Why Do I Owe Taxes Instead of Getting a Tax Refund?

Receiving a tax bill instead of a refund means the total amount of tax paid throughout the year was less than your actual tax liability. A refund is a reimbursement for overpaying taxes, so when you owe, it signifies your payments fell short, eliminating the possibility of getting money back.

Incorrect Tax Withholding and Payments

The most frequent reason for owing taxes is related to the amount paid throughout the year from your earnings. For most employees, this is handled through payroll deductions directed by the information on a Form W-4, Employee’s Withholding Certificate. If this form is incorrect or outdated due to life changes, your employer may withhold too little from each paycheck, leading to a tax bill.

A significant life event often requires submitting a new Form W-4 to your employer. For instance, getting married can change your tax rate, especially if both spouses work. A spouse getting a new job or a substantial pay increase can also alter your household income enough to push you into a different tax bracket, making your previous withholding insufficient.

Another scenario involves income from sources other than a primary employer, such as a side business, freelance work, or the gig economy. Taxes are not withheld from these earnings, so you must pay estimated taxes directly to the IRS on a quarterly basis. These payments, made using Form 1040-ES, Estimated Tax for Individuals, cover your income tax and self-employment taxes.

Failing to make these estimated tax payments on non-wage income is a direct path to owing money when you file. Individuals who expect to owe at least $1,000 in tax from this income are generally required to pay estimated taxes. The tax system operates on a pay-as-you-go basis, meaning taxes must be paid as income is earned.

Changes to Your Tax Credits and Deductions

The other side of the tax equation involves credits and deductions that reduce your tax liability. A tax credit provides a dollar-for-dollar reduction of the taxes you owe, while a deduction lowers your taxable income. If you no longer qualify for credits or deductions you’ve claimed in the past, your total tax can increase.

A frequent change relates to child-related credits. For example, a child turning 17 is no longer eligible for the Child Tax Credit. This credit is valued at up to $2,000 per qualifying child, so losing it can have a considerable impact on your tax outcome.

Similarly, education credits are a benefit that can disappear after graduation. The American Opportunity Tax Credit, worth up to $2,500 per student for the first four years of higher education, is no longer available once a student completes their undergraduate studies. A change in income can also affect eligibility for these credits, as they phase out at higher income levels.

Your eligibility for certain deductions can also change from one year to the next. If you pay off your student loans, you can no longer claim the student loan interest deduction, which allows you to deduct up to $2,500 in interest paid. Other deductions, such as for medical expenses, are only available if they exceed a certain percentage of your adjusted gross income, a threshold you may not meet every year.

Understanding Tax Refund Offsets

In some cases, a tax refund is calculated on your return, but you do not receive the money because it has been intercepted to pay a past-due debt. This is known as a tax refund offset and is managed by the Treasury Department’s Bureau of the Fiscal Service (BFS) through the Treasury Offset Program. This program collects delinquent federal and state debts by seizing federal payments.

The types of debt that can trigger a refund offset include:

• Past-due federal income taxes
• Delinquent state income taxes
• Unpaid child and spousal support
• Defaulted federal student loans
• Certain other non-tax debts owed to federal agencies
• Unemployment compensation debts owed to a state

If your refund is offset, you will receive an official notice from the BFS. This letter details the original refund amount, the amount of the offset, and the specific agency that received the payment. The notice also provides contact information for the agency to contact if you believe the debt is not yours or wish to dispute the amount. It is important to contact the agency listed, not the IRS, to resolve disputes.

Adjusting Your Tax Withholding for Next Year

To prevent owing taxes in the future, you can adjust the amount of money withheld from your paychecks. This ensures that your tax payments throughout the year more accurately reflect your total tax liability. The process involves using an online tool and submitting a form to your employer.

The first step is to use the IRS Tax Withholding Estimator, a free tool on the IRS website. This estimator helps you determine the appropriate amount of federal income tax to have withheld. To get an accurate estimate, you should gather your most recent pay stubs, information about other sources of income, and a copy of your latest tax return. The tool does not ask for sensitive personal information and does not save your data.

After the estimator provides a recommendation, the next step is to complete a new Form W-4, Employee’s Withholding Certificate. You can download a blank form from the IRS website or request one from your employer. The results from the estimator will guide you on how to fill out the form correctly for your financial situation.

The final step is to submit the completed Form W-4 to your employer’s payroll or human resources department. Your employer must implement the changes, though it may not take effect until the first payroll period that ends on or after the 30th day from when you submitted the form. It is a good practice to review your withholding annually to avoid future tax surprises.