Nobody likes a tax season surprise — especially when it’s a bill instead of a check. While the House GOP has projected $1,000 payouts for many taxpayers under the new 2025 laws, the reality for some will be a higher income tax bill or a shockingly lower refund.
Why the discrepancy? It can come down to life changes or missed opportunities. Maybe you no longer qualify for the student loan interest deduction, or perhaps you’re leaving money on the table by taking the standard deduction instead of itemizing.
To help you avoid a shock on filing day, here are six common ways you could be paying more income taxes than necessary.
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New tax law from 2025 introduced key temporary tax breaks.
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1. You overlooked the new 2025 tax credits and deductions
For instance, new car owners may be eligible for a car loan interest deduction, and workers earning tips or overtime may now qualify for targeted tax breaks. With the federal tax code in such a state of flux, it’s easier than ever to overlook a major deduction or credit.
However, new and continuing tax breaks come with strict eligibility requirements, most notably income phase-outs. If your earnings exceed specific thresholds, certain tax breaks disappear, leading to a higher tax bill than anticipated.
Here are a few common tax deductions and credits with income phaseouts:
- Student loan interest deduction. For 2025 income taxes, the phase-out begins at a modified adjusted gross income (MAGI) of $85,000 for single filers and $170,000 for married couples filing jointly.
- Traditional individual retirement account (IRA) deductions. If you’re covered by a retirement savings plan at work, your ability to deduct traditional IRA contributions starts to phase out at a MAGI of $79,000 for single filers and $126,000 for married couples filing jointly (for tax year 2025).
- “Senior bonus” deduction. Adults aged 65 and older may qualify for this temporary tax break, but their income phase-out is $75,000 for single filers and $150,000 for joint returns.
What should you do next year? Start by reviewing various tax deductions and credits you might be eligible for. Next, look for ways to lower your adjusted gross income (AGI) so that you can maximize your eligibility for tax breaks. For instance, you may increase contributions to pre-tax accounts — like a 401(k), FSA, or HSA — to directly reduce your taxable income.
Related: An HSA Sounds Great for Taxes: Here’s Why It Might Not Be Right for You
The 2025 standard deduction might be lower than your itemized deductions.
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2. You claimed the standard deduction when you should have itemized
Roughly 90% of taxpayers claim the standard deduction, but this “path of least resistance” might not get you the most bang for your buck. For the 2025 tax year, several shifts in federal policy have made itemizing more attractive than it has been in years. For instance:
- The SALT cap increase. Until recently, the state and local tax (SALT) deduction was capped at just $10,000. But under the 2025 tax legislation, that cap has been raised to $40,000 for many filers. If you live in a high-property-tax state or pay significant state income taxes, this change alone could push your itemized total well past the standard deduction.
- Larger charitable contributions. New tax changes for 2026 charitable donations caused many taxpayers to donate larger gifts last year. So if you increased your giving in 2025, those contributions could significantly tip the scales in favor of itemizing.
What should you do next year? Don’t file out of habit. In a shifting tax policy environment, choosing whether you itemize or claim the standard deduction can change from year to year. So gather your property tax statements, mortgage interest summaries, and receipts for donations and medical bills, and run the math on whether an itemized return could save you more on taxes.
Related: What’s the standard deduction and who should itemize?
Federal withholding tax is important to update annually.
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3. Your W-4 withholding is too low and outdated
Whether you’re starting a new role or settled into a long-term position, you should regularly review your Form W-4 (Withholding). This document tells your employer exactly how much to send to the IRS and state authorities on your behalf throughout the year.
If your tax withholding is out of date and too low, you might be building up a debt to the IRS. Various life changes can increase your tax bill if your withholding isn’t adjusted at least annually, like:
- Getting divorced or separated. Single and married-filing-separately statuses typically carry a lower standard deduction than those available to joint filers. Additionally, married separate filers may not qualify for certain tax breaks (like certain education tax breaks).
- Getting a pay raise. While a promotion, bonus, or raise is great news, that extra income could push you into a higher tax bracket, making your current withholding levels insufficient.
- Having a child leave home. When a child turns 17, they no longer qualify for the $2,200 child tax credit, even if they still live at home (though temporary absences, like college, are exempt from this rule).
What should you do next year? Reviewing your withholding annually can help you avoid a surprise tax bill filled with interest and fees. Currently, the IRS failure-to-pay penalty is 0.5% of your unpaid taxes for every month (or part of a month) the balance remains, capping at 25%. Also, don’t forget that most state agencies can apply their own underpayment penalties, adding another layer of cost to your tax bill.
Side hustle jobs mean you must pay income taxes on this “extra income.”
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4. Your side hustle income was underreported, or you missed estimated tax payments
Taking on a new side hustle during the past year means you probably owe taxes on the income generated from that work. Many freelancers and gig workers are surprised to learn that the IRS expects quarterly estimated tax payments if you anticipate owing $1,000 or more in federal taxes at year-end.
So, whether you’re an Etsy seller, an Uber driver, or a freelance consultant, you’ll probably receive some combination of the following tax forms when determining your income tax bill for the year:
- Form 1099-K: Reports payments received through third-party processors like PayPal, Venmo, or specialized gig platforms.
- Form 1099-NEC: Reports non-employee compensation for services you’ve performed as an independent contractor.
- Form 1099-MISC: Reports income not covered in the NEC category, like rental income.
*Note: All earned income is typically taxable regardless of whether you receive a tax form.
Failing to report your earnings throughout the year doesn’t just lead to a higher bill come tax time, but can also trigger IRS underpayment penalties and interest.
Furthermore, if you aren’t tracking your business expenses as you go, you might miss valid breaks (like the home office deduction) and other overlooked tax deductions for the self-employed.
What should you do next year? Take time now to review the rules for reporting self-employment income. Depending on whether you are a full-time contractor or just a casual freelancer, your tax requirements may differ. For a deeper dive into maximizing your savings, check out Kiplinger’s report, 12 Tax Strategies Every Self-Employed Worker Needs in 2026.
Investment income tax may be higher than you expect due to tax-inefficient investments.
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5. Your tax-inefficient investments hurt your return
Did you sell a stock, bond, or piece of real estate for a profit last year? If so, that capital gain likely boosted your taxable income and potentially contributed to a higher tax bill. However, it isn’t just what you sell that matters — it’s where and how long you hold your investments.
Your income tax bill might be higher than expected because of these common oversights:
- Poor asset location. Keeping “tax-heavy” investments — like high-yield bonds or actively managed mutual funds that payout frequent dividends — in a taxable brokerage account instead of a tax-deferred 401(k) or IRA.
- Frequent trading. Gains on assets held for less than a year (short-term) are taxed at ordinary income rates, which can reach as high as 40.8% when you include the net investment income tax (NIIT).
- Missing out on tax-loss harvesting. If you have winning investments, you can offset those gains by selling “losers” at a loss. If your losses exceed your gains, you can even use up to $3,000 to offset your ordinary taxable income.
What should you do next year? Aim to maximize your contributions to 401(k)s, 403(b)s, and IRAs to keep more of your growth tax-deferred until retirement (when your income tax rate might be lower). For your taxable accounts, try to hold investments for at least one year to qualify for lower long-term capital gains rates. Finally, make “tax-loss harvesting” a year-end habit to ensure you aren’t paying more on your winners than you have to.
More: The Wash Sale Rule: Six Things to Know to Avoid Tax Pitfalls
State income tax refunds might be lower (or state tax bill higher) if you’re not taking advantage of applicable credits, deductions, and exemptions.
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6. You overlooked state-specific tax credits and deductions
While not every state has its own tax rules (and some states have no income tax at all), ignoring state-level credits and deductions is one of the easiest ways to overpay your year-end income tax bill.
Taking advantage of every tax break available to you could help save on state income taxes. To ensure you aren’t leaving state money on the table, consider these tax resources and strategies:
What should you do next year? Visit your state’s Department of Revenue website before you file. Many states have tax deductions, credits, and exemptions that can significantly reduce your state income tax liability.
