How Come We Always Owe Federal and State Taxes?

If you have to pay taxes every year, the cause is likely not due to a one time tax credit or deduction. Rather, it is likely due to a recurring event, such as holding investments that pay dividends each year and not paying estimated taxes each quarter to the government and state for that income.

Likely Cause for Owing Federal and State Taxes:

1. Claiming too many exemptions on their W-4 form (less withholding is taken out of each paycheck, causing their year end tax bill to be high)

2. One spouse is self employed and not paying estimated taxes

3. They have a lot of investment income each year and are not paying estimated taxes

How to correct the issue?

Number 1 is easy to fix, just lower your exemptions on your W-4 form. Number 2 and 3 take a little more work because you’ll need to calculate your estimated taxes.

To calculate your estimated tax each quarter try to estimate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the current year as best as possible. You can use your prior year income, deductions, and credits as a starting point. Let’s say you expect your taxable income to be the same or great than last year, then pay 100% of last year’s tax bill divided by 4 for each quarter. But, if your income last year was greater than $150K if filing jointly or $75K separately, you have to pay 100% of last year’s tax bill divided by 4 for each quarter. If you expect this year you’ll make less, you can pay 90% of your estimated tax bill for this year but there is a greater change you’ll owe at the end of the year.

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