A lot of taxpayers get ready for their filing by making a quick assessment with a tax calculator. These calculators require you to punch in your figures and then showcase a final number. While these figures can sometimes come out to bring good news, it's also likely for them to occasionally showcase bad news.
When you see that you owe taxes instead of getting a refund, it can be a shock to the system. If you haven't been keeping track of your accounting, it's easy to lose track of everything contributing to your taxes. Let's take a look at why you might be owing more than expected in taxes this year!
Why Do I Owe Taxes This Year?
If you got a refund last year, it's only natural that you'd expect to receive one again this year. However, there's been a massive economic shift due to the impact of the COVID-19 pandemic. Many people ended up losing their jobs, and there were certain shifts in policy as well. Here are a few ways that job or policy changes might impact the taxes.
One of the major impacts of the pandemic is that more people than ever before are now claiming unemployment benefits. A lot of people haven't collected unemployment benefits before in their lives. As a result, they fail to realize that unemployment benefits fall under the category of taxable income.
The American Rescue Plan Act of 2021 states that taxpayers that earn below $150,000 will be able to exclude $10,200 of the income while filing taxes for the year 2020. Always include any unemployment income on your tax returns to understand how it affects the tax filing process.
There have also been policy changes when it comes to freelance or gig workers. It especially applies to those individuals that haven't been paying estimate quarterly taxes. That could help answer why they owe taxes in the current year. Since most freelance payments don't offer any paycheck withholding, the responsibility to file taxes completely falls on your shoulders. It's important that you keep track of potential tax payments and pay the quarterly estimates. Doing so can help avoid a massive tax bill staring at you in the face at the end of the year.
In the case of changing jobs, every new employee in America has to fill the W-4 form. The form is a document that lets you compete with the employer to help determine what amount should be withheld from the paycheck. This withheld amount is for the IRS and goes towards taxes. By completing your W-4 form on time, you can potentially help yourself avoid a significant tax bill at the end of the year.
However, if you fill the form incorrectly or fail to address it on time, the result could be a potentially massive tax bill heading your way.
Student Loan Repayments
One thing that might be causing you to owe taxes in 2020 is the impact on student loan repayments. Due to the impact of the pandemic, federal student loan holders have been exempted from making payments. While not having to make the payments is an advantage, it can be disadvantageous in tax returns.
When you make the loan repayments, you get a student loan interest deduction on the taxes. However, by not making these payments, you won't receive any student loan interest deduction. As a result, you could experience greater taxes instead of receiving a refund.
Any major changes in your tax filing status can potentially lead to changes in your tax returns. These changes are typically brought about by major life events such as marriage, divorce, retirement, or having another baby. All these can impact your tax situation. One of the main ways they impact your tax returns is by changing your filing status.
If you're filing status changes from the head of household to single, that'll impact the tax bracket and any credits or deductions that you could take. It's important to know about the difference in criteria between the filing status.
Another reason why you might be experiencing taxes in the year 2020 is due to your children going up. The Child Tax Credit is only applicable to children that are under the age of 18. If your children are older, then you no longer qualify and will not receive any credit. It's a significant amount of credit lost and could potentially explain why you owe taxes this year.
Credit and Deduction Eligibility
There are several other factors that could potentially impact your eligibility for different credits and deductions. If you experience changes in your income, that might impact whether you still qualify for earned income credit. Alternatively, if you're a college student, you had the chance of claiming the American Opportunity Credit. However, if there's been a change in your enrollment status, then you're no longer eligible for the status change.
How to Avoid Owing Taxes in The Future?
Nobody wants to owe taxes to the IRS, and there are some simple steps that you can take to avoid being in debt in the future.
Reconfigure Paycheck Withholding
As mentioned before, form W-4 deals with how much income the employer should withhold to pay your federal taxes. A reason why you might be paying so many taxes at the end of the year is that you're not letting the employer withhold enough money. Make the relevant changes to the form and increase the amount the employer can withhold to pay taxes.
Additionally, if there are any other changes that you need to make, it's a good idea to include them in the new form W-4. Once you're done making the changes, send the new form to your employers. Don't send the form to the IRS under any circumstances.
Withholding Tax on Other Income
You can also reconfigure your other income to have income tax withheld from the amount. If you're receiving unemployment benefits, you have the option of letting 10% be withheld to pay taxes. It might mean less money in the short-term, but it'll help avoid a larger tax bill the next year.
To get income tax withholding on your government payments, you're going to have to complete the form W-4V from the IRS website and then send it to the individual responsible for the payments. You can choose between having 7%, 10%, 15%, or 25% withheld from most government payments. Keep in mind that you can get 10% withheld from unemployment payments.
If you're self-employed, you have to encounter a few special challenges while paying income tax throughout the year. Unlike regularly employed individuals, self-employed individuals don't have access to a constant steady stream of income.
They also don't have the option of automatically getting their tax cut from their business income. It's significantly more difficult to take out the money for a tax payment rather than have it deducted automatically. The only way that self-employed individuals can avoid massive tax bills is by making a strong effort at their bookkeeping. Hiring the team at Hall Accounting could even be a potential solution as they can help get your accounts in order!
By maintaining good records of your accounts and paying taxes throughout the year, you can potentially avoid having to owe a massive tax bill next year!
The impact of the pandemic has seen a massive impact on taxpayers and tax policy as well. Hopefully, these guidelines can explain why you're facing a large tax bill this year and the steps you take to avoid a similar bill in the future. If you do have future questions, please reach out to the tax team at Hall Accounting for further guidance.
FUTURE IMPORTANT DEADLINES
Past due - 02/01/21
Deadline for employers to mail out W-2 Forms to their employees and for businesses to furnish 1099 Forms reporting non-employee compensation, bank interest, dividends, and distributions from a retirement plan
Past Due - 03/01/21
Deadline for businesses to mail Forms 1099 and 1096 to the IRS
Past Due - 03/15/21
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065) or to request an automatic six-month extension of time to file (Form 7004)
Past Due - 03/31/21
Deadline for businesses to e-file Forms 1099 and 1096 to the IRS, except Form 1099-NEC
Deadline to file individual tax returns (Form 1040) for the tax year 2020 or to request an automatic extension (Form 4868) for an extra six months to file your return, and for payment of any tax due, and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for corporations that use the calendar year as their tax year
Deadline for household employers who paid $2,200 or more in wages in 2020 to file Schedule H for Form 1040
Deadline for first-quarter estimated tax payments for the 2021 tax year
Deadline for second-quarter estimated tax payments for the 2021 tax year
Deadline for third-quarter estimated tax payments for the 2021 tax year
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020 for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065)
Final extended deadline to file individual tax returns for the year 2020 (Form 1040), and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020 for corporations that use the calendar year as their tax year