Why You May Owe More Tax Than You Expected (and how you can reduce what you owe)
The average tax refund in 2016 (for the 2015 tax year was $3,120), and is expected to be slightly lower this tax filing season, due to a stronger economy and higher employment figures. But if you’re among the 30% of American tax filers who don’t get a refund, there’s no pay off once submit your completed tax return (other than a possible of sigh of relief that your taxes are done).
Though there’s no getting around the fact that the 2016 tax return filing deadline is April 18, 2017, there may some remaining opportunities to lower how much you owe, before you file. Here are a few common reasons you may owe more taxes than you anticipated, and how to know if you can leverage any strategies to offset them.
You got married (but didn’t change your withholding). If you got married in 2016, your and your spouse’s ideal withholding amount may have shifted—but one (or both) of you didn’t officially adjust how much tax your employer was to withhold. While there’s little you can do about how much tax you paid over the course of 2016 at this, you can proactively ensure it’s a one-time event. The IRS offers a calculator to help you and your spouse decide how to divide the withholdings based on your respective incomes: The more money a person makes, the more each allowance will impact take-home pay and how much tax one pays upfront, versus what is owed when it’s time to file.
You boosted your earning power. Did you take on a side gig in 2016 to earn some extra cash? The additional money you generated may not have impacted your budget all that significantly, but self-employment income may mean you owe more Federal, state and local taxes.
Not only does the Internal Revenue Service require that you pay quarterly estimated taxes for your second job if you expect to owe more than $1,000 in taxes, the additional income may have put you into a higher tax bracket.
If you’ll continue with your side hustle as a self-employed contractor you may want to consider establishing an official small business (which may be a sole proprietorship, an LLC or similar). You’ll gain small business tax benefits like the potential to deduct certain expenses related to the operations of your business, and you may be able to shelter some of the income by making contributions into a self-employed retirement account, like a SEP-IRA.
You got a bonus. If you got a bonus or similar lump sum payout from your employer in 2016, the official tax code gives payors one of two options regarding the tax treatment of supplemental wages: The first allows employers to withhold a flat 25% of the bonus amount before it’s paid, while the aggregate method combines your income and bonus to arrive at the correct withholding amount. The latter option may put more money in your pocket when you receive the bonus, but could be more likely to result in your owing taxes when you officially file.
You got hit with the alternative minimum tax(AMT). The AMT was designed to make sure the wealthy weren’t able to avoid paying taxes with clever loopholes, but it hits plenty of people who consider themselves middle class. In fact, the Tax Policy Center estimates that 30% of people who’ll pay the AMT have a household income of $200,000 to $500,000; just 18.2% of taxpayers who make more than $1 million a year will be subject to AMT.
Taxpayers who are married, have three or more children they claim as dependents, live in high tax states, take large amounts of real estate tax deductions, and/or or have profits from stock options are especially likely to be impacted by AMT. Though it can be a tough penalty to avoid (by design) you may be able to offset your taxable income with increased retirement contributions (which you can still make to an IRA for the 2016 tax year until April 15th).