Why Do I Owe Money? I Got a Refund Last Year

A tax refund means the IRS returned money you overpaid during the year through withholding, estimated payments, or refundable credits.

A balance due (where you owe the IRS) means your tax liability exceeded what you paid in.

Getting a refund one year and owing the next is very common — your tax situation is not static. Many factors can change from one tax year to the next, increasing your taxable income, reducing credits or deductions, or lowering your payments/withholdings.

According to the IRS, your refund or balance due depends on income, filing status, dependents, credits, deductions, and payments. Even small changes can flip the result from refund to owing money.

The IRS recommends using the Tax Withholding Estimator on IRS.gov whenever your situation changes to avoid surprises.

Here are the major factors that commonly cause a shift from refund to balance due.

1. Changes in Income

Higher total income is one of the most frequent reasons.

• Wages or salary increased (raise, new job, bonus, overtime)
• New sources of income appeared: side gig, freelance, or gig-economy work (all taxable; net earnings over $400 usually trigger self-employment tax of 15.3%)
• Investment income, capital gains, or taxable distributions from retirement accounts
• Unemployment compensation (fully taxable)
• Social Security benefits became partially taxable

Up to 50% or 85% of Social Security benefits may be taxable if your “combined income” (adjusted gross income + nontaxable interest + half of Social Security benefits) exceeds the base amounts:

• $25,000 (single, head of household, or qualifying surviving spouse)
• $32,000 (married filing jointly)
• $0 (married filing separately if you lived with your spouse at any time)

Important: These thresholds have not been adjusted for inflation for many years.

• Debt cancellation/forgiveness income (unless you qualify for insolvency or other exclusions)

Even if your gross income is similar, losing a large deduction or credit can push you into a higher tax bracket on the margin because the U.S. tax system is progressive.

2. Changes in Withholding or Estimated Tax Payments

• Your employer withheld less federal income tax (new job, updated Form W-4 claiming more allowances, or multiple jobs where withholding was not adjusted properly)
• You started self-employment or a side gig without making quarterly estimated tax payments
• You had income with little or no withholding (interest, dividends, pensions, gig work)

The IRS stresses: update your W-4 after any major change and use the Tax Withholding Estimator to avoid underpayment penalties.

3. Changes in Filing Status

Your filing status is determined as of December 31 and affects your standard deduction, tax rates, and credit eligibility.

• Marriage → usually switches to married filing jointly (higher standard deduction but combined income may push you into higher brackets or phase out credits)
• Divorce or legal separation → often single or head of household (lower standard deduction, different tax brackets, possible loss of certain credits)
• Death of spouse → may qualify for qualifying surviving spouse for two years (if you have a dependent child), but then reverts to single or head of household

Filing status changes almost always require a new W-4 and can significantly alter the amount of tax owed.

4. Changes Involving Dependents

Dependents affect credits (Child Tax Credit, Credit for Other Dependents, Earned Income Tax Credit) and can help qualify for head-of-household status.

• New child or other qualifying dependent (adds credits but also changes household income calculations)
• Child ages out:
  • Qualifying child for Child Tax Credit must be under age 17 at year-end
  • For EITC and other benefits — generally under 19 (or under 24 if full-time student)
  Turning these ages can cause loss of thousands in credits.
• Dependent’s own income exceeds limits (for qualifying relative: gross income $5,200 or more in 2025)
• Change in custody, support, or residency (divorced/separated parents must follow IRS tiebreaker and release rules — often via Form 8332)
• Dependent no longer meets the support test (child now provides more than half their own support)

5. Changes in Deductions and Credits

• Shift from itemized to standard deduction (or vice versa) — e.g. mortgage paid off (less interest), lower medical expenses, state and local taxes capped
• Loss of education credits (no longer a student or expenses changed)
• Retirement contributions or other adjustments to income changed
• New senior deduction (available in 2025 for those age 65+ under the One, Big, Beautiful Bill provisions) or other new provisions may help some but not others

6. Other Common Life Events

• Job change or second job (new withholding rates, possible multiple-job under-withholding)
• Retirement or starting to receive pensions/annuities (often taxable)
• Moving (federal taxes same nationwide, but new employer may withhold differently; home sale could trigger capital gains if gain exceeds exclusion)
• Disability status changes (may qualify for new credits but also affect benefit taxation)
• Bankruptcy or debt relief (can create taxable income in some cases)

What Should You Do?

The IRS advises:

• Check your situation mid-year with the Tax Withholding Estimator
• Update your W-4 (or make estimated payments if self-employed) after major life events
• Life events such as marriage, divorce, birth of a child, job change, or retirement almost always require a withholding review

File accurately and on time even if you owe — you can set up a payment plan to avoid larger penalties and interest.

All information above is drawn directly from current IRS publications and resources (Publication 501, Publication 915, Publication 505, the Tax Withholding Estimator, and the “Managing Your Taxes After a Life Event” page) as applicable to tax year 2025 returns filed in 2026.

Tax laws and amounts are adjusted annually for inflation. Always verify the latest figures and eligibility on IRS.gov.