Why you owed taxes this year.

It is about a month after tax day.  You should have filed your taxes by now or at least have filed for an extension, hopefully. 

Most get a refund when they file their taxes.  The IRS designed the system that way.  But this year refunds are down.  Many taxpayers owed taxes to the IRS for the first time in their lives.  What Happened? 

Witholding tax? What is that?

The American tax system is a self-reporting income tax system.  This simplifies tax collection for the federal government.  The IRS collects withholding taxes from your paycheck as estimated partial payments of the taxes each taxpayer will owe.  The IRS has tables that tell how much to withhold from the taxpayers earnings based on the number of exemptions they claim in the hope that when tax time comes the taxpayer has withheld roughly the totally amount of taxes owed for the year resulting in a small refund or small tax bill. 

In 2018 the IRS under-estimated withholding from tax payers.  This was a result of the 2018 Tax Cuts and Job act.  The IRS adjusted their withholdings based on the projected tax savings from this new legislation.  The withholdings were adjusted and the projected savings did not materialize.

Tax Cut

So while many Taxpayers got a smaller refund than expected or even had to pay taxes for the first time in their lives most taxpayers actually paid less in total taxes as compared to last year.  While owing the IRS for taxes at tax time is not comforting attention should be paid to the total tax paid.  Many tax payers focus on the refund or bill and its size but that amount is affected by many different factors.  Keeping an eye on the total tax paid will allow you to compare apples to apples year over year.