Introduction

If you noticed a significant increase in your federal income tax for the 2020 tax year, you might be wondering why this change occurred. Several factors could be at play, including changes in your income, adjustments to tax laws, or modifications in your tax credits or deductions. Let’s explore the possible reasons for this increase in detail.

Increased Income

The most straightforward reason for an increase in your federal income tax is if you made more money in 2020 compared to previous years. Your tax obligations increase proportionately with your earnings. If you received a higher salary, bonus, or gains from investments, you may be responsible for paying more in taxes. This is a common occurrence when individuals experience career growth or increased income.

Adjustment of Tax Exemptions

One of the key adjustments you might have missed is your tax exemptions. If you did not update your tax exemptions with your employer, the Internal Revenue Service (IRS) may have used a lower exemption amount. This can lead to higher tax liability because the calculations for tax withholding or estimated payments are based on outdated information. It’s important to review and update your withholding information annually to ensure it accurately reflects your current financial situation.

Steps to Update Your Exemptions

Go to Your Payroll Department: The first step is to visit the human resources or payroll department of your employer. They can guide you through the process of updating your exemptions.

Use IRS’s Form W-4: Employee’s Withholding Certificate: If your workplace does not have a form for updating exemptions, you can access IRS Form W-4 online. Complete the form and submit it to your payroll office to ensure your tax withholdings are adjusted appropriately.

Review Other Income Sources: Make sure to account for all sources of income, including side gigs, rental properties, or alimony. These can also affect your federal income tax liabilities.

Changes in Tax Laws

Significant changes in the tax laws can also result in an increase in your federal income tax. The Tax Cuts and Jobs Act of 2017 introduced substantial changes to the tax code, with many of those changes expiring in 2025. Some of these changes, such as the new standard deduction, lower tax brackets, and increased child tax credit, may have provided larger refunds in previous years but could now result in higher taxes if you did not adapt your tax withholding or estimated payments accordingly.

Reviewing the New Tax Law Changes

New Tax Brackets and Rates: The tax brackets and rates have been adjusted, which can affect your tax liability. Higher incomes may now fall into a higher tax bracket, resulting in a larger tax bill.

Increased Standard Deduction: The standard deduction was increased, which may have reduced your taxable income in past years but could now be lower if you itemize your deductions. This can affect your overall tax burden.

Changed Tax Credits: The child tax credit has been a significant change, and if a child aged out of the eligibility for the credit, it can result in increased taxes.

Child May Have Aged Out of a Tax Credit

Another reason for an increase in your federal income tax could be that a child you previously claimed for tax credits has aged out. The child tax credit is available for eligible children under the age of 17. If your child has reached the age of 17, they may no longer qualify for the full tax credit, leading to a higher tax liability. It’s important to review your eligibility for tax credits and deductions each year to ensure you are not paying more than you should.

Steps to Adjust for a Child Aging Out of the Credit

Update Your Tax Exemptions: If you previously claimed your child for tax exemptions and credits, you may need to adjust this information with your employer to reflect the change in status.

Re-file Your Tax Return: Consider filing an amended tax return (Form 104) to claim the correct amount for the child tax credit. This can affect your refund or result in a higher tax liability for the current year.

Conclusion

Understanding the myriad factors that contribute to an increase in your federal income tax can help manage your finances more effectively. Whether it’s due to increased income, changes in tax laws, or a child aging out of a tax credit, it’s essential to stay informed and proactive with your tax obligations. Regularly reviewing and updating your withholding information, understanding the latest tax laws, and seeking professional advice can help you navigate these changes smoothly and avoid unexpected tax burdens.