The information in this article is up to date for tax year 2024 (returns filed in 2025).
Betting on a tax refund this year? Although many filers get a refund, it’s not guaranteed. Even if you had taxes withheld from your paycheck all year, there’s still a possibility that you underpaid. Experiencing big changes in your personal finances can also impact your taxes. If you’ve gone through any of the following situations in 2024, you may owe the IRS in April. So, start saving now. As tax season approaches, it’s important to understand the factors that might lead to owing taxes to avoid any surprises.
1. Unemployment Benefits
Lost your job? Got laid off? Yes, collecting unemployment benefits can help you keep a roof over your head, but many people don’t realize that it’s not free money. Unemployment benefits are taxable. Depending on where you live, you’ll have to pay state taxes in addition to federal. The best thing to do is request to have taxes withheld upfront by completing form W-4V. Another option is to set aside a portion of each check so at least you’ll have the funds readily available when you file. Alternatively, you can make estimated payments throughout the year to cover your tax liabilities and avoid penalties. Remember, you can do your taxes and file a FREE simple federal return with ezTaxReturn. See if you qualify.
2. Early Withdrawals From Retirement Accounts
Your retirement account is meant for just that – your retirement! If you make a withdrawal from a traditional IRA and dip into your retirement early (before age 59 ½), you need to pay taxes on the funds withdrawn. In addition, you’ll pay the IRS a 10% early withdrawal penalty. If you are over 59 1/2 years in age, you won’t incur a penalty. There are also other exceptions to the 10% penalty rule if you dip into your retirement prematurely. For example, some IRA plans allow withdrawals for qualified higher education expenses. Buying a home? First-time home buyers also may not be penalized up to $10,000. If you find yourself unable to pay the taxes owed on your early withdrawal, consider exploring IRS payment plans to manage your tax debt effectively.
3. Getting a Raise or a Higher-Paying Job
Congratulations on your new salary! But remember, when your income increases, your taxes increase too. Anytime you experience a change in your finances, it’s a good idea to use a withholding calculator to ensure you’re paying the appropriate amount of taxes based on your adjusted gross income. If too little is withheld, you’ll wind up owing taxes. But if you overpay, you’ll get the money back as a tax refund. Adjusting your withholding is easy, just complete and submit a new W-4 to your employer.
4. No Longer Qualifying for Certain Credits and Deductions
Enjoy the tax breaks while you can because there’s no guarantee you’ll be eligible for the same ones in the future. As life changes, so will your tax situation. For instance, selling investments like stocks or cryptocurrencies can result in capital gains, which may increase your tax liability. Alternatively, many parents benefit from the Child Tax Credit. It is worth up to $2,000 per child, but your dependent must be 16 or younger to qualify. Once they celebrate their 17th birthday, you can’t use them to claim the credit anymore. Without that extra couple grand in savings, you could end up owing taxes. But don’t worry, there are other money-saving tax breaks that can help you find and claim! Ready to file? Start now.
5. Insufficient Withholding
Insufficient withholding is a common reason why people end up owing taxes. If you’re not having enough federal income tax withheld from your paycheck, you might face a tax bill when you file your federal tax return. This situation often arises if you have multiple jobs, are self-employed, or have other sources of income that aren’t subject to withholding.
To avoid owing money due to insufficient withholding, you can adjust your withholding by submitting a new Form W-4 to your employer. Additionally, making estimated tax payments throughout the year can help cover any shortfall. Regularly reviewing your withholding ensures you’re not underpaying your federal taxes and helps you stay on top of your tax payments.
6. Errors or Omissions on Your Tax Return
Errors or omissions on your tax return can also lead to owing taxes. Forgetting to report income, claiming deductions or credits you’re not eligible for, or making simple math errors can result in a tax bill. To avoid this, it’s crucial to double-check your tax return before submitting it.
If you’ve already filed your tax return and realize you made an error, you can file an amended return to correct it. Using tax preparation software can also ensure your return is accurate and complete, helping you avoid owing money to the IRS.
Managing Your Tax Liability
Managing your tax liability is essential to avoid owing taxes. Here are some strategies to help you stay on top of your tax obligations:
Adjust Your Withholding
Adjusting your withholding is a straightforward way to manage your tax liability. If you’re not having enough taxes withheld from your paycheck, you can submit a new Form W-4 to your employer. The IRS’ Tax Withholding Estimator tool can help you determine the correct amount to withhold, ensuring you’re meeting your federal tax obligations.
Make Estimated Tax Payments
Making estimated tax payments is another effective strategy to manage your tax liability. If you’re self-employed or have other sources of income that aren’t subject to withholding, you’ll need to make estimated tax payments throughout the year. Use Form 1040-ES to make these payments, which are due on a quarterly basis.
By adjusting your withholding and making estimated tax payments, you can avoid owing taxes and reduce your tax liability. Regularly reviewing your tax situation ensures you’re meeting your federal tax obligations and helps you stay on top of your tax payments.
Don’t let tax surprises catch you off guard. File your taxes with ezTaxReturn today for an easy, stress-free experience and ensure you’re on track to avoid owing the IRS!
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
