I've Always Gotten a Tax Refund. Why Do I Owe Money This Year?

Picture this: It's April 14. You're frantically searching through your tax documents to find just one more credit or deduction. When you finally finish your return, you're shocked. Instead of getting a refund this year, you have to send a check to Uncle Sam.

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You may think, "Why do I owe federal taxes this year?" Here are some possible explanations for why you have to pay taxes instead of getting a refund.

"Why do I owe taxes this year when nothing changed?" Many people ask themselves this question when faced with a tax bill instead of a much-anticipated tax refund. Even if you think your situation is exactly the same as it was last year, there's a good chance you experienced at least one change in circumstances, causing your tax bill to increase.

It's possible you earned more money, didn't have enough withheld from your paychecks or went through certain changes in your household. Review your situation to determine if any of the following occurred.

Change in Eligibility for Credits or Deductions

A tax credit directly reduces the amount of tax you owe. For example, if you owe $2,000 in taxes and have a credit worth $2,000, the credit reduces your tax bill to $0. Some credits are even refundable, which means you get back the difference. If your tax bill was only $1,000 and you received a $2,000 refundable credit, you'd get the $1,000 difference as a refund.

If you owe federal tax this year, it may be because you lost eligibility for certain credits. For example, if one of your children turned 18, you won't be able to claim them as a qualifying child for the purposes of getting the Child Tax Credit. If you receive a lower Child Tax Credit, it may not be enough to cover your tax obligation, leaving you with a balance due.

A deduction reduces your taxable income. For example, if you have $100,000 in taxable income and take a deduction worth $5,000, your taxable income drops to $95,000. Because deductions reduce your taxable income, they also reduce your tax bill.

You may be ineligible for some of the deductions you took last year, increasing your tax burden. For example, if you paid off your student loans before the tax year began, you won't be able to use the student loan interest deduction.

Increase in Income

If you made more money last year and didn't increase your withholdings accordingly, your taxable income may be higher. The higher your taxable income is, the more tax you have to pay, assuming you don't qualify for any additional credits or deductions.

Side Hustle

Starting a side hustle is a great way to earn extra money, but it can also increase your tax burden. This is especially true if you get paid as an independent contractor instead of an employee. If you're an independent contractor, you have to pay both the employer and employee portion of your Social Security and Medicare taxes.

Major Life Changes

Certain life changes affect your tax situation, which may affect the amount of money you owe at tax time. For example, if you got married during the tax year, you may use the married filing jointly status instead of filing as a single person. If your new spouse has a high income, there's a chance the two of you didn't have enough withheld to cover your tax bill. Divorce also affects your tax situation, as you may lose the right to claim the Child Tax Credit or lose out on the opportunity to claim related credits and deductions.

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How Can I Avoid Paying Taxes Next Year?

If you have taxable income, you can't avoid taxes completely, but you can take a few steps to avoid owing money next year.

• Update your W-4 so that your employer withholds the correct amount of tax. You can even ask your employer to withhold an additional amount from each paycheck.
• Make quarterly tax payments if you have any self-employment income. If you make estimated payments, you can cover your taxes a little bit at a time instead of having to owe a huge amount when you file a return.
• Keep your tax bill in mind when you make financial decisions. You may be able to use tax-advantaged accounts to reduce your taxable income.