How to know when you owe taxes

If you hate owing, imagine how disturbing it can be to owe taxes. Sometimes you may expect extra funds when you file your taxes for the year, but you can wind up owing taxes even when you have been financially frugal.

However, the proper financial knowledge or an adviser can help you rectify your tax inequalities. So if you owe taxes, it is best to be proactive and implement innovative measures to repay them. You may contact the internal revenue service to report tax inconsistencies like processing delays. However, you need a systematic approach to straighten things out with them. It begins with knowing when you owe taxes, starting with your tax return.

So in this article, you will learn everything you need to know to help you through those times when you owe taxes.

What does it mean to owe taxes?

You can be said to owe taxes when you fail to completely offset your tax bills, whether due to higher taxes or lower deductions on your paystubs. It means your tax liability exceeds the payments you receive and display on your form W-2, 1040, and other tax forms.

So when you fail to fully pay the tax balance on your federal income tax return by the tax due date, you create a tax debt, meaning you owe taxes. As a result, the Internal Revenue Service reserves the right to impose penalties and interests on your tax debt. These debts will progressively add up until you offset them.

Tax debts are not uncommon, as some employees find themselves behind on their tax returns even when their employers withhold taxes from their paystubs. Several reasons lead to such occurrences, and understanding their dynamics can save you a lot of trouble.

Why do people owe taxes?

You may worry about the reasons you owe taxes when you receive a surprise tax bill, especially if your employer made a recent withholding. However, when the IRS underestimates your tax bills, it accumulates into debt. Here are a few reasons you might be in debt besides IRS calculations.

When you change Jobs

Your previous W-4 form might account for higher tax bills due to inconsistent information. The best way is to get a new W-4 form for the new year, which you can take to your new employer. This way, you can regularize all data on your tax forms.

When you change your filing system

The way you file taxes influences how much you owe. For instance, a change to your relationship status, like getting married, influences how you file your tax return. Also, if you file as head of household because you are divorced, you might lose deductions and tax benefits. Similarly, getting married and filing jointly could bring some tax advantages.

The empty nest syndrome

When your children are younger and depend on you, you can claim a child tax credit, reducing your tax burdens. In such situations, it is easier never to owe taxes. However, when your kids are grown up and independent (the empty nest syndrome), you lose the tax benefits, which can significantly increase your tax liability.

Getting a side hustle

Most side hustles are independent contractors of freelance jobs, which may not essentially have tax withholding. However, your 1099 increases your earnings, and as you know, your tax liability increases as your earnings because they are directly proportional. Also, depending on your state, you might have to pay self-employment taxes like those in Texas.

What not to do to avoid tax debts?

Many people make several mistakes of owing the IRS, leading to increased tax liability. So, now that you know a few reasons people owe taxes, it is vital also to learn what not to do to avoid making your tax debts worse. Here they are:

• Not filing a tax return: Not filing a tax return because you can't afford it will not make the bills go away. Instead, it attracts a 5% penalty from the IRS, leading up to 25% with interest.

• When you don't file an extension: Filing an extension before the tax deadline buys you more time to update your tax liabilities.

• Not having a payment plan: An installment plan can help you offset your taxes without feeling its intensity. Owing less than $50,000 in income taxes qualifies you for an online payment plan. Eligible taxpayers get about 72 months to settle their IRS debt.

How to know when you owe taxes?

Knowing when you owe taxes is critical for quickly offsetting your tax debts without attracting any penalties. The most effective way to know how much you owe is by contacting the IRS. Fortunately, there are several methods for reaching the Internal Revenue Service to understand how much taxes you owe. Here are some practical ways to know when you owe tax.

Email notification from the IRS

The Internal Revenue Service will send you an email notification when you fall behind on your taxes. Email is the most common IRS method for contacting individuals. As a result, you should suspect any direct contact through phone calls or text messages claiming to be from the IRS.

Through your tax account on the IRS website

The IRS website contains all information you need concerning your tax liabilities. So, you can log in to your tax account on the IRS official website to view your tax records and make payments.

Through filing and reviewing tax returns

Reviewing your tax allows you to discover back taxes. This way, you can straighten all tax liability you may not know.

Through direct contact using the IRS contact number

Although the IRS will never directly contact you through phone calls or text messages, you can contact them through their direct service number. The number is displayed on the IRS website. However, you may encounter challenges speaking with an official if you call during tax season.

Final Thought

Most people do not find tax payment pleasant, especially when they have to pay more than they can afford. Since taxes are compulsory levies, you are better off if you do not owe taxes. As a result, it is best to endeavor to clear them as soon as possible, rather than pretending they do not exist to avoid incurring consequences or penalties of owing taxes. Hopefully, this article helps.

FAQS:

What happens if I owe taxes?

Owing taxes may warrant significant penalties and have interests accrue for you as time passes. So, the impending penalties are inevitable whether you are behind on your back or current taxes. Usually, the penalty for failing to pay starts at 0.5 percent of your due balance every month, leading up to 25 percent of back taxes.

What makes me owe my income tax after filing a tax return?

One of the reasons responsible for making you owe your income tax even after filing a tax return is paying less tax during the year than what you owed for your level of income. Knowing this may resolve the internal conflict you experience about reasons for sending the IRS a check.

Is owing taxes better than getting a refund?

Some people and schools of thought believe it is better to owe than receive a tax refund. The reason is that you did not have enough money withheld from your paycheck, causing you to owe, and getting a refund only reinforces your debt.

Why do I get low refunds?

You might get low refunds if your tax deductions change, especially as the government takes more than usual from your paycheck. Although you can control the amount of withholding, changes to your deductions may instigate smaller refunds or an IRS bill.