How Do I Owe Money on My Tax Return? Common Reasons Explained

Filing taxes can sometimes lead to an unexpected bill instead of a refund. Many assume that paycheck withholdings or estimated payments fully cover their tax obligations, but various factors can result in owing money.

Understanding what led to the balance due helps prevent surprises in the future. Common reasons include changes in income, deductions, and employer withholding errors.

Adjusted Tax Brackets

Tax brackets change periodically due to inflation adjustments and legislative updates. The IRS modifies income thresholds annually using the Chained Consumer Price Index (C-CPI-U). If your income rises faster than these adjustments, a larger portion of your earnings may be taxed at a higher rate.

For 2024, tax brackets increased slightly, but if your salary grew more, you could move into a higher bracket. For example, if you earned $95,000 in 2023 and $102,000 in 2024, part of your income may now be taxed at 24% instead of 22%. If your employer withheld taxes based on last year’s rates, the difference could result in a balance due.

Tax law changes can also affect deductions and exemptions, pushing more income into higher brackets. The standard deduction increases annually, but if it doesn’t rise as much as your earnings, your taxable income grows. Additionally, some deductions and credits phase out at higher income levels, meaning a raise or bonus could reduce benefits you previously received.

Insufficient Employer Withholding

Employers withhold taxes based on the information provided in Form W-4. If this form is outdated or incorrectly filled out, withholdings may not cover your actual tax liability. Many people unknowingly claim too many allowances or fail to update their W-4 after major life changes, such as marriage or having children, leading to under-withholding.

Bonuses, commissions, and other supplemental wages are taxed at a flat 22%, but if your total income places you in a higher bracket, your actual tax rate may be greater than 22%, creating a shortfall.

Multiple jobs or dual-income households can also cause withholding issues. If each employer withholds taxes as if that job is your only income source, the combined earnings may push you into a higher bracket without enough withheld to cover the difference. The IRS provides a Tax Withholding Estimator tool to help individuals determine if adjustments are needed, but many fail to review their withholdings regularly.

Self-Employment Earnings

Self-employed individuals are responsible for both income tax and self-employment tax, which includes Social Security and Medicare taxes totaling 15.3% in 2024. Unlike traditional employees, who split these taxes with their employer, self-employed workers must pay the full amount themselves.

Many freelancers, independent contractors, and small business owners underestimate their tax liability by focusing only on income tax and overlooking self-employment tax. This miscalculation is especially common when business income fluctuates. A particularly profitable quarter can push taxable income higher than expected, leaving a shortfall when filing.

Record-keeping errors and misclassified income also contribute to tax bills. Payments reported on Form 1099-NEC or 1099-K must match what is declared on a tax return. Some self-employed individuals mistakenly believe that only income exceeding electronic payment thresholds—such as the $600 reporting requirement for third-party payment platforms—needs to be reported. However, all earnings are taxable, regardless of whether they are formally documented.

Missed Estimated Taxes

The U.S. tax system operates on a pay-as-you-go basis, meaning taxes must be paid throughout the year as income is earned. If withholdings are insufficient or estimated payments are missed, taxpayers may face penalties and interest. This often affects individuals with non-wage income sources such as rental properties, investments, or large one-time earnings from stock sales.

The IRS requires estimated tax payments to be made quarterly—typically on April 15, June 15, September 15, and January 15 of the following year—if a taxpayer expects to owe at least $1,000 after subtracting withholdings and refundable credits.

Failing to make these payments or underestimating the amount due can result in an underpayment penalty, calculated using IRS Form 2210. The penalty is based on the federal short-term interest rate plus 3%, which is adjusted quarterly. If the rate is 5%, the penalty would be 8% of the underpaid amount, accruing daily until resolved. Some taxpayers attempt to avoid penalties by making a large payment in the final quarter, but the IRS requires payments to be spread throughout the year. Uneven payments can still trigger penalties unless the “annualized income installment method” is used, which allows taxpayers with fluctuating earnings to allocate payments based on when income was received.

Lost or Reduced Credits

Tax credits directly reduce the amount owed, making them more valuable than deductions, which only lower taxable income. If a credit previously claimed is reduced or eliminated due to income changes or legislative updates, the resulting tax bill can be higher than expected.

Many credits, such as the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), have income phaseouts. In 2024, the CTC provides up to $2,000 per qualifying child, but the refundable portion is capped at $1,600. If a taxpayer’s income exceeds $200,000 ($400,000 for joint filers), the credit begins to phase out at a rate of $50 for every $1,000 over the limit.

The EITC, which benefits low-to-moderate-income workers, has strict income limits that adjust annually. A small salary increase or additional income from side work can push a taxpayer above the eligibility range, eliminating the credit entirely.

Education-related credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), also have income limits. The AOTC, which offers up to $2,500 per student, begins to phase out for single filers earning above $80,000 and disappears entirely at $90,000. If a taxpayer previously benefited from these credits but now earns more than the threshold, they may owe more than expected. Changes in filing status, such as getting married, can also impact eligibility, as combined household income may exceed the limits for credits that were previously available when filing separately.

Other Unreported Income

All taxable income must be reported, even if it wasn’t documented on a tax form. Many taxpayers overlook earnings that are not included on a W-2 or 1099, leading to discrepancies that increase tax liability.

Stock sales, dividends, and interest income are common sources of unreported earnings. Brokerages issue Form 1099-B for capital gains and Form 1099-DIV for dividends, but if these forms are misplaced or ignored, the IRS will still receive a copy and expect the income to be included on the return.

Cryptocurrency transactions are another area of concern, as exchanges report certain transactions to the IRS, but taxpayers must track and report all gains and losses themselves.

Rental income, even from short-term platforms like Airbnb or Vrbo, is taxable and must be declared. Many hosts assume that if they do not receive a 1099-K, the income is not reportable, but this is incorrect. The IRS requires all rental earnings to be included, and failing to do so can trigger penalties.

Deductions Not Matching Records

Deductions lower taxable income, but discrepancies between reported amounts and IRS records can lead to adjustments that increase the amount owed.

Mortgage interest is reported on Form 1098, and the IRS cross-checks this information with tax returns. If a taxpayer claims a higher amount than what the lender reported, the deduction may be disallowed.

Medical expenses are only deductible if they exceed 7.5% of adjusted gross income (AGI), and only the portion above this threshold can be claimed. Many taxpayers mistakenly include non-qualifying expenses, such as cosmetic procedures or over-the-counter medications, leading to adjustments.

Charitable donations must be substantiated with receipts or bank records. Contributions over $250 require a written acknowledgment from the charity, and non-cash donations must be valued correctly. If a taxpayer claims a large deduction without proper documentation, the IRS may disallow it.

Penalties and Interest

Owing taxes is one issue, but penalties and interest can make the situation worse. The IRS imposes penalties for late payments, underpayment, and failure to file, all of which add to the total amount due. Interest accrues daily on unpaid balances.

The failure-to-pay penalty is 0.5% of the unpaid tax per month, up to 25%. The failure-to-file penalty is steeper—5% per month, up to 25% of the unpaid tax. If both penalties apply, the failure-to-file penalty is reduced by the failure-to-pay penalty for that month.

Interest is based on the federal short-term rate plus 3%, compounding daily. Taxpayers who owe a large balance may find that penalties and interest quickly add up, making it harder to pay off the debt. Setting up an IRS payment plan can help reduce additional penalties, and in some cases, penalty relief may be available for first-time offenders.