Indeed, filing taxes isn’t the most exciting part of running a business, but it is essential to retain the IRS’s goodwill. If your return resulted in a tax bill rather than a refund, you might be asking why do I owe state taxes. There are many reasons why you may owe state income taxes this year. Knowing what caused your state tax bill may help you prepare for next year, so you don’t have to pay more than necessary. A financial advisor can assist you in avoiding paying more money to the state and federal governments than is required.
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State Taxes vs. Federal Taxes: What’s the Difference?
State governments and the federal government can both collect income tax and various other kinds of taxes. They are, however, not identical.
For example, the IRS requires most individuals to submit a return. While there are some circumstances in which this isn’t the case, the IRS usually demands that people file taxes. The data you offer on your tax return is used to calculate your obligation for federal income tax.
So, depending on your circumstances, whether or not you owe federal taxes may be determined by how much money you made in the year.
If your earnings were too high and you paid too much in taxes throughout the year through payroll withholdings, you might get a refund. You may also be required to pay additional tax if your employment was short-term and there were insufficient savings set aside for needed expenses during that time.
If you live in a state that charges income tax, you’ll have to file a state return as well as a federal return. This form determines your state income tax obligation according to your earnings and the deductions or credits you take advantage of.
The tax bracket you fall into at the state level may differ from your federal tax bracket, which is one of the reasons you might owe state taxes but not federal. Once again, how much you paid in taxes throughout the year can determine whether or not you get a refund.
Why Do We Owe State Taxes?
When you receive a state tax bill, it may come as a surprise, but there are several reasons why you might be due money instead of receiving a refund.
Again, bear in mind that state and federal tax rules differ. If your earnings rose substantially and you found yourself in a higher tax bracket at the state level. As a result, this could push you into a higher income tax bracket. You might end up owing extra money in taxes as a result.
Last, take a look at what you kept back from your income throughout the year. Furthermore, if you don’t make enough money to pay taxes, you may owe the state tax authorities when it’s time to submit your return.
If you haven’t updated your withholdings in a long while, you might need to increase them to avoid owing state taxes in the future. Using an online wage calculator can help you figure out how much should be withheld.
Changes in income can also influence your eligibility for certain tax credits. Consider this example: You formerly qualified for the federal Earned Income Credit, but you are no longer eligible because of a pay raise. Any similar state tax benefits may be lost if you can no longer claim that credit on your federal taxes.
Your state tax liability depends on your itemized or standard deductions, as well as the deductions you claim. Your state tax bill is also influenced by the number of deductions you take and whether you itemize or take the basic deduction.
For example, if you have fewer deductions than previously, you may end up having to itemize. Alternatively, if you take the standard deduction instead of individualizing your expenses like in prior years, your state tax obligation might decrease, but you will be owed more money.
In addition, there are several circumstances that may impact your state tax filing, including:
- Starting a side job or changing jobs
- If you’re self-employed, you may underpay estimated quarterly taxes.
- Getting married or divorced
- Becoming a widow(er)
- Having a child
- No longer being able to claim a child as a dependent
- Reporting gambling winnings
- Taking Social Security benefits for the first time
- Withdrawing money from a 401(k) or IRA
- Buying or selling a home
- Reporting capital gains from the sale of investments
- If you’ve paid off your home mortgage or student loan debts, you may not be able to deduct them from your taxes.
Remember that the same factors that cause you to owe additional state taxes might also raise your federal tax burden.
What to Do If You Owe State Taxes
If you owe state taxes this year, it’s critical to settle your tax obligation by the filing deadline. Otherwise, if your unpaid balance remains for each day that passes, your state tax agency may charge you penalties and interest. This might end up increasing your outstanding sum.
You may choose to pay by check, credit card, or taking out a personal loan. If you don’t have the cash to pay your state tax bill in full, you must contact your state tax department. Your state tax office might be able to set up an installment payment plan for you to pay what you owe over time, similar to the IRS’s installment plans for federal taxes.
If you’re unsure whether to use a credit card to pay state taxes, keep in mind what each choice may cost. A high APR on a credit card could make paying state taxes more expensive. If that’s the case, search for a card with a 0% introductory rate on purchases.
Just make sure you understand when the special offer ends so, you’ll know when the regular APR kicks in. Also, think about any fees charged by your state’s tax department for processing credit card payments.
How to Avoid Owing More in State Taxes
If you want to avoid asking why I owe state taxes next year, there are a few things you may do ahead of time. First, check your tax withholdings with your employer to ensure that you’re withholding the correct amount based on your income, filing status, and anticipated deductions or credits. If necessary, fill out a new Form W-4 to change your withholding.
If you’re self-employed, look at your estimated quarterly taxes to see how much it costs. Estimating monthly tax payments allow you to pay into the federal and state tax systems throughout the year instead of relying on an employer’s withholding.
If you underpaid your quarterly taxes because you didn’t pay enough in estimated quarterly taxes, you might need to raise your payment in each quarter.
After that, consider any life changes that may have altered your tax filing. For example, if you divorced or separated and had to change your filing status, this can affect how much you’re taxed.
However, by increasing your deductions or qualifying for tax credits, you might be able to decrease the chance of a larger state tax bill.
Look at what you claimed in the most recent tax year for credits and deductions. Consider which credits or deductions you might claim for the following tax year.
It’s conceivable that you’re missing out on essential deductions that could lower your tax liability. You may be eligible for the retirement saver’s credit if you contribute to an IRA.
Although state taxes might be a financial strain, it’s vital to understand why your tax statement is more prominent this year. Depending on your circumstances, owing state taxes may be a one-time occurrence. However, if you’re concerned about a recurrence next year, working with a financial counselor or an accountant can help you discover more ways to lower your tax burden at the state and federal levels. The SALT deduction, for example, may save you money.