Why do I owe taxes?

February 20, 2020 : H&R Block

If you’re like many taxpayers, getting ready to file starts with a quick check with a tax calculator. You plug in your numbers and eagerly anticipate that final number. But when that last screen doesn’t show a refund, you have to ask, “why do I owe taxes?”

We get it. Having a balance due on your taxes can be somewhat of a shock—especially if you were planning on a nice refund. Let’s look at the reasons why you would owe taxes and what your next steps should be.

Why do I owe taxes this year? – It could be withholding changes

If you received a refund last year, you generally could expect one this year—if your personal tax situation was the same. However, tax years 2018 and 2019 weren’t the same from a withholding perspective. As part of the Tax Cuts and Jobs Act, the IRS rolled out new withholding tables in February 2018. For many, the new tables meant they were withholding less, which provided for a slight bump in their paychecks. What’s more, they may have received a lower refund (or owed taxes) for the same reason.

Fast forward to 2020 and some taxpayers have gone from getting a refund to owing—but they haven’t had any changes in their tax situation. What gives? Well, it may be the timing of the withholding changes. In 2018, the new withholding tables were in effect for only 10 months; in 2019, it was the full 12 months. For some, those two months of higher withholding provided a cushion that kept them from owing for 2018. If this sounds familiar, it may help explain why you owe taxes this year. To get your withholding back on track, you should  fill out a new Form W-4.

If that scenario doesn’t reflect your situation, there are other possible reasons why you owe the IRS. Read on to learn about other factors that may affect your refund results.

Why else would I owe taxes? Here’s what to look for

The first question you should ask yourself is what changed about your tax situation? It could be one big change or several changes that made an impact.

Job changes – If you or your spouse changed jobs last year, you would have completed a new Form W-4.  Because completing this form can be tricky, it’s possible that slight changes in how you filled it out affected what you withheld each pay period.

Filing changes –But big life events, such as marriage, divorce or having a dependent, can affect the filing status for which you are eligible and how you are taxed. For example, changing from  Head of Household to Single will affect your tax bracket and the credits and deductions you can take. If you’re married, be sure you understand the difference between the status of married filing jointly vs. married filing separately.

Older children – One of the notable changes from tax reform was the increase to the Child Tax Credit, which is now worth up to $2,000 for qualifying child. To claim the credit, however, your child must have been under age 17 at the end of the year. If they no longer qualify, you may still be able to claim the $500 credit for other dependents. The drop from a $2,000 credit to $500 one can mean a great deal to your bottom line and may answer the question of “why do I owe taxes?”

Side job – Freelance and contract workers generally need to pay quarterly taxes on their own. Since there’s no paycheck withholding in these situations, the job of keeping up with payments falls on the freelancer’s shoulders. If you have a freelance job, but haven’t been paying estimated quarterly taxes, that could shed light on why you would owe taxes to the IRS.

Credit and deduction eligibility – Other changes in your life can impact your eligibility for various types of credits and deductions. For example, changes in your income might affect whether you qualify for the Earned Income Tax Credit. Or, if you’re a college student, maybe you were previously able to claim the American Opportunity Credit, but due to an enrollment status change are no longer eligible.

Why do I owe so much in taxes? What can I do about it?

While some taxpayers prefer to have more in their paycheck vs. receiving a refund, many of us look forward to getting money back at tax time.

If you owe taxes this year and hoped for a refund instead, you need to update your withholding. It’s likely that you’ll owe again next year unless you complete a new Form W-4 and increase your withholding. The sooner in the year you submit this change to your employer, the sooner your new withholding will take effect. We can help you understand how to fill out a new Form W-4. Plus, our W-4 calculator page is a great resource.

If you owe the IRS money and can’t pay, there are options. We can help you understand how you can pay back taxes if your tax bill is too much to pay right now. H&R Block specializes in helping taxpayers in this situation and our tax pros can explain the steps to take.

How will I know why I owe taxes?

As part of our commitment to keeping you informed, we’ll help you understand what could affect your refund or if you’ll owe.

If you use our online tax filing options, you’ll be able to see your refund results in real time. Plus, we explain why your results move up or down.

If you visit one of our tax offices, your tax pro can walk you through each credit and deduction to explain how it affects your refund.

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