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Filing your taxes every year is difficult enough, but then realizing you owe money to the IRS?

Talk about a punch in the gut.

It’s a moment that leaves you scratching your head and wondering what went wrong.

When my husband and I got married in March 2020, we thought Covid was going to be our biggest problem. We navigated canceling our April wedding, moving cross country to get back to Texas, working from home, and just staying healthy. Taxes were the last thing on our minds.

Until April 2021, when we were hit with a huge tax bill that left us both in shock. How did we owe so much? Hadn't the IRS been taking money out of our paychecks?

Unfortunately for us, there were a handful of mistakes we had made over the course of the year, and they all came back to bite us.

We eventually figured out what went wrong and took steps to prevent it from happening again, but I remember the confusion and stress of that moment were overwhelming.

If you find yourself in a similar situation after hitting “submit” on your tax filing, don’t worry. I’m about to break down the most common reasons for surprise tax bills (and how you can figure out why you owe so much). I’ll also cover how you can avoid that sinking feeling next year.

Why Do I Owe Taxes This Year?

Owing the IRS can be a real drag, especially if you were counting on a tax refund. But a tax bill simply means you didn’t pay enough taxes throughout the year. Let's dive into some common reasons why this happens.

1) Your Tax Withholding Is Off

Remember that stack of paperwork you filled out when you started your job? One of those forms was the W-4, which tells your employer how much tax to withhold from your paycheck. If you didn't fill it out right or your life changed during the year, your withholding might be off.

In fact, this was probably the biggest reason my husband and I owed money in 2020. We each updated our W-4, but for some reason, my withholding was never changed to account for the overall increase in our joint income. And as frustrated as I was with my HR rep, at the end of the day, it was my responsibility to catch the mistake.

How to Avoid It Next Year? Reevaluate Your Withholding

Regularly updating your W-4 and doing a paycheck checkup can help ensure the right amount is withheld. Think of it as a tune-up for your taxes.

The IRS has a tax withholding estimator that will help you determine your withholding rate and compare that you’re paying the right amount from your paycheck. This tool helps you adjust your W-4 form accurately based on changes in your life or income.

Next, you should be able to check your most recent paystub to see how much is being withheld for taxes. If the numbers don’t match up, ask your HR rep for a new W-4 form so you can adjust the number. It may mean a smaller paycheck each month, but at least you won’t have to deal with a surprise bill in April.

2) You Have Self-Employment Income

So, you picked up a side hustle like driving for Uber or selling t-shirts on Etsy? Maybe you’re doing some extra freelance work to help pad your savings account. That's awesome!

But unlike regular jobs, taxes aren't automatically taken out of the money you earn working for yourself, so you need to set aside around 25% to 30% of your earnings for taxes and make quarterly estimated tax payments.

This was another mistake I made in 2020. When I took on a second job as a freelancer, I was putting in enough hours that I thought they were withholding taxes from my paycheck. I had even filled out tax documents during the onboarding process! But again, it just goes to show how important it is to double check these things every quarter or so.

If you don’t, you might face a hefty tax bill and penalties.

How to Avoid It Next Year? Make Quarterly Tax Payments

If you have self-employment income, make quarterly tax payments. It’s easier to manage smaller payments throughout the year than facing a big bill in April.

Not sure how much to pay? The IRS has a worksheet (Form 1040-ES) that you can fill out to determine how much you’ll need to pay (and if you need to pay at all).

3) You Experienced Some Major Life Changes

Life happens fast. You get married, have a baby, or your kids grow up. All these changes can affect your taxes. For instance, when your kids turn 17, you lose the child tax credit — a credit that can reduce your tax bill up to $2,000 per child. That’s a pretty big change. Or, if you received unemployment benefits, remember those are taxable too.

How to Avoid It Next Year? Adjust Your Taxes for Life Changes

Any big life changes like getting married, having kids, or changes in your income should prompt a review of your tax situation. Updating your tax and withholding information to reflect these changes will ensure accurate withholding.

4) You Took Fewer Tax Deductions

Deductions are like discounts for your taxes. If you paid off your student loans or mortgage this year — nice! — or had fewer medical expenses, you’ll have fewer deductions to take on your taxes. This means more taxable income and a higher tax bill.

How to Avoid It Next Year? Reexamine Your Withholdings

This may seem like a bizarre suggestion at first, but stick with me. While it may feel like Uncle Sam likes to tax all aspects of our life, your federal income tax is truly only based on money you make. Theoretically, if you’re correctly estimating your full taxable income for the year and then withholding accordingly, your tax bill should be $0 even before you take any deductions.

By that logic, if the only reason you owed taxes this year was because you didn’t take certain deductions you normally take, that means something is potentially off with the amount you’re withholding. Compare how much you’re currently withholding to how much the IRS says you should be withholding, and adjust your W-4 accordingly.

5) You Moved Into a Higher Income Bracket

Got a raise? Or a massive bonus? That’s awesome! But it might bump you into a higher tax bracket. If you don’t adjust your withholding, you could end up owing more at the end of the year. Higher income might also disqualify you from certain tax credits, like the Earned Income Tax Credit (EITC).

How to Avoid It Next Year? Adjust Your Withholdings

Again, any time you have a significant change in income, you should run it through the IRS tax estimator to make sure your current withholdings match what they should be.

Additionally, most employers typically withhold taxes on bonuses or stock compensation at a 22% rate. If you’re in the 22% tax bracket, you should be fine, but if your tax bracket is higher, this could trigger a major bill.

6) You Got Hit With Capital Gains Taxes

Did you know that when you sell a winning investment in your brokerage account, you have to pay a tax on your gain? Same for selling almost any major asset at a gain.

That’s right, if you sold investments for a profit, you owe capital gains taxes, even if the money is still in your brokerage account or you rolled it straight into another investment (although there are certain rare exceptions to this rule). Short-term gains (assets held for less than a year) are taxed at your regular income rate, while long-term gains get a lower rate. Keep track of your investments and their tax implications to avoid surprises.

How to Avoid It Next Year? Plan for Investment Income

Keep an eye on any investment income you have and plan for the taxes you’ll owe. You can do this by setting the taxable amount aside as soon as you take your profit or simply keeping track of it and make sure you have enough liquid assets to cover it. Consulting a financial advisor can help you optimize your investments and tax strategy.

7) You Earned Interest on Savings Accounts

A lot of people I know were surprised by this one when they filed their 2023 taxes. More and more banks are offering high-yield savings accounts that generate 4% or even 5% interest on your money, but you have to pay taxes on it. Interest from CDs and money market accounts is also taxable.

If you earned significant interest from any of these sources, it adds to your taxable income. Planning for this extra income can prevent unexpected bills.

How to Avoid It Next Year? Set Some Money Aside Accordingly

This is pretty similar to the prior entry. Plan to use some of the interest you earned on your savings account to pay the tax it generated. The good thing about taxes is that they’re only a portion of what you made, so you should be able to cover them as long as you haven’t spent the money on something else.

The No. 1 Takeaway From Getting a Surprise Tax Bill

If you’re still feeling lost about why you owe so much, a tax professional can help. They can guide you through your specific situation and help you avoid future surprises.

Now, there’s one more thing I want to leave you with. It’s possibly the most important piece of information you can take from this article...

If you get hit with a large and unexpected tax bill in April, make sure you still file your return. Even if you can’t pay the full amount, filing your tax return on time will prevent you from racking up hefty penalties, and the IRS website makes it surprisingly easy to set up a payment plan.

Remember, filing late is way more expensive than paying late.