Will You Be in for an Unpleasant Tax Surprise in 2024?

Millions of tax filers received a tax refund from the IRS in 2023. As of the end of the year, the average refund amount was $3,167.

If you typically get a refund when you file your taxes, you may be anticipating a repeat situation this season. But here's why you may end up having to write the IRS a check instead.

How much interest income did you earn in 2023?

The Fed began raising interest rates in March 2022 to fight high inflation. That rate hike was the first to come through in years. The Fed then proceeded to raise interest rates 10 more times through late 2023 for a total of 11 rate hikes.

Before the Fed's rate hikes, banks were generally paying minimal interest on savings accounts and CDs. But once those rate hikes took hold, savings account and CD rates began to soar.

That was a good thing for people with money in the bank. But if you earned a lot of money in interest in 2023, you may be in for a rude awakening this tax season.

You may not realize this, but the IRS is entitled to a piece of pretty much any type of income you earn. And that includes interest income in a bank account, whether it's a savings account or a CD. Not only is the interest a bank pays you taxable, but it's taxed as ordinary income, which means it's subject to the highest rate possible based on your tax bracket.

Now, when you earn money from your job, you'll typically be paid on a post-tax basis. In other words, your paycheck won't represent your total wages, but rather, your after-tax wages.

When you earn interest in a bank account, you're not paying taxes as you go -- at least not usually. Some people with a lot of money in the bank may know to make estimated quarterly tax payments on their interest income, the same way self-employed people have to pay estimated taxes on their earnings each quarter. But if you earned a nice amount of interest in 2023 and didn't pay a portion of it to the IRS along the way, then you may end up owing money when you file your tax return this year.

Work with a professional to avoid unpleasant tax surprises

Learning that you might have to pay the IRS some money this April, as opposed to getting a refund, might constitute a harsh blow. That's why it could be a smart idea to engage the services of a tax professional -- both this season and in general.

Someone who knows the tax code inside and out can help you anticipate a tax bill, such as one that might ensue as a result of having earned a lot of interest income the year before. Just as importantly, in the context of this year's return, a tax professional might be in a position to help you offset your tax bill from that interest income by helping you identify deductions you weren't aware you could take. So if you're now realizing you might owe the IRS a bundle from 2023, you may want to line up some help.

"I almost always recommend people work with a tax professional," says Mark Steber, Chief Tax Information Officer at Jackson Hewitt Tax Services. These people really do know the tax code in and out because it's their job. And you may be surprised at how a tax professional can help you legally whittle down your IRS bill and avoid hiccups in the future.