Why do I owe taxes this year? Tax expert explains common reasons
(NEXSTAR) – Tax season is back, as the Internal Revenue Service has officially started accepting and processing tax returns as of last week.
The IRS has already been warning taxpayers to expect smaller refunds than they received in recent years because of certain COVID-era relief measures rolling back to pre-pandemic norms.
Changes to those credits may not only cut your refund but leave you owing more taxes this year. Here are a few common reasons, mostly caused by big changes in your life, that could leave you without a refund.
Changes to COVID-era relief
As mentioned above, changes to credits that were enhanced during the COVID pandemic are reverting back to their pre-pandemic amounts. That includes the child tax credit, dependent care credit, earned income credit, the option to deduct charitable donations without itemizing your taxes, and also stimulus payments, Mark Steber, chief tax information officer for Jackson Hewitt Tax Services, tells Nexstar.
“You could find yourself under withheld if you were counting on those double-size credits, which won’t be here this year,” he explains.
Employment status
Any big changes in your life, like buying a house or getting married, will impact your taxes. One of the most notable is, of course, changes to your employment status.
If you started a new job in 2022, you may remember completing a Form W4, which determines how much tax is withheld from your paychecks. By putting a 0 on your W4, a larger amount of taxes will be taken, while putting a 1 means less will be taken. Having the most taxes taken out of each paycheck will lead to a refund, according to the IRS.
Any supplemental wages you earned last year, like bonuses, severance pay, or payments for moving costs, are also subject to income taxes, the IRS explains. They are subject to different federal withholding rules, based on how much you received.
Though unemployment compensation falling within a certain range wasn’t considered taxable during the pandemic, that is no longer the case. If you didn’t ask for withholding on that compensation last year, Steber says you may find yourself having a smaller refund, or even owing taxes.
Side gigs and self-employment
If you were self-employed in 2022, worked part-time, or had a side gig or two, your taxes will likely look different this season.
“What we found for those folks is not a lot of them make estimated payments, or certainly not the amount to cover their total tax liability,” Steber says. Like others, you may have opted to wait until tax season to pay up in a lump sum. “We saw that last tax season, we expect to see that number grow again this season.”
More taxpayers in this category are expected to owe balances this year as well, Steber says.
According to the IRS, if you earn $400 or more from self-employment, side gigs, or part-time or temporary work, you need to file a tax return.
Owe the IRS but can’t afford it?
As both Steber and the IRS recommend, file your taxes early, regardless of whether or not you’ll owe money. While the IRS can penalize you for failing to file, it can also penalize you for failing to pay the taxes you owe on time.
Taxes you owe are subject to interest and monthly late payment penalties, according to the IRS.
If you can’t pay the amount you owe, the IRS recommends paying what you can and exploring payment options, which include short-term and long-term payment plans.
The tax filing deadline falls on April 18 this year for two reasons: April 15 is on a Saturday, and the District of Columbia’s Emancipation Day holiday falls on April 17, the IRS announced last week.