Many people expect to get a little bit of cash back when they file their taxes. So if you find yourself writing a check to the IRS instead of receiving one, it can feel frustrating. Especially considering the average refund was up roughly 11% this year compared to the 2024 filing season
But owing money at tax time doesn’t mean you made a mistake. It usually just means something changed in your financial life, and your tax strategy didn’t keep up. The good news is that once you understand what happened, you can take steps to make sure you’re not caught off guard again next April.
This guide will explore the four most common reasons people end up owing taxes and six steps you can take to maximize your refund next year.
Why You Didn’t Get a Refund
At its core, a tax bill comes down to simple math: If you paid more than you owed to the IRS throughout the year, then you’ll receive a refund during tax season. If you underpaid, you’ll owe money come April 15th.
There are lots of factors that can influence your tax payments, including your paycheck withholding, estimated quarterly payments, or side income you may have earned. The tricky part is figuring out why the gap appeared, but there are usually a handful of culprits.
You Earned Extra Income With No Taxes Withheld
Side hustles, freelance projects, rental income, and gig work through apps like Uber or DoorDash all have one thing in common: no one withholds taxes for you.
With a traditional W-2 income, your employer will set aside tax payments from every paycheck. But with a side hustle (1099 income), it’s on you to set the money aside. If you don’t make payments throughout the year, you’ll owe more money in April.
This has become a bigger issue in recent years, as more people have picked up gig work to keep up with the cost of living. That extra income helps with cash flow, but can create a significant bill in April. Additionally, the IRS generally expects you to make quarterly estimated tax payments rather than once a year. Missing those payments can trigger underpayment penalties on top of the tax you already owe.
The math can be especially jarring for self-employed earners. On top of regular income tax, self-employed individuals owe 15.3% in self-employment tax to cover both the employer and employee portions of Social Security and Medicare.
The best way to avoid paying a hefty bill in April is to work with a financial advisor who can help you set aside the right amount and make quarterly payments to the IRS.
Investment Gains Added More Than You Expected
If you invest in a taxable brokerage account, last year’s strong market may have created a tax bill you weren’t anticipating. 2025 was a strong year for investors, with the S&P 500 posting its third consecutive year of double-digit gains. That’s great news. But that growth doesn’t just show up in your portfolio balance. It can also show up on your tax return.
The most common unexpected investment tax is capital gains tax. When you sell a stock, fund, or other investment at a profit, you have to pay Uncle Sam part of that gain. If you held the investment for a year or less, those short-term gains are taxed at your ordinary income tax rate. Longer-term holdings (a year or more) get more favorable rates of 0%, 15%, or 20%, depending on your income.
There’s also the Net Investment Income Tax (NIIT), an additional 3.8% surtax that applies when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). This extra layer catches a lot of investors off guard in strong market years.
You Lost Credits or Deductions You Used to Claim
Sometimes your taxes go up, not because you earned more, but because you lost a tax break you’d been relying on. Here are a few common examples:
- Your child aged out of the Child Tax Credit: This credit is worth $2,200 per qualifying child under 17 for the 2025 tax year. When your child turns 17, the credit disappears, and depending on your bracket, that can mean an extra $2,000+ on your tax bill.
- Education credits expired: If you or a dependent graduated or is no longer enrolled, you may have lost the American Opportunity Tax Credit (up to $2,500) or the Lifetime Learning Credit.
- You switched from itemizing to the standard deduction (or vice versa): Tax law changes in recent years have altered the math behind itemizing vs. taking the standard deduction. If you didn’t re-evaluate which approach saves you more, you may have left money on the table or lost deductions you were counting on.
What You Can Do Now to Avoid Paying Too Much in Taxes Next Year
Owing taxes once is frustrating, so let’s explore a few strategies you can take to avoid owing a large bill next April.
Use the IRS Tax Withholding Estimator
The IRS recently updated its Tax Withholding Estimator to reflect recent tax changes from the One Big Beautiful Bill, including the new deductions for tips, overtime, and auto loan interest.
Using this tool can help you determine whether your current withholding amount is correct or if you need to adjust.
Submit a New W-4 to Your Employer
If the estimator shows a gap, consider filling out a new W-4 and giving it to your employer’s payroll department. This ensures that you’re not accidentally underpaying your tax obligation throughout the year.
You can increase your withholding at any time during the year, and the IRS treats withholding as if it were paid evenly throughout the year, which means even a late-year adjustment can help you avoid penalties retroactively.
Set Up Quarterly Estimated Payments for Non-Wage Income
If you have freelance income, rental income, investment gains, or any other income that doesn’t have tax withheld automatically, you’re generally required to make estimated payments every three months.
The 2026 quarterly deadlines are April 15, June 15, September 15, and January 15, 2027.
Avoid the Underpayment Penalty
You can avoid the underpayment penalty if you meet one of three conditions:
- You owe less than $1,000 after subtracting withholding and credits
- You paid at least 90% of your current-year tax
- You paid at least 100% of last year’s tax (110% if your prior-year AGI exceeded $150,000).
That last option is especially useful because it gives you a concrete number to aim for regardless of what happens with your income this year.
Be Proactive With Investment Income
If you’re invested in taxable accounts, consider reviewing your portfolio’s potential tax impact before year-end rather than after. Strategies like tax-loss harvesting, which involves selling losing investments to offset gains, can reduce your liability.
Learn More: 5 Key Tax Planning Considerations Before April 15th
Work With a Financial Advisor to Build a Year-Round Tax Strategy
Tax planning really shouldn’t be something you do once a year in April. It’s most effective when it’s woven into your broader financial plan, alongside your investment strategy, retirement timeline, and income projections.
Working with a financial professional can help you identify tax-efficient moves throughout the year to help reduce your liability.
An SD Capital Advisor Can Help You Plan Ahead
At SD Capital, we don’t believe in scrambling in April. We believe in building a financial plan that accounts for taxes year-round so that filing season becomes a checkpoint, not a crisis.
If you owed money this year and aren’t sure why, or if you want to make sure it doesn’t happen again, we’re here to think it through with you. That starts with understanding your full financial picture, including your income sources, your investment accounts, your retirement timeline, and the tax implications that connect them all.
Reach out to schedule a conversation.
Frequently Asked Questions
Is it bad to owe taxes?
Not necessarily. Owing a small amount can actually mean your withholding was well-calibrated throughout the year, since a large refund simply means you overpaid the government what you owed.
How do I avoid owing taxes next year?
Start by running the IRS Tax Withholding Estimator and submitting a new W-4 to your employer if needed. If you have non-wage income, set up quarterly estimated tax payments. Review your tax situation any time your income, employment, or family circumstances change.
What happens if I can’t pay my taxes?
File your return on time regardless. The failure-to-file penalty is significantly higher than the failure-to-pay penalty. From there, you can apply for an IRS installment agreement online to pay your balance over time.
The opinions and market review expressed in this material are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is not a guarantee of future results. All indices are unmanaged and cannot be invested in directly.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee success or protect against loss in all market conditions.
This material is not intended to be a substitute for individualized financial, tax, or legal advice. Please consult your financial advisor, tax professional, or legal counsel regarding your specific situation.
Brent Shimman is the co-founder of SD Capital with over 20 years of experience helping clients align their finances with what matters most. He lives in Oregon, Ohio with his wife and five children.
