Filing your taxes can be stressful for anyone but discovering an unexpected balance due can make it much worse. And while a surprise check in the mail in the form of a tax refund is more pleasant, you may still be left confused by why you’re being given this money. If you’re wondering why you got the tax result that you did, here are some common situations that may have impacted your results this year.
Why do I owe taxes?
- A change in employment. The Form W-4 you fill out at the start of a new job determines how much tax will be withheld from your paycheck. If you don’t withhold enough, you’ll have to pay the remainder with your tax return. Unemployment income is generally taxable, so if you received unemployment benefits in 2021, that may be reflected in your tax balance due.
- A change in lifestyle. Any big life changes such as getting married, moving or having a child can impact your taxes. Sometimes this means savings, and sometimes this means more taxes owed.
- Self-employment. When self-employed, taxes aren’t taken out of your pay, like an employee. Instead, you pay quarterly estimated tax payments to cover your Social Security, Medicare and income taxes. If you didn’t pay enough in with your estimated tax vouchers, you may owe when you file.
- You got a bonus. Getting a bonus is great news! However, bonuses are included in taxable income and subject to withholding. Sometimes, receiving a bonus can bump you into a higher tax bracket or lower the amount of allowable tax deductions, so you may not have withheld enough to cover this shift, resulting in a balance due.
- The Child Tax Credit (CTC). There are several reasons why the CTC may be to blame for the taxes you owe. Unless you opted out, the IRS may have sent you an advance on your child tax credit. This was not free money or extra money, just an opportunity to get your money sooner. If you historically get refunds due to CTC, this year your refund may have been shockingly lower. If you received too much or got an advance you weren’t eligible to receive, you may even have to pay some of it back. This is common when you have shared custody and received the advance CTC in a year when it wasn’t your turn to claim the dependent, and also when your dependent child turned 18 or is no longer your dependent.
- Stock Sales/Cryptocurrency. If you made money selling stock or cryptocurrencies this year, that income is reported on your tax return, subject to short term or long-term capital gains rates. If you didn’t have enough withheld on this income, you could owe tax while filing.
Why do I get a tax refund?
- Too much tax paid in. The simplest explanation for getting a tax refund is that you’re withholding more money from your paychecks (or paying more with your estimated tax payments) than needed to cover your tax liability. The IRS pays the excess back to you. Instead, you can adjust your withholding using a Form W-4 (or reduce your estimated tax payments).
- The Earned Income Tax Credit. Low-to-moderate income taxpayers may qualify for this credit, also known as the EITC. Because the EITC is refundable, it can not only result in getting back the income taxes you paid in, but also giving you a refund if your liability is below zero.
- The Child Tax Credit (CTC). While there are some situations where the CTC could result in tax due, others result in a refund instead. For 2021, the CTC is fully refundable, which means that if you qualified for the credit and it resulted in a negative liability, you may receive a refund of both the taxes you paid in AND the portion of the credit that brought your liability below zero.
Regardless of the end results of your tax return, you don’t have to be surprised on April 18. Working with a tax professional during the year can be key to helping you avoid receiving a shocking tax bill or giving the IRS an interest-free loan from your paycheck.
If you need help understanding your tax result and preparing for next year, Padgett’s nationwide network of tax professionals are here to lend a hand. Find an office near you today!