The Surprising Reason You Might Owe the IRS Taxes This Year

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It has to do with getting paid more in a surprising manner. 

At this point, many Americans are in the process of putting the finishing touches on their tax returns. And if you’re anticipating a large refund, you may want to get your return filed sooner rather than later.

But some people may not be in line for a tax refund this year. In fact, Mark Steber, Chief Tax Information Officer at Jackson Hewitt, says that more people might owe the IRS money than they did in 2022. And the reason largely boils down to the expiration of pandemic-era tax breaks that were in effect in 2021.

In 2021, a number of key tax credits had their maximum value boosted. Also, the Child Tax Credit became fully refundable, so anyone eligible for it could claim its full value. Those provisions, however, did not stick around for 2022, even though some lawmakers pushed for them to.

But that’s not the only reason you might owe the IRS taxes this year for the first time. In 2022, banks finally started paying a lot more interest on savings accounts and certificates of deposit (CDs). So if you earned a lot of interest income, that alone could push you to the point of having to write the IRS a check.

A very unpleasant surprise

Steber has been keeping tabs on the tax situation this filing season, and he says many filers are shocked to learn that they owe the IRS money.

“We’re seeing a big increase in balance due filers,” he explains. And tax refunds are also down. If you earned a lot of interest in your savings account or in a CD in 2022, that could be driving your tax bill up.

It’s not so common to make estimated quarterly tax payments on interest income — or at least it hasn’t been in recent years, given that savings accounts and CDs were barely paying anything. But last year, the Federal Reserve raised its benchmark interest rate numerous times, and that led to higher interest rates for savings accounts and CDs. That’s a good thing for savers — but only to a point.

Many people don’t realize that interest income is taxable. Not only that, but it’s taxed as ordinary income, which means it’s subject to the same tax rate as your regular paycheck.

So let’s say you earned $40 in interest income in 2021, but you earned $400 in 2022. That, combined with other factors, might push you to the point where you owe money to the IRS.

Brace for a higher tax bill this year

If you received a large refund last year or had a fairly small tax bill, you may be anticipating a repeat situation this year. Steber says you shouldn’t.

“Last year’s tax return is probably not a good roadmap for what to expect this year,” he insists. And if you earned a lot of interest in your savings account in 2022, don’t be shocked to end up sending money to the IRS rather than receiving it after filing your tax return.

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