Are you wondering why you owe so much in taxes this year? Want to make sure you never owe a big tax bill – or any bill at all – when you file your income taxes?
Judging by the amount the average American has over withheld from his or her pay, we’re scared to death of owing the IRS even the smallest amount at tax time.
That’s somewhat curious, considering the average American doesn’t seem that worried about owing money to other creditors. There must be something about the IRS that inspires fear and dread in the hearts of taxpayers.
Overpaying by thousands of dollars “just to be sure” is not the answer. The average tax refund is about $3,000.
That’s a lot of money to be tied up all year, when you could be putting it to better use.
You wouldn’t overpay your electric bill by that much and then think you really scored when you got the excess back.
Why do that with your taxes?
Causes of income tax underpayment
To avoid owing the IRS money, it’s important to know why you might find yourself in that situation.
Here are 4 of the most common reasons people find themselves owing extra tax:
1. Too little withheld from their pay
You can give yourself a raise just by changing your Form W-4 with your employer.
However, if you do that without careful planning, you might be setting yourself up for an unpleasant year-end surprise.
2. Extra income not subject to withholding
If you sell stock, for example, you may have more income than usual – and a bigger tax bill. Even unemployment benefits can increase your tax bill.
3. Self-employment tax
For many small business owners, self-employment tax is a far bigger burden than income taxes.
4. Difficulty making quarterly estimated taxes
If you have significant non-wage income, you generally make quarterly estimated payments.