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3 Reasons Why You May Owe Money to the IRS

With almost eight out of every 10 tax filings resulting in money back to the taxpayer, it’s normal to be disappointed when you owe money to the Internal Revenue Service (IRS). There are three main reasons why you might owe money: You have withheld too little over the year, you had an increase in income, or you had a substantial one-time income event.

Withholding Too Little

Image via Flickr by John-Morgan

One of the most common reasons you might owe the IRS money is for withholding too little out of your paycheck. This results in taking home too much pay, and when your taxes are calculated, you end up owing the IRS.

This can occur when you experience a life event such as marriage or divorce. When you get married and file jointly, you might find yourself in a higher tax bracket, especially if you both make a similar income. If you get divorced, you also might land in a higher tax bracket if your spouse made less than you.

Increase in Income

There are a few ways your income might increase, with one of the most common being taking a job with higher pay or receiving a raise. Another example is starting a side business in your free time. Both can result in more money owed to the IRS than was taken from your paycheck.

When you increase your income enough to get into a new tax bracket, you’ll find yourself paying a higher portion of your income in taxes, which also can result in a debt to the IRS at the end of the year.

One-Time Income Event

A one-time income event occurs when you receive a lump sum of money. Examples of one-time income events include receiving a bonus at work, selling stock, or selling a property. These events are often taxable. If you file as a single person, you will be taxed for any property sale capital gain over $250,000. If you file as a couple, you’ll be taxed for gains over $500,000.

Though there isn’t much you can do to prepare for these taxes, you should keep a portion of the income aside in anticipation of paying them.

What to Do When You Owe the IRS Money

When you learn that you owe money to the IRS one of your first tasks should be to look for ways to make sure it doesn’t happen again. Submit a new W-4 to your employer that takes the proper amount of deductions for your new financial situation.

Next, contact the IRS to determine exactly how much you owe. This number will include the taxes due, as well as any penalties and interest. Pay that amount promptly, if you’re able, or request a payment plan.

The IRS allows installment agreement requests and often approves them as long as the amount owed is less than $10,000 and the debt will be paid off within three years. If you are struggling with next steps or can’t pay what you owe, consult with a qualified tax professional to get the best outcome for your situation.

In many cases, it’s easy to avoid owing money to the IRS. By adjusting your W-4, coordinating with your spouse, and putting aside money during one-time income events, you’ll be less likely to be surprised come tax-filing season.

FYI:  I worked at a dead end cubicle job from 2005-2011 for about $30,000 per year.  I went self-employed in July 2011 and make between $70,000-$90,000 through blogging, professional pet sitting, hubby's reffing, and our rental home.  If you’d like to start your own site (link to my free step-by-step guide), I highly suggest checking out Bluehost (my referral link with a nice discount for you, PLUS a free custom header banner from me!).  Please contact me any time at budgetingfunstuff*at*gmail*dot*com with questions or just to brainstorm! I’d love to help!
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