Filing taxes may not be your favorite financial chore but it is a necessary one to stay in the good graces of the IRS. Why do I owe state taxes is a question you might have if filing your return has resulted in a tax bill rather than a refund. There are different reasons why you might owe state income taxes this year. Knowing what’s behind your state tax bill can help you plan ahead for next year so you don’t end up owing again. A financial advisor can help you avoid paying more than you need to the state and federal governments.
State Taxes vs. Federal Taxes: What’s the Difference?
Both state governments and the federal government can collect income tax, as well as other types of tax. But they aren’t exactly alike.
First, federal taxes apply to everyone, regardless of which state you live in. While there are some exceptions, the IRS requires most people to file a tax return. The information you provide on your federal tax return determines what you owe in federal income tax.
So what determines if you owe federal taxes or get money back? If you paid too much in taxes during the year through payroll withholdings, then you may get a refund. If you paid too little in withholding then you may owe additional tax.
If you live in a state that assesses income tax, then you’ll need to file a state return along with your federal return. This return determines what you owe in state income taxes, based on your income and which tax deductions or credits you claim.
The tax bracket you land in at the state level can differ from your federal tax bracket, which is one reason you might owe state taxes but not federal. Again, whether you owe state taxes or get a refund can depend on how much you paid in tax throughout the year.
Why Do I Owe State Taxes?
Getting a state tax bill may come as a surprise but there are several reasons why you may owe money, versus getting a refund. Here are the four most common reasons that you might owe state taxes:
- State Taxes are Different:Again, the first thing to keep in mind is that state and federal tax laws and tax brackets work differently. If your income changed significantly and you earned more than in previous years, this could push you into a higher tax bracket at the state level. That could result in owing more money in taxes.
- Your Withholding Is Too Small:Next, consider what you withheld from your income during the year. Again, withholding too little in taxes can result in owing money to the state tax authorities when it’s time to file. If you haven’t updated your withholdings in some time, you may need to adjust them to avoid owing state taxes in the future. Using an online paycheck calculator can help you get an idea of what you should be withholding.
- Income Change:Changes in income can also affect your ability to claim certain tax credits. For example, say you previously qualified for the federal Earned Income Credit but thanks to a pay raise, you’re no longer eligible. If you can no longer claim that credit on your federal taxes you could lose any similar state tax benefits.
- Your Deductions:The deductions you claim and whether you itemize or take the standard deduction can also affect your state tax bill. Having fewer deductions than in previous years, for example, could mean you have less to itemize. Or you might end up taking the standard deduction instead. Either way, that could affect your state tax liability and cause you to owe more money.
Other situations that may affect your state tax filing include:
- Starting a side job or changing jobs
- Underpaying estimated quarterly taxes if you’re self-employed
- Getting married or divorced
- Becoming a widow(er)
- Having a child
- No longer being able to claim a child as a dependent
- Reporting gambling winnings
- Taking Social Security benefits for the first time
- Withdrawing money from a 401(k) or IRA
- Buying or selling a home
- Reporting capital gains from the sale of investments
- Losing deductions for home mortgage interest or student loan interest because you’ve paid those obligations off
Keep in mind that the same things that can result in you owing more state taxes could also increase your federal tax bill as well. It’s important to work with an expert if you think your federal taxes were filed incorrectly, or if you’re looking for ways to decrease your overall tax bill.
What to Do If You Owe State Taxes
If you owe state taxes this year it’s important to pay what’s owed by the filing deadline. Otherwise, your state tax agency could charge you penalties and interest for each day your outstanding balance goes unpaid. That could end up adding to what you owe. Your options for paying may include writing a check, paying by credit card or taking out a personal loan. If you can’t pay your state tax bill in full, it’s important to get in touch with your state tax agency. Your state may allow you to set up an installment payment plan to pay what’s owed, similar to the installment agreements the IRS offers for federal taxes.
If you’re debating whether to use a credit card to pay state taxes, be aware of what each option may cost. A credit card that has a high APR could make paying state taxes more expensive. In that case, you’d want to look for a card that offers a 0% introductory rate for purchases. Just be sure you understand when the promotional period ends so you know when the regular APR kicks in. Also, consider any processing fees your state tax agency may charge for credit card payments.
How to Avoid Owing More in State Taxes
If you want to avoid having to ask why you owe state taxes next year, there are some things you can do to plan ahead. First, check your tax withholding with your employer to see if you’re withholding the appropriate amount based on what you earn, your filing status and the deductions or credits you anticipate taking. If necessary, you can fill out a new Form W-4 to update your withholding.
If you’re self-employed, review what you’re paying in estimated quarterly taxes. Estimated quarterly tax payments allow you to pay into the federal and state tax systems through the year in place of an employer’s withholding. If you owed state taxes because you underpaid your quarterly taxes, then you may need to increase what you pay in each quarter.
Next, consider any life changes that may have impacted your tax filing. For example, if you got divorced or separated and had to change your filing status that can affect how you’re taxed. But you might be able to offset the possibility of a bigger state tax bill by increasing your deductions or qualifying for tax credits.
Speaking of credits and deductions, look at what you claimed for the most current tax year. Then consider which credits or deductions you may claim for the next tax year. It’s possible you may be overlooking valuable deductions that could help you avoid a higher tax bill. Contributing to an IRA, for example, could help you snag a deduction for those contributions. And you may also be able to qualify for the retirement saver’s credit.
The Bottom Line
Owing state taxes may be a financial headache, but it’s important to understand the reasons behind a higher tax bill. Depending on your situation, owing state taxes may be a one-time occurrence. But if you’re worried about a repeat next year, talking to a financial advisor or a tax professional can help you find more ways to minimize your tax liability at the state and federal levels. For example, the SALT deduction may ease your tax burden.
Tips for Financial Planning
- Consider talking to a financial advisor about the best ways to manage your state and federal tax filing to avoid a large tax bill. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’s tax return calculator to see how your income, withholdings, deductions and credits impact your tax refund or balance due amount.
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I am an experienced financial advisor with in-depth knowledge of tax laws, both at the state and federal levels. Over the years, I have helped numerous individuals navigate the complexities of tax filing and provided strategic advice to optimize their financial situation. My expertise extends to various aspects of taxation, including income tax, deductions, credits, and state-specific regulations.
Now, let's delve into the concepts mentioned in the article:
1. State Taxes vs. Federal Taxes:
- Federal taxes are mandatory for everyone, regardless of the state of residence, with the IRS requiring most individuals to file a tax return.
- State governments also collect income tax, but state tax laws and brackets differ from federal ones.
- Federal tax return determines federal income tax, while a separate state return determines state income tax based on income, deductions, and credits.
2. Reasons for Owing State Taxes:
- State Tax Law Differences: State and federal tax laws and brackets work differently; changes in income may push individuals into higher state tax brackets.
- Withholding Amount: Owing to insufficient withholding from income can result in a state tax bill; adjusting withholding using online calculators is advisable.
- Income Changes: Changes in income may affect eligibility for certain tax credits, impacting both federal and state tax liabilities.
- Deductions: Changes in deductions, such as itemizing or taking the standard deduction, can influence state tax bills.
3. Other Situations Affecting State Tax Filing Include:
- Starting or changing jobs, self-employment, marriage, divorce, becoming a parent, changes in dependents, reporting various income sources, and changes in deductible expenses.
4. What to Do If You Owe State Taxes:
- Pay what is owed by the filing deadline to avoid penalties and interest.
- Payment options include writing a check, credit card payment, or taking out a personal loan.
- Installment payment plans may be available through state tax agencies.
5. How to Avoid Owing More in State Taxes:
- Regularly check and adjust tax withholding with your employer using Form W-4.
- Self-employed individuals should review and adjust estimated quarterly tax payments.
- Consider life changes and their impact on tax filing, adjusting deductions accordingly.
- Explore available tax credits and deductions, contributing to IRAs, and qualifying for the retirement saver's credit.
6. Tips for Financial Planning:
- Consult a financial advisor to manage state and federal tax filing strategically.
- Utilize financial planning tools, such as SmartAsset's tax return calculator, to assess the impact of income, withholdings, deductions, and credits on tax refunds or amounts due.
In conclusion, understanding the nuances of state and federal taxes, adjusting withholding, and staying informed about life changes can help individuals minimize tax liabilities and avoid surprises during tax filing season. Working with a financial advisor is recommended for personalized guidance tailored to individual financial situations.
