Tuesday, October 4, 2022

Why Am I Owing Taxes This Year

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Why Do I OWE TAXES THIS YEAR on my Tax Return?!

So, which is it for you: loss of deductions or smaller withholding? Without looking at your tax return, we cant tell you for sure. But you can get to the bottom of it by pulling out your 2017 and 2018 returns and doing a side-by-side comparison of the income, deductions, credits, and withholding.

To keep this from happening next year, you can complete a new Form W-4to adjust your withholding for 2019. The IRS has a Withholding Calculator that can help you ensure you have the right amount withheld. Turn the updated form into your HR department as soon as possible. Withholding takes place throughout the year, so if you need to adjust it, the sooner you get it changed, the better.

However, consider whether you might actually be better off writing a small check to the IRS at tax time rather than receiving a big windfall when you file. The money that sits in the IRS coffers until you receive your refund is essentially an interest-free loan to the federal government. Your money might be put to better use when you get it in a small boost to your paycheck every two weeks instead of waiting on a fat refund every spring.

For more information on filing this year, read How to File Taxes.

Do you owe a lot to the IRS and fear you wont get caught up? Get in touch to find the best solution.

Why Do I Owe Taxes This Year Changes In 2020

By April 15 you should have filed your taxes.

Now, that’s not the same as saying that you will have paid your taxes. In fact you pay taxes all the time – provided you make the minimum amount required to file a tax return. That will vary depending on your filing status .

Most Americans pay their income taxes every two weeks through automatic federal and state withholding from each paycheck. And while many taxpayers will get some of that money back, everyone who earns an income pays the FICA tax that funds Social Security, Medicare and Medicaid.

Then there are sales taxes, property taxes and import taxes, which Americans pay all the time. In the end, although we think of April 15 as Tax Day, paying taxes is a day-to-day feature of life in a modern economy.

That doesn’t make April 15 any less complicated, and that’s particularly true this year.

Most Americans get a refund when they file their taxes. The system is designed that way. This year, though, tax refunds are down way down. By the beginning of April 2019 the IRS had issued about 1.64 million fewer refunds than it had by that same period in 2018. Individual refunds have only gone down by an average of $20 per taxpayer, but a lot fewer people are getting them. In fact, many Americans actually owe money on April 15 for the first time in their working lives.

Here’s why.

Individuals Required To File A North Carolina Individual Income Tax Return

The following individuals are required to file a 2020 North Carolina individual income tax return:

  • Every resident of North Carolina whose gross income for the taxable year exceeds the amount shown in the Filing Requirements Chart for Tax Year 2020 for the individual’s filing status.
  • Every part-year resident who received income while a resident of North Carolina or who received income while a nonresident that was attributable to the ownership of any interest in real or tangible personal property in North Carolina, or derived from a business, trade, profession, or occupation carried on in North Carolina, or derived from gambling activities in North Carolina and whose total gross income for the taxable year exceeds the amount shown in the Filing Requirements Chart for Tax Year 2020.
  • Every nonresident who received income for the taxable year from North Carolina sources that was attributable to the ownership of any interest in real or tangible personal property in North Carolina, or derived from a business, trade, profession, or occupation carried on in North Carolina, or derived from gambling activities in North Carolina and whose total gross income from all sources both inside and outside of North Carolina for the taxble year exceeds the amount shown in the Filing Requirements Chart for Tax Year 2020. For nonresident business and employees engaged in disaster relief work at the request of a critical infrastructure company, refer to the Personal Tax Division Bulletins.

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What Happens If I Owe Too Much In Taxes

There might be a couple of reasons contributing to an extremely high tax bill. For example, underpaying throughout the year can result in a tax underpayment penalty. If you paid at least 90% of your taxes, the fee is waived. But if you were significantly off the mark on your tax payments, youll likely owe money to the IRS.

Owing too much in taxes may also result in an IRS audit. This process verifies your financial information to ensure your taxes are accurate.

If your employer doesnt withhold taxes or you earn additional income through a side hustle, you should pay your taxes quarterly. This can help you avoid an underpayment penalty.

Also, learn how to avoid tax evasion, which can come with major consequences.

Who Does Not Have To Pay Estimated Tax

Heres why millions of Americans owe more in taxes this year

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

If you receive a paycheck, the Tax Withholding Estimator will help you make sure you have the right amount of tax withheld from your paycheck.

You dont have to pay estimated tax for the current year if you meet all three of the following conditions.

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

You had no tax liability for the prior year if your total tax was zero or you didnt have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

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How Has Tax Reform Impacted Withholding

However, in 2018 the IRS systematically under-estimated the withholding for millions of taxpayers.

In December of 2017 Congress passed the Tax Cuts and Jobs Act. This bill took effect for the first time for the 2018 tax year, those due on April 15 of this year. Although called “tax reform,” the TCJA focused on a trillion dollar tax cut. Among other changes this bill significantly lowered taxes for corporations and high-earners, doubled the standard deduction for all tax payers, and changed the rates and income cutoffs for all tax brackets.

To reflect these changes the IRS adjusted its withholding tables for 2018. In doing so, the agency reduced the amount it withheld from the average worker’s paycheck. This caused people to keep slightly more of their money on a per-paycheck basis. Media reports have indicated that the IRS was directed to make this adjustment for political reasons during the 2018 election year.

However, the IRS cut its withholding further than it has in the past. As a result, the Government Accounting Office has estimated that up to 30 million taxpayers had too little taken out of their paycheck. By the end of the year they hadn’t yet paid all of their taxes through biweekly withholding.

If you owe a surprise tax bill in 2019, this is why. Your taxes have probably not gone up, the IRS simply took less money from you over the course of the year.

State Taxes Vs Federal Taxes: Whats The Difference

Both state governments and the federal government can collect income tax, as well as other types of tax. But they arent exactly alike.

First, federal taxes apply to everyone, regardless of which state you live in. While there are some exceptions, the IRS requires most people to file a tax return. The information you provide on your federal tax return is used to determine what you owe in federal income tax.

So what determines if you owe federal taxes or get money back? If you paid too much in taxes during the year through payroll withholdings, then you may get a refund. If you paid too little in withholding then you may owe additional tax.

If you live in a state that assesses income tax, then youll need to file a state return along with your federal return. This return determines what you owe in state income taxes, based on your income and which tax deductions or credits you claim.

The tax bracket you land in at the state level can differ from your federal tax bracket, which is one reason you might owe state taxes but not federal. Again, whether you owe state taxes or get a refund can depend on how much you paid in tax throughout the year.

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Failing To Pay Estimated Tax

Another common form of falling behind on taxes is linked to business owners and entrepreneurs.

Most people who are self-employed are responsible for paying their own taxes on a quarterly basis, depending on their income and estimated tax payments.

Since they are self-employed, they do not have an employer to withhold taxes from their paycheckthat’s usually an effective backstop for people who might otherwise forget to file their taxes. But if you’re self-employed and you fail to make your estimated tax payments throughout the year, youll incur a large tax liability at the end of the year.

There are a variety of ways to calculate your quarterly estimated tax payments. Just be sure the method you choose doesn’t leave you struggling to make daily expenses or set you up with a huge tax bill and underpayment penalties.

Due to Hurricane Ida, some residents and business owners in Louisiana and parts of Mississippi, New York, Pennsylvania, and New Jersey have been granted extensions on their deadlines for filings and payments to the IRS. Most relate to upcoming due dates for quarterly filings and payments.

How Does Tax Reform Impact Withholding

Why Do I Owe Taxes If I Claim 0 Exemptions || Why I Owe The IRS So Much In Taxes This Year

Changes in tax law can impact how much you owe the federal government each year. While minor changes happen frequently, the Tax Cuts and Jobs Act of 2017 brought significant changes for both individuals and businesses.

One of the major changes for individuals is that standard deductions have become much higher. On the flip side, the Tax Cuts and Jobs Act also eliminated personal exemptions. IRS rules also impact claiming your boyfriend or girlfriend as a dependent in some situations.

Many people are disenchanted with the current tax system: Only 18% of respondents in a recent GOBankingRates survey believe that their taxes are being spent effectively. This frustration may end up affecting tax policy so it wouldnt hurt to pay attention to tax reform measures and to cast your ballot in the next election.

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What To Do If You Owe State Taxes

If you owe state taxes this year its important to pay whats owed by the filing deadline. Otherwise, your state tax agency could charge you penalties and interest for each day your outstanding balance goes unpaid. That could end up adding to what you owe. Your options for paying may include writing a check, paying by credit card or taking out a personal loan. If you cant pay your state tax bill in full, its important to get in touch with your state tax agency. Your state may allow you to set up an installment payment plan to pay whats owed, similar to the installment agreements the IRS offers for federal taxes.

If youre debating whether to use a to pay state taxes, be aware of what each option may cost. A credit card that has a high APR could make paying state taxes more expensive. In that case, youd want to look for a card that offers a 0% introductory rate for purchases. Just be sure you understand when the promotional period ends so you know when the regular APR kicks in. Also, consider any processing fees your state tax agency may charge for credit card payments.

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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Tax Withholding From Other Income

If you have non-wage income, you may be able to have income tax withheld from it voluntarily.

For example, you can have 10% of your unemployment benefits withheld for taxes. That may hurt a little now, but its a whole lot less painful than a big tax bill next spring.

To have income tax withheld on government payments, including social security benefits or unemployment benefits, complete Form W-4V from the IRS website and send it to the payer.

Do not send it to the IRS. You can have 7%, 10%, 15%, or 25% withheld from most government payments.

You can only have 10% withheld from unemployment payments.

If you receive pension or annuity payments, adjust your income tax withholding on Form W-4P, available on the IRS website.

If you do not tell an annuity payer how to withhold income tax, the IRS generally requires them to withhold as if you are married and have three dependency exemptions.

How To Check The Status Of Your Coronavirus Stimulus Check

30 Million People Will Owe the IRS Next Year. Could You Be ...

If you’re trying to find out the status of your coronavirus stimulus payment, go to the IRS’s Get My Payment page. You can learn whether your payment has been issued, and if it’s coming by direct deposit or mailed check.

Learn more about the stimulus payments, including whether you qualify for one and what, if anything, you may have to do to get yours.

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What Can I Do If I Owe Taxes

If you cant pay your entire tax bill when its due, there are a number of options available to help you avoid serious consequences. Some involve working out payments directly with the IRS, while others involve finding alternative ways to pay your taxes.

Here are some payment options to consider:

  • Apply for a full-payment agreement if you can pay your taxes within 120 days
  • Sign up for an IRS installment plan
  • Make an offer in compromise
  • Consider a loan or other financingto make a tax payment

Each of these options comes with different eligibility requirements and consequences. This is especially true when you think about taking out a personal loan, home equity loan or another type of financing to take care of your tax bill.

Mandi Woodruff Executive Editor Of Magnifymoney Responds

It probably doesnt help to hear that youre not the only one facing an unpleasant surprise this year. Many are finding they owe money to the IRS when they were expecting a refund this year. But its true. And no one can blame you for being confused at how a tax cut turns into owing money.

In fact, a lot of people are asking the same question this year.

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Understand Your Tax Situation

Even if you owe taxes this year, use it as a learning opportunity to understand your finances better for the future. Keep track of how much you earn, what methods you use to earn money, and how your life changes over time. Its also smart to stay on top of tax-related news so you know about major changes that might affect you. Of course, anytime youre in doubt about how much you owe or what your payment options may be, talk to a professional. Its the best way to protect yourself and keep the IRS happy.

Why Do I Owe Taxes This Year It Could Be Due To Pandemic Impacts

Why do I owe a lot on state taxes?

If you received a refund last year, you generally could expect one this yearif your personal tax situation was the same. But, for so many people this last year, their situation was not the same. That said, the answer to why do I owe taxes this year? might have to do with economic shifts due to the coronavirus pandemic.

Receiving unemployment income, taking on an extra job or self-employment are all plausible causes for your refund amount changing from year to year.

Here are a few ways job and policy changes might have impacted your taxes.

If the scenarios above dont reflect your situation, there are other possible reasons why you owe the IRS. Read on to learn about other factors that may affect why you may owe taxes.

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