If you consistently owe taxes at the end of the year when filing your Form 1040 (U.S. Individual Income Tax Return), there are several common reasons why this might be happening. Understanding these reasons can help you take steps to better manage your tax liability. Here are some potential explanations for consistently owing taxes:
One of the most common reasons for owing taxes at the end of the year is that your income sources did not withhold enough federal tax. This can happen for many reasons:
1. Improperly Filled Out W-4: Though it appears to be easy, Form W-4 (Employee's Withholding Certificate) can be complicated based on your position and potential life changes.
2. Multiple sources of income: Form W-4 allows you to identify multiple sources of income and withhold.
3. Updating Form W-4: Submitting a new Form W-4 to the source of income will update your circumstances to the payroll processor or custodian. This will update the amount withheld for each source of income.
If you are self-employed or have income that is not subject to withholding, you may be required to make estimated tax payments throughout the year. Owing at the end of the year can occur if you underestimate your tax liability when making these payments. To avoid this, it's important to accurately estimate your tax liability and make timely estimated payments.
Major life changes such as a change in income, marital status, or the birth of a child can impact
your tax liability. If you don't adjust your withholding or estimated payments to account for these changes, you may end up owing more when you file your return.
Owing taxes at the end of the year can also result from not taking full advantage of available tax credits and deductions. Some taxpayers may not be aware of all the credits and deductions they are eligible for, or they may not have kept adequate records of their expenses.
If you have capital gains from investments or other sources of taxable income beyond your regular
salary, you may owe additional taxes. These types of income are often subject to different tax rates and may not have sufficient withholding. Since investment income may vary greatly by year, consulting with
your financial advisor or custodian is important. Ask about large transactions or large gains/losses being recognized. State and Local Taxes:
Remember that your federal income tax return is only part of your overall tax picture. If you live in a state or locality with income taxes, your overall tax liability may be higher, and you could owe state and local taxes in addition to federal taxes.
Taxes will be a consistent burden for the rest of your life but should not be similar to gambling. By taking a proactive approach to managing your tax liability throughout the year, you can help prevent the unpleasant surprise of owing taxes when you file your Form 1040. If you would like to schedule a consultation to better understand why you owe at the end of each year, please click the button below. We are happy to help you understand the source of your tax liabilities.