Here's why you owe the IRS so much in tax this year


Many Americans cross their fingers at tax time, hoping for a huge refund from the federal government. At the very least, they want to break even. The vast majority of filers — more than 70 percent — do get money back from the government, with the average refund close to $3,000, according to the IRS. But every year, some taxpayers get a nasty surprise: They owe Uncle Sam hundreds or even thousands of dollars that they didn't budget for.

How can that be?

Simply put, if you owe a large sum in taxes, it's likely because you kept too much of your paycheck during the year and had too little withheld automatically. If you owe more than $1,000, you also have to pay a penalty to the IRS.

RELATED: A guide to the most commonly-used tax forms:

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Guide to commonly-used US tax forms
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Guide to commonly-used US tax forms

The 1040 family of tax forms is for federal income tax and is absolutely essential for all.

The 1040EZ form is the simplest version and is typically filed by those who:

  • Have no dependents
  • Are younger than 65
  • Earned less than $100,000
  • Don’t plan to itemize deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. It's beneficial for those who earn less than $100,000 and don’t have self-employment income -- but who want to make adjustments to their taxable income, such as child tax credits or deductions for student-loan interest. Note that it doesn't allow for itemized deductions.

Form 1040 is filled out by those who make $100,000 or more, have self-employment income or plan to itemize deductions.

The W-2 is completed by employers document each employee's earnings for the calendar year. You will want to take a look at this tax form for important information you'll need to fill out your 1040, 1040A or 1040EZ. 
The 1098 form is filled out by those who:
  • paid interest on a mortgage
  • paid interest on a student loan 
  • paid college tuition
  • donated a motor vehicle to charity

The 1099 series is reports all income that isn’t salary, wages or tips, and must be reported on both the state and federal level.

1099-DIV reports dividends, distributions, capital gains and federal income tax withheld from investment accounts, including mutual fund accounts.

1099-INT trakcs interest income earned on investments.

1099-OID (Original Issue Discount) is provided if you received more than the stated redemption price on maturing bonds.

1099-MISC documents self-employment earnings, as well as miscellaneous income such as royalties, commissions or rents. It covers all non-employee income that is not derived from investments.

If you receive a refund that you're unable to pay in full, you can request a monthly installment plan using Form 9465.
Don't forget to notify the IRS if you move! Use Form 8822 to change your address with the Internal Revenue Service. Otherwise, notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes will be sent to your former address.
Anyone who has been employed by a company has completed a Form W-9. The W-9 is used by employers for payroll purposes -- and the information on the W-9 is used to prepare employee paychecks during the year and W-2 forms at the end of the year. 
The W-4 is an IRS form completed for employers know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can both ensure you don't have a big balance due at tax time and also prevent you from overpaying your taxes.
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Related: The Best and Worst States for Taxes in 2017​​

This can come as a big shock to people who have had the same withholding as the year before, but didn't end up owing money previously. "Any time you have a major life change such as getting married, having a child, retiring or starting a new job, you should re-evaluate your tax situation and update your withholding," says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block.

The three changes below could result in an unexpected tax hit.

Increasing income: Did you go from being a one-income family to a dual-income family? Did one spouse get a promotion, large raise or bonus? If your household income increased but you didn't take any additional deductions or exemptions versus the prior year, that could make your tax withholding too low, says Lisa Lewis, CPA and TurboTax expert.

Related: 7 Common Tax Mistakes That Could Cost You Thousands

Fluctuating income: Similarly, if your income fluctuates throughout the year — either because you're self-employed or you rely on investment income — maybe you didn't realize exactly how much income you have coming in and didn't withhold enough. In that case, "you should consider doing a quarterly check on your potential tax return to adjust withholdings or make estimated payments," says Mark Steber, chief tax officer of Jackson Hewitt.

One-time event: It's also possible that your tax liability was triggered by a unique event such as large capital gain from a property sale, says Perlman. That means you may not need to adjust your withholding. Instead consider paying estimated tax if you sell property or receive income from an unexpected source, Perlman says.

If you do need to change your tax withholding, figure out by how much. The IRS and other tax professionals offer an online W-4 withholding calculator to help determine your appropriate strategy.

Related: Scammers Have a New Trick to Get Your W-2 Form

Once you know that, request a Form W-4 from your employer to adjust your withholdings. Self-employed workers — who make quarterly estimated payments to the IRS — use Form 1040-ES. Retirees need to complete Form W-4P for pensions and annuities, Form W-4V for Social Security and railroad retirement or Form W-4 for military retirement. Return the form to the payer.

"If you are married and both you and your spouse work," Perlman says, "you'll get the best results if you coordinate with your spouse."

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