Why Do I Owe Taxes This Year? (Here’s The Real Culprit)

Thought you were getting a refund, but ended up owing the IRS instead? Your paycheck withholding, side hustle, or investments might be the culprit, and it’s time to find out what went wrong.

Common Reasons Why You Owe Taxes This Year (And How to Fix It)

Owing taxes doesn’t mean you messed up. It just means the numbers didn’t add up the way you expected. If you owe taxes this year, here are a few reasons why it might have happened — and how you can fix it.

1. Your tax withholding is way off (and you probably had no idea)

When you start a new job, you fill out a W-4 form. That little piece of paper tells your employer how much money to take out of your paycheck for taxes. If it’s wrong, you could end up owing money at tax time, or you might get a refund way bigger than expected.

Most people fill out their W-4 once and never touch it again. But life changes. Your income changes. Tax laws change too. If your W-4 stayed the same through all of it, your withholding could be way off without you even knowing.

If you have more than one job, if your spouse works, or if you picked up a side hustle, your W-4 needs to be adjusted. Otherwise, you might be underpaying taxes all year long.

The IRS updated the W-4 form in 2020, and it looks very different now. If you haven’t updated it since then, it’s time to revisit it.

Some common reasons why your withholding could be wrong include:

• You started a second job but never updated your W-4, causing your employer to withhold too little.
• Your spouse started earning income, and the combined household income pushed you into a higher bracket.
• You claimed deductions or credits on your W-4 that you no longer qualify for, like education credits or dependent credits.

If you owed more than $500 this year, it’s smart to visit the IRS Withholding Estimator online. It will help you calculate how much should be withheld from each paycheck moving forward. Once you have your results, you can update your W-4 with your employer and get on track for next year.

2. Side hustle success, tax time stress

Side hustles are great for extra income. The problem is, no one is taking taxes out for you. If you didn’t set money aside throughout the year, you could be staring down a big tax bill.

Side hustle income is hit with a 15.3% self-employment tax on top of your regular income taxes. That means you might need to save 25–30% of everything you earn. If you expect to owe $1,000 or more in taxes, the IRS requires you to make quarterly estimated payments. Skipping those can result in additional penalties and fees.

A lot of side hustlers also overpay because they don’t track expenses or claim deductions. If you have a home office, use your car for business, or buy supplies, those costs can lower your taxable income.

Keeping your business money separate and planning can help you avoid getting caught off guard next year.

3. Life changes that blow up your tax situation

Big life events can change your taxes overnight. If you didn’t update your withholding, that could explain why you owe this year instead of getting money back from taxes. Here are some major life changes that often disrupt tax situations:

• Getting married can combine incomes, push you into a new tax bracket, and change your filing status overnight.
• Having a child can lower your taxes at first, but when they turn 17, you lose access to the Child Tax Credit.
• Moving to a different state can introduce new state taxes, different deduction rules, and unexpected filing requirements.

When these big life changes happen, the best move is to adjust your W-4 right away. That way, your paycheck reflects your new situation before tax season hits.

4. Investment moves that made a tax mess

If you made investment moves this year, they could be the reason you owe.

Selling stocks, crypto, or mutual funds triggers capital gains taxes. Short-term gains from investments held less than a year are taxed at higher rates than long-term gains. Timing matters, and short-term trades can quickly increase your tax bill.

Even when you reinvest dividends or mutual fund distributions, those amounts are still considered taxable income. Cryptocurrency trades also count as taxable events, even when you exchange one coin for another instead of selling for cash.

Without careful planning, these investment activities can create an unexpected tax bill at the end of the year. Planning strategies, such as tax-loss harvesting and using tax-advantaged accounts, can help minimize these surprises in the future.

5. You’ve moved up a tax bracket (congrats and sorry)

Getting a raise or earning more money is an outstanding achievement. However, it can create new tax challenges if your withholding was not kept up to date.

The U.S. tax system is progressive. Only the portion of your income that crosses into a higher bracket gets taxed at the new rate. Even a small increase in income can lead to a larger overall tax bill if the amounts are not adjusted correctly throughout the year.

Higher earnings can also phase you out of valuable credits and deductions. Losing eligibility for benefits like the Child Tax Credit or the student loan interest deduction can raise your final tax bill more than you expect.

Checking your withholding after a raise or job change helps avoid problems next year.

6. You lost valuable tax deductions or credits

Losing valuable tax deductions or credits often explains why taxes owed feel higher compared to previous years. Some common examples include:

• Paying off a student loan and no longer qualifying for the student loan interest deduction.
• Paying off a mortgage and losing the mortgage interest deduction that helped lower taxable income.
• Having a child turn 17 and losing eligibility for the $2,000 Child Tax Credit.

Other tax benefits created during the pandemic or earlier tax law changes may have expired as well. Without these deductions and credits, taxable income climbs, and the amount owed rises along with it.

Doing a mid-year tax checkup helps you catch these changes early and make adjustments before the next tax season.

7. You had taxes due from multiple sources

Earning income from multiple sources without proper tax withholding can result in a significant tax bill.

Rental income, freelance work, investment dividends, and retirement account withdrawals often do not have automatic tax withholding. Many people underestimate the tax liability associated with these types of earnings, which can cause a shortfall when filing taxes.

Making estimated tax payments throughout the year or adjusting your withholding to reflect all sources of income can help prevent surprises at tax time.

How to Never Owe Taxes Again: Your Action Plan

While some tax professionals argue that a small tax bill is ideal because it means you have not given the government an interest-free loan, most people prefer avoiding the stress and penalties of owing taxes.

Here is your step-by-step action plan to prevent future tax surprises and stay ahead of the curve.

1. Recalculate your true tax liability

To get a clear picture of what you owe, it helps to work through a few simple steps:

• Estimate your total income from all sources, including wages, side hustles, investments, and any retirement income. Don’t forget to subtract your likely deductions, either the standard deduction or itemized deductions, whichever gives you the bigger benefit.
• Apply expected tax credits, such as the Child Tax Credit or education credits, to lower your estimated total tax.
• Use the current tax tables to calculate your estimated tax owed based on your taxable income.
• Divide your estimated total tax by the number of pay periods left in the year to figure out how much should be withheld from each paycheck moving forward.

Taking the time to do this math now helps you avoid guessing and gives you real numbers to work with for the rest of the year.

You should also read my article, 5 Common Tax Myths Could Cost You Thousands, where I talk about some common myths and give a few more tips on how to prepare for tax season.

2. Adjust your W-4 with your employer

The redesigned W-4 form is simpler than it used to be, but it still requires careful attention to the details. Here are the important steps:

• Enter your personal information accurately, including filing status and dependents.
• Account for multiple jobs or a working spouse by using the IRS worksheet or the IRS Withholding Estimator to help calculate the correct amount.
• Claim your dependents and any credits properly, making sure to adjust them if you have had life changes, such as a new child or a dependent aging out of eligibility.
• Adjust for other income, deductions, or any extra withholding you may need based on investment earnings or freelance work.
• Finally, submit the completed form to your employer’s HR department as soon as possible so that the changes take effect on your upcoming paychecks.

Making these adjustments quickly can help smooth out your withholding and prevent surprises when you file your next tax return.

3. If you’re self-employed or a side hustler, set up quarterly estimated tax payments

If you run a business or have a side hustle, you need to stay ahead by setting aside a portion of every payment you receive. Saving 25–30% of all self-employed earnings into a separate tax savings account keeps you ready for tax time.

Mark your calendar for the IRS’s quarterly estimated tax deadlines so you are not caught off guard. Use IRS Form 1040-ES to calculate how much you should send in each quarter based on your projected annual income.

Payments can be made quickly online through the IRS Direct Pay system or the Electronic Federal Tax Payment System (EFTPS), which helps you stay organized without needing to mail paper forms.

4. Perform a mid-year tax checkup

A mid-year review is one of the best ways to catch small problems before they turn into big ones. Around July, pull up the IRS Tax Withholding Estimator or a trusted tax planning tool to review your income, withholding, and any taxes you have already paid.

If you find that you have underpaid, you can adjust your withholding for the rest of the year or make an estimated payment to catch up. This is also the time to check for tax-saving opportunities like contributing more to retirement accounts, using Flexible Spending Accounts (FSAs), or timing deductible expenses before the end of the year.

By checking in mid-year, you can correct course early instead of scrambling when tax season arrives.

If you’re curious where these taxes are going, read my guide, What Do Taxes Pay For? (A Dead Simple Guide).

How to Live Your Rich Life (Even If You Owe Taxes)

Most people stress about taxes, but here's the truth: owing a small amount is not always a bad thing. It can be a sign that you're managing your money wisely. Instead of worrying about tax season, focus on building a system where you keep more of your money, grow your income, and enjoy your life along the way.

When owing taxes isn’t bad (and might be a smart move)

Getting a huge tax refund might feel exciting for a few weeks. But it also means you spent the entire year giving the government an interest-free loan. That money could have been working harder for you instead—growing in investments, boosting your savings, or helping you crush debt faster.

Rather than waiting around for a big check once a year, a more innovative approach is to adjust your W-4 so you keep more of your paycheck each month. When you have that money flowing into your account regularly, you can start using it right away to build your financial foundation.

Extra cash from lower withholding can be redirected into places that move your life forward. You might use it to invest for the future, grow a high-yield savings account, or pay down credit cards and loans. Every dollar put to work now builds momentum toward your bigger goals.

Consistent cash flow gives you power. It means you're managing your money intentionally, month after month, rather than waiting for a refund to bail you out.

Taxes shouldn’t be your source of stress

Most people treat taxes like a confusing, unpredictable monster. But people who manage their money well treat taxes like any other part of their system: predictable, manageable, and never emotional.

Here are three ways to shift how you handle taxes:

• Focus on cash flow by setting aside money for taxes all year long. Having a dedicated savings account for taxes removes panic and helps you stay ready no matter what.
• Grow your income so that minor changes in your tax bill no longer cause major stress. More income brings more flexibility, even when your taxes rise slightly.
• Optimize your system by legally keeping more of your money through smart strategies, such as maximizing retirement contributions and deducting eligible expenses.

Instead of treating taxes as a burden, see them as just another number to plan for. Rich people do not obsess over taxes. They set up systems to manage them efficiently and move on. You can do the same, and in doing so, free up your energy to focus on building the Rich Life you want.