5 Tips to Help You Avoid Surprises at Tax Time

Quick Answer

While the tax code is complicated and ever-changing, there are ways to be prepared and reduce surprises. Be aware of deductions and credits you may no longer be eligible for, plus life changes that impact taxes. Know that investment profits and side hustle earnings aren’t taxed like regular income, so set aside a portion for taxes.

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If you're lucky enough to receive a tax refund most years, it can feel like a shock if you find out upon completing your federal return that you actually owe the government money.

Tax codes are wildly complicated, so refund and payment changes can happen for various reasons, from marriage to self-employment to investment profits. Here are five common reasons you may owe more taxes than expected, and a few ways to avoid an unpleasant April surprise.

Ways to Avoid a Surprise Tax Bill

There are a litany of reasons why your tax burden can shift, including new laws. But there are plenty of factors within your control, and being aware of them can help you avoid unexpectedly owing money.

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1. Don't Forget About Investment Income

While money earned from non-retirement investments is taxed differently from work income, Uncle Sam still expects his cut.

If you've received dividends from stocks or profits from selling personal investments, you might owe money at tax time—especially if you don't have losses to offset your investment gains. The tax burden also depends on the type of investment, and whether it's taxed as a long-term or short-term gain.

When you profit from dividends or investment sales outside of a 401(k) or IRA, do some research or consult a professional to find out how much, if any, you may owe at tax time. If it's a significant amount, it may be best to set aside a portion of the profits for taxes rather than spending it all and having to come up with money for a tax bill later.

2. Plan Ahead for Reduced Deductions or Credits

Many people benefit from deductions at tax time that help reduce bills, and if you don't realize you're losing one you've come to rely on, you might have a rude awakening at tax time.

Some common deductions include student loan interest, uncovered medical expenses, child care and contributions to health savings accounts. The government also sometimes offers tax credits on a temporary basis. For example, the child tax credit was adjusted as part of pandemic relief measures, but reverts to its pre-pandemic form for 2022. Pay attention to any changes that might impact your eligibility for tax breaks.

3. Know How Life Events Affect You

Getting married and filing jointly for the first time can make a big impact on your taxes―sometimes for the better, sometimes not. If your new spouse earns a much higher income, it may force you into a higher tax bracket.

In other circumstances, you may also enjoy some new tax breaks. Having a child, buying a home, moving to a new state and other life changes may offer new tax breaks. Be sure to find out ahead of these events how your taxes will be impacted.

4. Check Your Withholding Amount

If you're a full-time employee, you have a say in how much of your paycheck is withheld for taxes. It may be tempting to adjust your withholding allowance to have a larger paycheck and a smaller tax refund, but going too far in that direction may mean you end up actually owing money at tax time.

Use the IRS' tax withholding calculator to see if yours is in a good spot, especially after major life events. Keep in mind that receiving a huge refund at tax time isn't always a good thing, especially if you're on a very tight budget and would benefit more from receiving that money in your paychecks throughout the year.

5. Pay Quarterly Taxes on Your Side Hustle

If you're new to self-employment or side hustling, you may not know how freelancers are taxed.

In a full-time job, your employer withholds and pays taxes on your behalf, so your entire paycheck is post-tax and yours to keep (barring any tax-time adjustments). As a freelancer, you don't have an employer, so nothing is held and payments you receive are pretax. This can be a tough pill to swallow if you're not used to setting aside a portion of each paycheck for taxes.

If you're an independent contractor and you earn more than $400 per year after expenses, you will owe the IRS self-employment tax in addition to income tax.

Additionally, if you expect to owe $1,000 or more in taxes, you're expected to pay quarterly estimated taxes. Failure to pay quarterly taxes on time, or at all, can result in penalties. If you've underpaid, you may find you owe a hefty amount on your annual return.

For those just beginning contract work, it's an ideal time to hire a tax professional to help determine how much to pay each quarter—especially if your income will fluctuate. An expert can also help identify potential small business deductions that reduce your tax bill.

Plan Ahead to Avoid the Unexpected

Now that you know some common circumstances that lead to surprise tax bills, how else can you avoid them? Here are a few tactics:

  • Review your tax situation after major life changes. Whether you change jobs, move houses, get married, have kids, go to grad school or the like, review your tax withholding and try to determine if you're gaining or losing any key deductions.
  • Hire a professional. You don't have to wait until tax time to make an appointment with an accountant or tax prep expert to review your situation and advise accordingly. If you've started a side gig or ventured into self-employment, it's worth having a one-off consultation so you know if you should pay quarterly estimated taxes, and if so, how much. You can contact an accountant you trust, or hire an advisor at a company such as H&R Block.
  • Maintain an emergency fund. Sometimes, even the best planning can still leave you with an unexpected bill. Perhaps the IRS stopped permitting a deduction you used to rely on, or you didn't realize you'd drifted into a higher tax bracket and weren't setting aside enough. Having a buffer of cash in an emergency fund is a helpful fallback if a large tax bill arrives that you can't cover with your checking account. This helps you avoid going into debt and maintains your financial health.

The Bottom Line

Tax time can inevitably come with some surprises, even for the best planners. Laws and tax codes are always evolving, and our lives often undergo changes that impact how much we owe or get back as a refund. But by being aware of how your actions impact your tax burden, and by seeking out help from savvy professionals, it's easier to stave off surprises when tax time rolls around next year.