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Why more Americans are owing the IRS money

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  • Adjustments in marginal tax rates and the standard deduction have impacted taxpayers' liabilities, leading to higher balances due.
  • The rise of freelance and contract work requires gig workers to pay taxes throughout the year, often resulting in unexpected balances due and penalties.
  • The expiration of enhanced tax credits has led to lower refunds and higher tax liabilities for many families.

The landscape of tax season has shifted dramatically for many Americans. Instead of the anticipated refunds, a growing number of taxpayers are facing unexpected balances due to the IRS. This trend can be attributed to several key factors, including changes in tax laws, the burgeoning gig economy, and the rollback of pandemic-related tax benefits. In this article, we delve into these reasons, supported by three insightful charts that highlight the underlying trends.

Chart 1: Changes in Tax Laws and Their Impact

One of the primary reasons more people owe money to the IRS is the recent changes in tax laws. The adjustments in marginal tax rates and the standard deduction have significantly impacted taxpayers' liabilities. For instance, the federal tax brackets were adjusted for inflation, increasing by about 7% from 2022 to 2023. This means that even if your income remained the same, the rate at which it is taxed could have changed, potentially resulting in a higher tax bill.

Moreover, the standard deduction has also seen an increase. For single filers, it went up by $900 to $13,850 in 2023, and for married couples filing jointly, it increased by $1,800 to $27,700. While these changes might seem beneficial, they have also led to a reduction in the amount of taxable income, which in turn affects the overall tax liability.

Chart 2: The Rise of the Gig Economy

The gig economy has seen exponential growth in recent years, with more people taking on freelance and contract work. However, this shift has also brought about new tax challenges. Gig workers are required to pay taxes throughout the year in quarterly estimates. Failure to do so can result in a surprise balance due at tax time, along with potential underpayment penalties.

In addition to this, there is the growth of the shared economy. Throughout the course of the year, gig workers are required to make quarterly tax payments estimates. In that case, they will be subject to a surprise balance payable at the time of tax filing, in addition to the possibility of an underpayment penalty. This demonstrates how important it is to comprehend and fulfill one's tax duties throughout the course of the year in order to prevent incurring tax liabilities that were not anticipated.

Chart 3: Expiration of Pandemic-Related Tax Benefits

During the pandemic, several tax benefits were introduced to provide financial relief to individuals and families. These included enhanced tax credits such as the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). However, many of these benefits have now expired, leading to a decrease in refunds and an increase in tax liabilities.

For example, the maximum Child Tax Credit in 2021 was $3,600 per child under age 6 and $3,000 for children ages 6 to 17. In 2023, this has reverted to a maximum of $2,000 per child up to age 16, and the credit is no longer fully refundable. This means that if the credit exceeds the taxes owed, taxpayers do not receive the difference as a refund, which has resulted in lower refunds and higher balances due for many families.

The combination of changes in tax laws, the rise of the gig economy, and the expiration of pandemic-related tax benefits has led to a significant shift in the tax landscape. More Americans are finding themselves owing money to the IRS instead of receiving refunds. Understanding these factors and planning accordingly can help taxpayers manage their liabilities and avoid surprises at tax time.

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