One of two scenarios is typical when you file your annual income tax return -- either the IRS owes you a refund or you must send payment for additional taxes owed. Though various causes can contribute to owing more taxes, the overriding reason is that you had too little withheld from your paychecks throughout the year or you underpaid estimated taxes.
When you start a new job, you fill out a W-4 form. This form is where you designate your allowances for dependents, your expected tax credits and any extra amount you want withheld from taxes. If you claim too many allowances, you won't have enough withheld to cover your tax obligation. The W-4 comes with instructions on how to treat various allowance options. One common mistake is to claim an allowance for a spouse who is working. If you both work and both claim spouse deductions, you likely won't have enough deducted.
Not Accounting for Side Income
In addition to their regular job, many people receive income on the side that does not have taxes withheld. You must report self-employment income to the IRS. In fact, any company that pays you $600 or more during the year must send you a 1099 form recognizing the non-employee compensation. If you don't have extra money withheld through your regular work paycheck, you would likely owe when April 15 rolls around. To avoid that unpleasant surprise, as well as any penalties, pay estimated taxes on your self-employment income quarterly.
Tax Return Errors
One reason you might owe taxes is because you made a mistake on your return. Entering wrong information about you or your dependents, or failing to complete certain items on the return, could prevent you from getting the correct exemptions, deductions or credits. You can amend an incorrect return with Form 1040X.
Another reason you may owe taxes is because you have a favorable year with investments. Typically, financial services companies and brokers don't withhold money from investment gains. You receive a tax report after the year showing what you made on various investments. You have to submit a report for each investment, including proceeds and the cost basis. If you made a lot of money on stocks or other investments, you owe a percentage of your good fortune to the IRS.
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