Why Do I Owe Money After Taxes?

Failing to properly plan for your taxes can result in a larger than expected tax bill.

An unexpected tax liability is an unwelcome surprise, particularly if you have been paying taxes all year through the monies withheld from your paycheck. In most cases, it is simply a matter of earning too much money and the more you earn, the more the Internal Revenue Service (IRS) wants its share. However, for the vast majority of us that are not in the top annual income bracket, owing taxes is often the result of poor planning or tax preparation.


Not Enough Withholding

If you are employed full-time, you are used to having money taken out of your paycheck each pay period for taxes and other items, such as Social Security and Medicare. Some of these withholdings are allocated for the year's federal tax liability. There are guidelines for how much should be withheld based on your income, your filing status and the number of dependents you claim. However, you are usually free to adjust your withholding schedule to alter your take-home pay. If you are not withholding enough, you may end up not paying enough toward your total tax bill for the year, and may actually owe taxes on top of what has already been taken out of your paycheck.


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Other Taxable Income

Having other sources of income can help you pay down credit card debt or improve your overall financial stability, but any income you generate is usually subject to taxes. If you sold some stock that was given to you by your grandparents, you may end up having to pay taxes on the capital gains -- the amount you received above what you paid for it. If you have been freelancing and getting paid as a contractor where taxes are not withheld, you are further increasing your overall income. Having a higher tax bill due to making more money is typically a good problem to have. However, if you are only having taxes withheld from your full-time job based on your salary there, and not setting aside money for payments received for freelancing, you may end up owing taxes.


Disallowed Deductions

Your tax liability can be reduced by claiming certain credits, deductions and exemptions. When you file, the IRS does a review of your tax forms and uses a computerized system to verify their accuracy. If you have reported some items as deductions or claimed a dependent that you are not eligible to claim, the IRS may simply adjust your return and send you notice of their adjustments along with a bill for any taxes owed. For any item you claim as a deduction or tax credit, make sure you submit the proper forms as specified by the IRS and you can substantiate your expenses with receipts.


Back Taxes

The year before, you owed taxes but did not pay them. This year, you are expecting to get a refund. Unfortunately for you, the IRS will take your refund from this year and use it to pay off your old tax liability. If the credits you have are not enough to pay off old tax debts, you will still owe the balance and have to pay the taxes. Pay up any old tax liability or other debts, such as delinquent student loan amounts, as you become aware of them to avoid having a larger tax bill down the road.


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