5 Common Reasons You Might Owe Taxes This Year (2024)

Taxpayers are gearing up to file for the past year. Like each tax season, 2024 will consist of a lot of variables that might work for or against you in terms of getting a refund. You might actually be one of the many Americans who owe taxes this year for a variety of reasons.

If taxes are due this year, the primary reason could be insufficient tax withholding from your salary. You might also owe taxes if you were self-employed, worked side gigs or had major life changes. Here is a closer look.

Also see how many people expect refunds.

You Claimed Too Few Allowances

The more allowances you claimed last year on your W-4 form as an employee, the less tax the IRS will withhold from your paycheck, and the more you’re likely to pay at tax time this year. Make the appropriate changes to the form moving forward to avoid paying more in taxes.

Self-Employment, Side Hustles and Passive Income

If you worked a side gig, part time or were self-employed in 2023, your taxes could change this season. Not having made estimated quarterly payments to cover your total tax liability, you will probably have to pay those taxes in a lump sum when you file this year.

“I’ve seen lots of people newly getting into investing this year as a way to earn some passive income, maybe without realizing that even passive income is subject to taxation,” said David Kemmerer, CEO of CoinLedger. “I’ve also seen lots of taxpayers having set up other income sources from side jobs, which will also be subject to taxes. So, depending on how you’re withholding from your day job, this could certainly result in more people owing taxes this year than in previous years.”

Major Life Changes

Perhaps you got married, bought a house or your employment status changed last year. Any of these life-changing events will affect your taxes.

Getting married can change your tax bracket, which is the rate of tax on your income. Your income is combined with your spouse’s when you file a joint return and may be taxed at a higher rate than when you were single.

If you purchased a home in 2023, you won’t qualify for any tax deductions because most of the expenses incurred when buying a home are not deductible during the year of purchase. One exception is prepaid mortgage interest points, but you must meet specific qualifications to deduct these points.

If you started a new job last year, remember that the allowances you claimed on your W-4 will determine how much tax is withheld from your pay. If your W-4 is not up to date with your currently filing status and details, the treasury might see you as owing them. This includes details such as working several jobs, filing jointly with your spouse, having tax credits or other taxable income, all of which can affect that rate of withholdings on your taxes.

Additionally, any supplemental wages earned, such as moving costs, bonuses or severance pay, are taxable. Different IRS rules apply, depending on how much you received for these payments.

Decrease in Deductible Expenses

You could find yourself owing the IRS some money if your deductions are itemized. This could include a change in your tax filing because of reduced medical expenses, paying off a student loan, or making the final payment on your mortgage. It’s great to not be in debt with added costs, but your taxes will not reflect these deductible expenses so you could end up with a smaller refund or even owning more in federal and state taxes.

New Forms of Capital Gains

Did you invest in cryptocurrencies, individual stocks, ETFs, real estate or any other category of capital gains as defined by the IRS? It might be a smart fiscal decision or blazing new territory in terms of financial growth, but you will still have to pay taxes on any realized profits from your investments.

Final Take

How can you avoid owing taxes this year? When taxpayers underpay their taxes by too much, the IRS imposes penalties that can add up to several hundred dollars or more. To avoid paying these penalties and more in taxes, consider adjusting your withholding allowances or the amount of your estimated tax payments. This is advisable, especially if you had a significant life change such as a marriage, a new child, a new job or more than one job.

Jake Arky, Lauren WardandCaitlyn Moorheadcontributed to the reporting for this article.

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