Taxpayers may find themselves puzzled by an unexpectedly high tax bill. This increase often results from factors that impact the amount owed to the government, making it crucial for individuals to understand these elements and plan accordingly.
Expanded Earnings from Multiple Sources
Modern income streams can complicate tax liability. Freelance work, side gigs, or rental income can push taxpayers into higher tax brackets, as the U.S. tax system is progressive. For 2025, federal income tax rates still range from 10% to 37%, so additional income can cause more of your income to be taxed at higher marginal rates.
Income from multiple sources often lacks automatic withholding, unlike traditional employment. This can lead to underpayment of taxes throughout the year, resulting in a substantial amount due at tax time. Taxpayers should consider making estimated quarterly payments to avoid penalties. Generally, you must make estimated payments if you expect to owe at least $1,000 for the year after withholding and credits and if your withholding and credits will be less than the smaller of 90% of your current‑year tax or 100% of your prior‑year tax (110% if your prior‑year AGI exceeded $150,000; $75,000 if married filing separately). 1Internal Revenue Service. Individuals: Who Must Make Estimated Tax Payments?
Self-employment income also introduces the self-employment tax, which covers Social Security and Medicare contributions. The self-employment tax rate is 15.3% on net earnings. 2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Changes in Filing Status or Exemptions
Shifts in filing status and exemptions can significantly affect tax liability. A change, such as moving from married filing jointly to single or head of household, alters the tax brackets and standard deduction amounts applicable to your income. Because married filing jointly generally has a larger standard deduction than single or head of household, switching statuses can increase your taxable income if you don’t adjust planning during the year.
The elimination of personal exemptions under the Tax Cuts and Jobs Act continues to impact many filers through 2025. Instead, families often rely on credits such as the Child Tax Credit, subject to eligibility rules and income limits.
Reduced or Eliminated Deductions
Tax legislation changes have reduced or eliminated certain deductions, increasing tax liability for many. The deduction for state and local taxes (SALT) is capped at a combined $10,000 ($5,000 if married filing separately), which can notably impact taxpayers in high-tax states. 3Internal Revenue Service. Topic No. 503, Deductible Taxes
The mortgage interest deduction is generally limited to interest on up to $750,000 of home acquisition debt ($375,000 if married filing separately) for mortgages incurred after December 15, 2017. Interest on home equity loans is deductible only when the funds are used to buy, build, or substantially improve the home securing the loan. 4Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Miscellaneous itemized deductions subject to the 2% AGI floor (for example, unreimbursed employee expenses and certain investment fees) remain suspended through tax year 2025. 5Internal Revenue Service. Instructions for Form 8960 (NIIT) – Miscellaneous Itemized Deductions Suspension
Unqualified Distributions from Retirement Accounts
Withdrawing funds from retirement accounts before reaching the designated age can lead to significant tax consequences. In general, distributions taken before age 59½ are subject to an additional 10% tax on early distributions, on top of regular income tax, unless a specific exception applies. 6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
While exceptions exist for certain qualified expenses, they are specific and limited. Failing to meet an exception can also trigger state-level penalties depending on where you reside.
Large Capital Gains or Dividends
Substantial capital gains or dividend income can significantly increase a taxpayer’s liability. Short‑term gains (assets held one year or less) are taxed at ordinary income rates, while long‑term gains are taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income. 7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Qualified dividends are taxed at the same preferential rates as long‑term capital gains, which can change the overall tax owed when dividend income is large. 8Internal Revenue Service. Topic No. 404, Dividends
Gaps in Withholding or Estimated Payments
Inaccurate withholding or missed estimated payments often result in a surprising tax bill. Employers withhold based on your Form W‑4, but changes in income or circumstances may require adjustments to avoid underpayment. A pay raise or additional income sources should prompt a review of withholding amounts.
For income not subject to withholding—such as self‑employment, rental income, interest, dividends, and capital gains—estimated tax payments are essential. You generally avoid an underpayment penalty if you owe less than $1,000 for the year after withholding and credits, or if you paid in at least 90% of the current year’s tax or 100% of the prior year’s tax (110% for higher‑income taxpayers). 9Internal Revenue Service. Individuals: Who Must Make Estimated Tax Payments? If you do owe an underpayment penalty, the interest portion is calculated using the federal short‑term rate plus 3 percentage points for individuals. 10Internal Revenue Service. Rev. Rul. 2025‑11 (Underpayment Rate Equals Federal Short‑Term Rate + 3%)
Alternative Minimum Tax Considerations
The Alternative Minimum Tax (AMT) ensures certain higher‑income individuals pay a minimum tax, even when using deductions and exemptions under the regular tax system. The AMT disallows or limits some deductions—such as the SALT deduction—which can increase taxable income under the AMT calculation.
For individuals, AMT is computed at rates of 26% or 28% on AMT‑specific income amounts, and you must compare regular tax to AMT and pay the higher figure. Planning techniques like timing income and deductions can help manage AMT exposure, especially for those exercising incentive stock options or taking large itemized deductions.