7 Unexpected Reasons You May End Up Owing Money

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No one likes to get surprised with a bill, but sometimes, you might find yourself owing money for an unexpected reason.

A little bit of knowledge can go a long way, which is why exploring some of the common reasons you might owe money unexpectedly could help you avoid a budgeting catastrophe.

Tax Withholding Issues

Tax withholding indicates the amount of money that your employer deducts from your paycheck to cover your income taxes. When your withholding details are set up correctly, you likely won’t face a significant tax bill at the end of the year. But if your withholding details instruct your employer to withhold less than it should, you might find yourself stuck with a rather large tax bill at the end of the year.

For example, an incorrect filing status, like married filing jointly instead of married filing separately, could completely adjust your tax obligations, leading to a bill at the end of the year.

Side Hustle Income

Building a side hustle offers a way to bring more income into your household. As your side hustle makes income, you need to pay income taxes on those funds. If you didn’t pay taxes on your side hustle income throughout the year, then you’ll likely owe the IRS at the end of the year.

For side hustlers, it’s a good idea to save a portion of your income for your anticipated tax bill. If possible, tuck these funds into another account to avoid accidentally spending your tax money.

Early Retirement Account Withdrawals

Retirement accounts often offer a tax-deferred way to build a nest egg for your golden years. But for anyone who decides to tap into those specific savings early, expect to face an early withdrawal penalty.

For example, if you withdraw money from your 401(k) before age 59 1/2, you’ll pay a 10% early withdrawal penalty. With that, withdrawing $100,000 from your 401(k) at age 50 would involve a $10,000 early withdrawal penalty. That’s on top of your standard income tax obligations.

Overdraft Fees

Depending on your checking account, your financial institution might charge an overdraft fee when you spend more than you have in the account. According to SmartAsset, overdraft fees generally range from $10 to $40, which can add up quickly.

If you want to avoid overdraft fees altogether, consider opening a bank account without any embedded overdraft fees.

Utility Bill Errors

If your utility company undercharges you and later catches its mistake, it might send you an updated bill with your newly calculated costs. Although this isn’t too common, it can happen.

Beyond underbilling, many utility companies charge a range of fees, which you might not see coming. If the fees add up too fast, you might find yourself in debt.

Medical Bills

Medical emergencies can come out of nowhere and stick you with a significant bill. Even if you have health insurance, the wrong situation could still lead to a plethora of uncovered medical costs.

Unfortunately, medical debt is a financial burden for millions of Americans. According to Gallup, 12% of adults in the U.S. had to borrow money to pay for medical costs in the past year.

Escrow Shortage

For homeowners, an escrow account shortage could mean owing more money to your mortgage company at the end of the year.

Some mortgage companies collect your property taxes and insurance bills through your monthly payment. Each month, a portion of your payment is tucked into the escrow account to cover these annual bills. Essentially, an escrow shortage means the account doesn’t have enough to cover your property tax or insurance bill.

Generally, an escrow shortage happens when costs rise, like a higher property tax bill or insurance premium. While you may have the option to cover the shortage in one payment, sometimes you might need to spread out the shortage across your mortgage payments for the upcoming year. Either way, that’s more cash out of your wallet than you might have expected.

Take Action

Most of us want to avoid debt where we can. But unfortunately, unexpected situations can lead to a growing pile of bills that we can’t pay for immediately.

If possible, take action by building an emergency fund. With several months’ worth of emergency savings on hand, you can more comfortably handle whatever bills come your way.

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