If your taxable income was higher this year, odds are good you’re feeling frustrated. Many financial decisions can result in you paying more in taxes, and it’s also possible you made a mistake, leading to you overpaying. 

We’ll explain some common reasons why your taxable income is so high and some strategies to reduce what you owe the IRS.

Key Takeaways

• It’s important to ensure your finances are in order to determine the correct amount you need to pay the IRS so you don’t overpay.
  
  

• There are various ways to reduce how much you pay in taxes. You can take deductions or credits, and the IRS has several resources you can take advantage of.
  
  

• Hiring a tax accountant is important if you need help understanding your tax situation, among other tax-related services.

  
  

Why Is My Taxable Income So High?

If your taxes are higher than in previous years and you haven’t gotten a raise or moved, there could be another factor contributing to an unexpected bump in your tax liability. Here are several reasons you might pay higher taxes than you anticipate:

Miscalculations

You may have made some mistakes when determining how much you owe the IRS. Repeating a step in the equation or pressing the wrong number can be all it takes for your taxes to soar when they shouldn’t. This is why you should be very careful when doing your taxes or hire a tax accountant to do it for you.

Double Taxation

Double taxation is when there are two levies on the same income. For some reason, the government might issue the tax twice, or different levels of government may impose taxes on the same finances. This could happen if you lived in two different tax residencies. 

However, this could be a mistake on the part of the IRS. If you feel your taxes are unreasonably high, file an appeal for your tax returns. You can also look at your income and see whether your owed taxes are correct or not. If you’ve already overpaid on taxes, you can get the IRS to review it, and you should get a refund if your assumptions are right.

Use Trustworthy to keep all your tax information in one neat place online. Our website can provide easy ways to email tax documents to other parties without sending copies in the mail and waiting for responses or decisions.

Overlooked Tax Credits

There are ways to earn “tax credits” to reduce the amount of taxes owed. The IRS outlines that you can file claims to them to qualify for credits on children and dependents, education, clean energy investments, and more.

One tax credit is the Earned Income Tax Credit (EITC). According to the IRS, one of every four eligible taxpayers does not claim this credit. You may be eligible if you recently lost your job and haven’t found a new one.

Keep track of all your credit cards, checking, and savings accounts with Trustworthy. Our site allows you to look at all your finances on one page, so there’s no need to log into each individual app or website.

Potential Tax Hikes

Local and state governments use tax bills every year to pay for schools, new buildings, parks, repaired roads, renewable energy, and other additions or changes. 

On a federal scale, the government imposes taxes on increases in Social Security, national defense, and health insurance. The more the government has to pay for, the higher the taxes will be for each taxpayer.

High State Taxes

States such as California, New York, and Hawaii have the highest state tax rates in the country. California offers more public services than states such as Missouri or Alaska, which explains the naturally high tax and how more effort is made to serve low-income families.

Selling Stocks

Stockholders often sell stocks to gain money, and the IRS sees this as income that can be taxed. In 2023, short-term gains were taxed between 10 to 37%, depending on how much the taxpayer earned. The only way selling stock can reduce one’s tax liability is if they sold it at a loss rather than a profit.

If you hold your stocks for over one year and profit from the investment (a long-term gain), you’re taxed at a much lower tax rate.

How to Know If You’re Overpaying Taxes

If the taxes you owe seem higher than necessary, there are several things you can do to verify the levies are correct. Your financial situation changing year to year can complicate matters, but you can spot any errors if you have all your financial information on hand.

Examine Your Annual Income

Check your pay stubs, paychecks, or online payroll account to see how much in taxes is being withheld. Then, compare this to the previous year’s income tax return to see if the amounts match.

Review Your W-4

Your W-4 form determines how much tax is barred from your paychecks. If you didn’t update your W-4 recently or filed for too many allowances, you might be overpaying by withholding too little in taxes).

Know Your Tax Bracket

Learn about your IRS tax bracket. If you're in a lower tax bracket than what you need to pay back, you may be overpaying.

Consult with a Tax Professional

If you aren’t sure about your taxes or want a second opinion, you can contact a certified public accountant (CPA) to help you understand your taxes and whether the amounts you owe are correct.

Strategies to Reduce Taxable Income

To find ways to pay less in taxes next year and beyond, you can do so with assistance from the IRS, a tax professional, or both. Consider the following strategies before the next tax season:

Use All Available Deductions

Be sure to review all the options available for tax deductions, as you might qualify for at least one. The IRS explains that deductions are legal ways to subtract money from your income to pay less in taxes.

Some popular tax deductions include:

• Student loan interest deduction

• Charitable donation deduction

• Medical expenses deduction

• Mortgage interest deduction

• Investment and gambling loss deduction

• Retirement account contribution deduction

• State and local tax deduction

• Home office deduction

Leverage Your Tax Credits

Tax credits aren’t the same as deductions but can be used to lower your taxes or increase your tax refunds if you qualify. The IRS offers credits for taxpayers in certain family, lifestyle, or financial situations. Several credits are available for parents, caregivers, students, health insurance customers, electric car or solar power owners, and more.

Some popular tax credits include:

• Earned income tax credit

• Child tax credit

• American Opportunity Tax credit

• Lifetime learning credit

• Solar tax credit

• Electric vehicle tax credit

Contribute To Your Retirement Accounts

You can create an IRA and put money into it that the IRS won’t be able to tax. IRAs help individuals save up money for retirement so they have the means to continue living without needing to continue working.

Sherman Standberry, founder of MyCPACoach.com, says:

“An IRA stands for ‘individual retirement account.’ Literally, anyone can set this up at a brokerage like Fidelity, Vanguard, TD Ameritrade, and so on. This does not have to be done through a job employer or business…

You can contribute up to about $7,000 to a traditional IRA, and when you do this, you will receive a tax deduction in return…This is per person. If you have a spouse, you can get another $7,000 in and…kids get another $7,000 in per child…

So if you’re paying 40% of your income in taxes, you would save 40% of your IRA contributions in taxes. Then, inside this account, you can invest in various assets like stocks, bonds, CDs, and other assets to build wealth up, up until you retire.”

Even better, you can build up a bundle of wealth in a traditional IRA, and then convert it into a Roth IRA. With Roth IRAs, you won’t get any taxes on withdrawals. This is one of the best strategies to lower your tax bill.

Hold Stocks for the Long Term

By holding onto stocks long term, you can make a lot of money compared to selling the stock at the right time. Long-term capital gains tax can be as low as 0% up to $89,250 if you’re married or $44,625 if you’re single, and just 15% up to $553,850 if you’re married and $492,300 if you’re single.

Long-term gains are normally taxed at lower rates than short-term gains and annual income. Long-term gains mean the stocks have been held for more than a year since they were purchased.

Move to a More Tax-Friendly Area

Moving to a state with lower taxes can alleviate your tax situation. If you’re willing to leave your current job and can find a job with a similar salary, your housing, food, and utility costs may also decrease.

Here are examples of 10 tax-friendly states to live in:

1. Alaska

2. Tennessee

3. Florida

4. Wyoming

5. Kansas

6. Alabama

7. Oklahoma

8. Georgia

9. Tennessee

10. Missouri

Donate To Charity

One way to make income nontaxable is to make charitable donations. You can deduct any money donated to charity from your income. When filing for taxes, keep a record of all your donations in the past year.

Open an HSA

For those with high-deductible health plans, you can put earnings in a health savings account (HSA) to exclude them from your taxable income. Your employer may create an HSA for you, or you can open your own HSA if you’re also registered with a high-deductible health plan (HDHP).

Adjust Your Home Mortgage

If you own a home and pay it off with a mortgage, you can deduct the interest you pay. If you’re willing to do this, this can lower your taxes. The IRS lists the requirements for filing for a Home Mortgage Interest Deduction.

Why You Need to Involve a Tax Accountant

Not everyone is able to successfully file and pay taxes on their own, and there’s no shame in asking for help. A CPA or tax accountant can help you in more ways than one. Here are the reasons to enlist their help:

Plan for Tax Season

An accountant can help you develop strategies for planning your taxes, minimizing your liabilities, and saving money this year and in the future.

Save Time

Meeting with a tax accountant can help you prepare for tax returns and help you file for deductions and credits. One meeting can save you days, or even weeks, of your time doing these tasks independently.

Get Represented When You Need It

Tax accountants can also represent you when dealing with a tax dispute or audit. Getting a tax accountant involved will ensure you don’t have to worry when the IRS comes with questions.

Get faster results from your accountant by having all your tax information online with Trustworthy. Emailing all your tax information to your professional can help you speed up the process of determining whether you’re overpaying your taxes to the IRS.

Frequently Asked Questions (FAQs)

What is the highest tax bracket?

According to the IRS, the highest marginal tax rate is 37%. For 2024, individuals who make more than $609,350 per year or couples filing jointly who make more than $731,200 will make up the highest tax bracket. 

How much is the tax on $1 million in California?

When federal, state, sales, and property taxes are added together, the total taxes for California residents are currently around 48% for individuals with an income of $1 million or more. For a $1 million income, this means around $480,000 of that income needs to be paid for taxes.

How much is tax in the USA for foreigners?

Non-residents living in the USA must pay a flat 30% tax rate on any income earned. For instance, if a non-U.S. citizen makes $48,000 annually, that person needs to pay back $14,400 in taxes. This tax can be lifted if the non-resident becomes a U.S. citizen.

How much salary is tax free in the USA?

In the U.S., the standard deduction refers to the amount of income that isn’t subject to federal taxes. In 2023, this deduction was $12,950 for individuals and $25,900 for married couples. So, taxpayers will at least keep these amounts of their income every year, at least when it comes to federal taxes. State and local governments may still be able to tax this money.