When Do You Owe Taxes Instead of Getting a Refund?

Whether you owe taxes or receive a refund comes down to how much tax was withheld from your paychecks, how your income changed over the year, and whether you still qualify for the credits and deductions you may have relied on in the past. If too little tax is withheld or your tax situation shifts, you may end up with a balance due, even if your overall income hasn’t changed dramatically. Life events, side income, and the loss of certain tax benefits can all contribute to an unexpected tax bill.

A financial advisor can help you evaluate your withholding, project future taxes and build a plan that reduces surprises year after year.

Why You Might Owe Taxes Instead of Getting a Refund

A refund occurs when the IRS receives more tax from you throughout the year than your final tax liability requires. If your employer withholds too much from your paychecks, you receive the excess back at tax time. But if your withholding doesn’t keep up with your income or tax situation, you’ll owe money instead.

This often happens when income increases such as through a raise, bonus or new job, but withholding remains unchanged. Many workers assume their employer automatically adjusts withholding when pay goes up, but that’s not always the case. As income rises, taxpayers can also lose access to credits they previously relied on, which we’ll cover further below. When these credits phase out, a refund can turn into a tax bill.

How Tax Withholding Affects Whether You Owe Money

Your Form W-4 tells your employer how much federal income tax to withhold from each paycheck.

Your employer uses your Form W-4 to determine how much federal income tax to withhold from each paycheck. If too little is withheld, you will owe taxes when you file your return. If too much is withheld, you’ll receive a refund.

Common withholding mistakes contribute to unexpected tax bills. Claiming too many allowances or marking yourself as “exempt” can drastically reduce the amount withheld from your paychecks. Many people also forget to update their W-4 after big life changes such as a promotion, a raise or a shift in marital status.

Consider a taxpayer working two jobs. Each employer withholds taxes as though that job is the worker’s only source of income. When combined, the total withholding may fall short of covering the higher tax bracket that applies to the taxpayer’s total earnings. This is one of the common reasons taxpayers may owe taxes instead of getting a refund.

Here are some other common situations:

Raises or bonuses: These can push you into a higher tax bracket or generate extra income with less withholding, especially if the bonus was taxed at a flat rate.
Freelance income: Side income rarely includes withholding, and people may not realize they need to make e quarterly estimated payments, which can end up creating a tax shortfall.
Investment income: Capital gains, dividends and interest add to taxable income and may require estimated payments.
Early retirement withdrawals: Withdrawals from 401(k)s or IRAs may not include enough withholding to cover your tax liability, especially if the 10% early withdrawal penalty applies.

How Credits and Deductions Can Affect Your Refund

Tax credits and deductions significantly influence whether you owe money or receive a refund.

Refundable credits, like part of the Child Tax Credit or the Earned Income Tax Credit, can increase your refund even if you owe little or no tax.

Meanwhile, nonrefundable credits reduce your tax liability but cannot produce a refund beyond what you paid.

As income rises, many credits begin to phase out. For example, higher earners may lose access to the Child Tax Credit, the Lifetime Learning Credit or the American Opportunity Tax Credit. When these phaseouts occur, a taxpayer who previously received a strong refund may suddenly owe money instead.

Deductions can shift year-to-year as well. Mortgage interest may decline as you pay down your home mortgage, lowering deductible expenses. Limits on state and local tax (SALT) deductions also reduce the benefit for many filers. Fewer deductions increase taxable income, which in turn reduces your refund.

Life Events That Can Impact Taxes

Major life events often alter your tax situation, sometimes in ways you don’t expect. These shifts can change your filing status, your eligibility for credits or the taxes withheld from your paycheck.

Common examples include:

Marriage or divorce: Your filing status changes, which affects tax brackets and withholding needs.
Having a child or no longer claiming a dependent: Credits and deductions tied to dependents may increase or disappear.
Buying or selling property: Unexpected capital gains or reduced deductions can alter what you owe.
Job loss: Severance pay, unemployment benefits, and changing withholding amounts can create mismatches between taxes owed and taxes paid.

When Estimated Taxes May Be Required

Taxpayers with income that isn’t subject to withholding, such as self-employment income, freelance work, rental income, or significant investment gains, may need to make quarterly estimated tax payments.

Failing to pay estimates can lead not only to owing taxes, but also to underpayment penalties. For example, a freelancer earning $20,000 in untaxed income during the year may owe federal tax on that amount plus penalties for not paying quarterly taxes as required.

How to Manage Taxes Next Year

If you faced an unexpected tax bill, the good news is that you can take steps to prevent the same outcome next year.

Strategies include:

Update your W-4: Adjust your withholding after raises, marriage, second jobs or any major financial change.
Increase withholding: Request a fixed additional amount withheld from each paycheck.
Make quarterly estimated payments: Essential for gig workers, freelancers, and investors.
Track credits and deductions: Monitor eligibility as your income and expenses change.
Use tax planning software or annual projections: Identify potential tax issues early and adjust withholding before tax season.

Bottom Line

Changes in deductions, such as lower mortgage interest or SALT limits, can raise taxable income and reduce your refund.

There are many reasons when you owe taxes instead of getting a refund, including income changes, insufficient withholding, loss of tax credits, and major life events. Keeping an eye on how your financial situation evolves throughout the year can help you plan more effectively and avoid unexpected balances due at tax time.

Tax Planning Tips

If you’re unsure how much you’ll owe in taxes, a financial advisor can help you calculate your liability and avoid costly mistakes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.