Most people don't want to have to pay taxes, but they still have to. Many people wonder why they owe state taxes, as well as if there is anything they can do to avoid them.
State taxes go to public services. Most people get state tax refunds when filing their taxes, but you may owe taxes. This could happen if you didn't have enough of your income withheld or ended up in a different tax bracket. You may also no longer qualify for a tax credit or deduction.
Learn more about why you may owe state taxes and what you can do to avoid them or at least reduce the amount you owe.
Why Would I Owe State Taxes?
Many people wonder why they owe state taxes, but most people have to pay state taxes. The taxes you pay in your state go to a range of social services and other things for the community. They pay for schools, police, public housing, Medicaid, welfare, and more.
Do I Owe State Taxes?
The best way to figure out if you owe taxes is to complete your tax forms completely. You will enter your income, deductions, and credits. You will also report how much of your state tax was already withheld from your paycheck. If the amount withheld is more than what you owe, you will get a refund. If less was withheld than you owe, you would have to pay taxes.
In most cases, if you get a refund one year and nothing significant in your life changes, you will also get a refund the next year. That being said, there are exceptions, such as changes to policies. For example, the new IRS withholding tables in 2018 and 2019 meant that some people had less withheld in the previous year. This reduced their refund or meant they owed taxes instead of getting a refund.
State Tax Due Meaning
When you fill out your taxes, you may see the phrase "state tax due." If it is a positive number, you have to pay state tax. This means that the amount withheld from your paychecks during the year was not enough to cover your taxes due.
Types of State Tax
When filing your taxes, you also have to keep in mind that your state likely has various types of taxes that you have to pay. A handful of states don't have an income tax, but there are plenty of other taxes you may have to pay. Some, like sales tax or cigarette tax, are paid at the time of purchase. Others, like property tax and income tax, are paid once a year.
I Didn't Owe State Taxes Last Year – Why Do I Now?
As mentioned, if you didn't owe state taxes one year, you are unlikely to the next unless something significant changes. While this rule of thumb will work throughout most of your life, there are milestones and life changes that can significantly affect whether you get a refund or owe tax.
Your Children Are Older
If you are a parent, one of the major potential reasons for a change is if your children are older. For example, maybe one of your kids is now an adult and filed their own taxes, so you can't claim them as a dependent. Or maybe your child is 17 or older and no longer qualifies for the Child Tax Credit.
On the other end of the spectrum, having a child can also change your tax situation.
Your Job Changes
One of the most common reasons for a change is if your job changes. Specifically, when you filled out Form W-4 when you started, you may have filled it out differently. What you entered for withholding preferences is particularly important.
You Got a Side Job
Certain side jobs can affect your taxes more than others. For example, freelancers and contract workers have to pay their taxes quarterly. You also don't have withholding, so people with this role will always owe taxes. The amount that you owe will depend on whether you paid your estimated quarterly taxes. Even how you estimate those quarterly taxes can affect the amount you owe or are owed at the end of the tax year.
Other Income-related Differences
While most people think of income as just being related to their job, there are also other types of income that can change how much you owe in state taxes. These include:
- Selling investments and therefore reporting capital gains
- Winning money from gambling
- Buying or selling a house
- Starting to collect social security benefits
- Withdrawing money from your IRA or 401(k)
- Claiming unemployment
Your Filing Status Is Different
If you get married or divorced, your filing status will be different. This can affect various factors about how you are taxed, including your tax bracket. This applies to other changes in filing status, such as if you become a widow or widower.
You Are (No Longer) Eligible for Different Credits or Deductions
Your eligibility for various deductions and credits will also affect your amount refunded or owed. Maybe your income changed, or you are no longer a student, so you don't qualify for credits as you used to. Some common deductions you may no longer qualify for are those for a home mortgage or student loan interest.
Why Do I Owe State Taxes but Not Federal?
Sometimes, you may find yourself owing state taxes but not federal taxes. This will always be due to differences in the requirements for each. For example, your state may have tax brackets different from those of the federal government. Or maybe your withholding was set up to be different for each.
How to Avoid Paying State Taxes
No one likes paying taxes, but you have to. If you don't pay your taxes, the state tax agency can come after you. On top of that, they will charge you interest and penalties. This will increase the amount that you owe.
If you can't pay your state taxes in full, contact your state tax agency. There is a chance (but no guarantee) that they will be willing to set up a payment plan. The IRS offers a similar option for your federal taxes.
While you need to pay any state taxes that you owe, you can do some things to reduce the amount that you owe.
Adjust Your Withholdings
Start by looking at your withholdings from your paycheck. You want to confirm that you are withholding the appropriate amount based on your income, credits or deductions, and filing status. If you owe state taxes one year, you may want to file a new Form W-4 to increase your withholding for the next year.
Adjust Your Estimated Quarterly Tax Payments (If Self-employed)
If you are self-employed, you will need to look at your estimated quarterly taxes instead of your withholdings, as these replace them. You are likely to owe state tax at the end of the year if you underpay the estimated taxes. In the future, increase the amount you pay each quarter.
Consider Filing Status, Deductions, and Credits
One of the most complicated but useful ways to reduce what you owe in state taxes is to look at your filing status and check for credits or deductions. See what credits or tax deductions you qualify for. You may be surprised to learn you are missing out on some useful ones. For example, maybe you don't realize that you can get a deduction for contributing to your IRA. You will have to evaluate to see if you should take the standard deduction or not.
Consult a Tax Accountant
It likely seems intimidating to consider the various deductions and credits, as well as how your filing status affects the state taxes you owe. A simple solution is to hire a tax accountant instead of filing your taxes yourself.
They will be familiar with all the credits and deductions. This saves you the hassle of having to research them yourself. Simply put, hiring a tax accountant is the best way to minimize the amount of taxes you owe or maximize your refund. Yes, you will have to spend a little bit of money to pay them, but your potential savings are likely worth it.
At least, that is the case for most people. It is smart to at least have a tax accountant do your taxes one year, so you can get an idea of the deductions you are eligible for. Then, if nothing major changes, you will know what you are eligible for the next year.
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While you hope to get a tax refund from both the state and federal government, this is not always the case. The only way to tell whether you owe state taxes is to complete your taxes. You may owe if you didn't withhold enough from your job or underestimated your quarterly earnings if you are self-employed. Filing status changes and changes to what deductions you are eligible for can also affect your filing status. The best way to reduce your taxes is to withhold more and evaluate your deductions.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.