Opening your finished tax return and seeing “balance due” is a frustrating feeling. It’s also no fun to be the accountant who has to explain to their client that they still owe a sizable sum to the government after thinking they paid up on time all year.
Just know that you’re not alone, and that you also didn’t necessarily do anything wrong along the way. A tax bill comes down to a series of moving parts, and we’re here to help you understand what went into yours.
Tax professionals asked Truss’ AI assistant 239 questions about what drove a refund or balance due, 881 about summarizing or explaining a return, and 304 about comparisons from one year to the next. Clearly, “why do I owe this year?” is one of the most common things taxpayers want explained, so here’s our best answer.
How to frame refunds and balances due
Don’t think of a refund as a “reward” or a balance due as a “penalty.” It’s also not inherently true that people who earn more will finish their returns with bigger balances due. Owing money when it comes time to file generally means your withholding or estimated payments didn’t keep pace with your income, not that you “owed more taxes” compared to someone who earned a similar amount.
Two people with identical incomes could, in fact, have wildly different outcomes come filing time based on how much was withheld from each paycheck.
“Why do I owe?” is the question you might have in your head. Reframe it to “What changed between what I paid throughout the year and what I wound up owing?”
Why your number changed: Top 5 explanations
- Your income went up, likely without increasing withholding. Maybe you got a raise in the middle of the year, or a bonus. Maybe your side business took off, or you took on new freelance work. Or maybe you made investment gains (congratulations). Most of these have little or no tax withheld at the source, so the income outpaces the prepayment on your return.
- Your withholding dropped and you may not have noticed. There are a lot of life changes that can reduce how much is taken out of each check, like a new job, a change in marital status, or a second household income. A common occurrence: If you and a spouse both filled out W-4s as if you were the only earners in your household, both of you might have paid less than you owed.
- Investment, retirement, and other one-off events. If you sold stock, took money out of a retirement account, or sold a property, you might have brought in taxable income that wasn’t on last year’s return. Early retirement withdrawals can also come with tax penalties.
- Credits and/or deductions went away. Children age out of the Child Tax Credit. Former dependents stop qualifying for that status. People finish school and education credits go away. All of these can raise your bill even if your income didn’t budge.
- Estimated payments came up short. Self-employed people often need the expert touch of an accountant more than their counterparts on W-2s, and the same goes for people with significant non-wage income. Estimated payments are made in quarterly installments, and they’re “estimated” for a reason – because these folks don’t always know how much they’re going to make. Missing or underpaying estimated taxes makes the balance much larger come April, especially if that underpayment was significant enough to warrant a penalty.
Most common way to find an answer: compare year to year
A side-by-side comparison of last year’s return to this one almost always reveals the answer. Look at each line and see where there was significant variance.
Total income might have jumped. Withholdings may have gone down. Your filing status or number of dependents might have changed. A zero on one side next to a big number on the other side probably holds the answer, whether it’s a credit going away or a new source of income coming in.
Typically, you’ll find two or three lines that explain the vast majority of the change you saw. That doesn’t make the bill less onerous at the moment, but it removes the mystery – and potentially helps plan for next year.
How to control your bill next time
You probably have more control over what you end up owing in April than you think. The key is to stay diligent throughout the year, and these are a few paths to doing so:
- Adjust your W-4 so more is taken out per paycheck. For most wage earners in America this is the quickest and most effective fix.
- Take control of your estimated payments if you have self-employment or investment income. Pay in at least as much as last year’s total tax, and scale up if you’re earning more. Underpayment penalties are worth making the extra effort to avoid.
- Make pre-tax contributions to retirement accounts. This often lowers your taxable income, and this can often be done right up close to the yearly filing deadline.
- Plan ahead for significant one-time events. If you’re about to sell a big stock or make a large withdrawal from a retirement account, figure out how much tax you’ll owe and set it aside ahead of time.
The biggest takeaway
Timing is everything, and owing taxes just means not enough was withheld over a certain period of time. You might not be able to predict to the dollar and cent how much you’ll owe, but if you track the changes in life that lead to drastic swings in line items on your return, you’ll be better positioned for a predictable filing in the spring.
Truss is the more-in-one tax workflow platform — helping accounting firms collect client info, manage workpapers, prep returns with AI support, and deliver everything in one place. Book a demo.