might reach out to you by telephone. In serious cases, they may even attempt to visit you at work or at home.
If the agency is unable to get you to voluntarily satisfy your tax debt, it may take collection action. It has the authority to put a lien on your house and put a garnishment on your wages. It will also tack on penalties and interest until your debt is paid.
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Why You Might Get A Tax Calculation Letter
You might get a tax calculation letter if you either owe tax or are owed a refund because you:
- were put on the wrong tax code, for example because HMRC had the wrong information about your income
- finished one job, started a new one and were paid by both in the same month
- started receiving a pension at work
- received Employment and Support Allowance or Jobseekers Allowance
Heres Why You Owe The Irs So Much In Taxes This Year
Many Americans cross their fingers at tax time, hoping for a huge refund from the federal government. At the very least, they want to break even. The vast majority of filers more than 70 percent do get money back from the government, with the average refund close to $3,000, according to the IRS. But every year, some taxpayers get a nasty surprise: They owe Uncle Sam hundreds or even thousands of dollars that they didnt budget for.
How can that be?
Simply put, if you owe a large sum in taxes, its likely because you kept too much of your paycheck during the year and had too little withheld automatically. If you owe more than $1,000, you also have to pay a penalty to the IRS.
This can come as a big shock to people who have had the same withholding as the year before, but didnt end up owing money previously. Any time you have a major life change such as getting married, having a child, retiring or starting a new job, you should re-evaluate your tax situation and update your withholding, says Jackie Perlman, principal tax research analyst at The Tax Institute at H& R Block.
The three changes below could result in an unexpected tax hit.
If you do need to change your tax withholding, figure out by how much. The IRS and other tax professionals offer an online W-4 withholding calculator to help determine your appropriate strategy.
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Why Do I Owe So Much In Taxes For 2022
The amount you owe in state income tax is based on a variety of factors. Starting a side hustle or changing jobs, underpaying estimated quarterly taxes if you’re self-employed, reporting gambling winnings, getting married or divorced, or losing a child tax credit are just some of the many reasons why you might owe state taxes this year.
Other factors that could contribute to why you owe so much in taxes for 2022 may include:
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Social Security, if this was your first year receiving benefits
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Increase in taxable income because you didn’t contribute to an individual retirement account
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Change in filing status, changes in education, or tuition deduction
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Increase in home or property tax
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One-off capital gains
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Change in military service
You must also consider the possibility that you could owe taxes in more than one state. This could also be one of the reasons why you owe so much in taxes. If you have done work in a state where you don’t normally reside and tax was withheld from the income, you may owe or be due a refund from that state.
If the taxes from your income were not withheld in that state, you will have received a Form 1099 listing your earnings as you’re not required to file in that state. However, the income listed on your Form 1099 is liable to taxation by your state of operation or residence.
How Much Do I Owe In State Taxes
There are 43 states in the US that collect state income taxes and California is one of them. It has the highest state income tax rate in the country at 13.3%. California also ranks fourth for combined income and sales tax rates at 11% with only New York, New Jersey, and Connecticut ahead of it.
California requires both residents and nonresidents that receive income from a California source to pay taxes. The state does offer tax deductions and credits that enable taxpayers to reduce their liabilities.
California has three major tax agencies that are responsible for causing confusion amongst taxpayers. The state income tax and corporation tax are administered by the Franchise Tax Board. It runs several state programs in addition to handling collections, penalties, and dispute resolution.
Sales and use tax are administered by the California Department of Tax and Fee Administration. Businesses have to register with this department to obtain permits and licenses, particularly if they’re in the fuel, alcohol, and tobacco trade. Lastly, the Employment Development Department administers payroll taxes, unemployment, disability, and other state programs.
The Franchise Tax Board provides a calculator that you can use to figure out your tax liabilities by entering your income and filing status. You can compare the information with your filings from last year to get a full picture of how your tax situation has changed.
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Find Out Online If You’re Withholding Enough
A new withholding form now exists for 2020. It’s suggested that taxpayers go online and use a Tax Withholding Estimator at www.irs.gov/W4App to help you work through some of the numbers. Or talk with your tax professional as you’re filing your return this year for help.
Remember, you’re not required to fill out a new Form W-4 if you’re working at the same old job. If you do end up changing jobs, though, you will be dealing with a new form.
Even so, taxpayers need to be aware their withholdings may not be enough and they may want to file a new W-4 to make necessary changes.
You also may need to use the tax withholding estimator if you expect to work only part of the year, have dividend or capital gain income or are subject to additional taxes, such as the additional Medicare tax for some filers.
“Monitor your taxes, when you file your tax return this year,” said Mark Steber, chief tax officer at Jackson Hewitt.
If you don’t like the result such as if your tax refund is too small or you’re owing too much money now is the time to adjust your tax withholding via W-4 for 2020 tax returns.
“This year, withholding tables and forms attempt to be more closely tied to the withholding needs of the individual,” Steber said.
Taxpayers who follow the new W-4 form and instructions should be able to cover their taxes due. But Steber said the new format intentionally doesn’t withhold large amounts of money to engineer sizable tax refunds. But there are ways around that one.
No Matter How You File Block Has Your Back
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Figure Out What You Owe With Polston Tax
If you need help figuring out what you owe in taxes or need help paying off the taxes you do owe, Polston Tax can help! Our team of tax attorneys and tax accountants can guide you through the tax brackets and let you know how you can save money through tax deductions or credits.
We have a team of more than 100 attorneys, accountants, tax professionals, CPAs, case managers and financial analysts who will fight for you. Founded in 2001, we have been operating with the mission to help our clients escape the challenge of owing back taxes. We are located in five offices across the nation. We offer services to those who owe the IRS or the state back taxes and can help with the following services:
What Situations Can Cause Me Not To Pay Enough Tax
PAYE usually collects the right amount of tax where you have a stable employment that lasts a complete tax year. If your tax affairs are more complicated than this in the tax year, the PAYE system might not be able to collect the right amount of tax during the year.
You might not pay the right amount of tax if, for example, you:
- have more than one job, or pension, or are in receipt of a taxable state benefit or some other untaxed income
- change jobs or retire
- draw income flexibly from your pension
- are widowed or your civil partner dies
- get extra benefits or expenses payments from your employer on top of your cash wages
- need to claim extra allowances or expenses against your tax
- leave the UK or arrive in the UK from overseas.
In these and other situations, HMRC might need to send you a PAYE tax calculation after the end of the tax year when they put all your income and tax details together. They will send you a P800 if they find you have paid too much or too little tax.
The P800 shows your income from employment, pensions and taxable state benefits . Sometimes it may include small amounts of other income. It also includes the allowances and tax reliefs that HMRC think you are entitled to, and a breakdown of what tax you owe against what you have actually paid.
Note that the P800 applies to tax only and not National Insurance contributions , as NIC is calculated each pay day and not recalculated at the end of the tax year.
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