Management Your Tax Refund Standing

By Connie Brezik, CFP

As you can tell from the abundance of tax software commercials on television, tax season is upon us once again. No pressure, but your job is to file your tax returns correctly and on time. In basic terms, your total tax liability — less what you already paid for 2021 — is what you will owe when you file your 2021 returns. If you overpaid, you will be due a refund.

Connie Brezik

If you are a glutton for punishment and preparing your own tax returns, the first step is gathering all your documentation. This may include:

  • W-2s from employers
  • 1099s from interest, dividends, the sale of investments and real estate
  • K-1s from partnerships and S-corporations in which you have ownership
  • 1098s to show mortgage interest paid
  • Letters from charities that document your charitable contributions.

And the list goes on… and on.

Taxes can be paid in during the year from withholding on payroll checks, IRA required minimum distributions, Social Security and pension income. Many taxpayers also make quarterly estimated tax payments. The hassle of making these payments four times a year can be avoided by paying your full tax liability through withholding. Please note that taxes withheld at any time during the year is considered paid-in ratably throughout the year. Therefore, you could make up for any shortage in payments on your last paycheck of the year.

Of course, getting a tax refund feels better than writing a check. However, owing an appropriate amount of tax when you file your return is a good thing! A refund means you let the government act as your interest-free piggy bank.

If you don’t pay in enough during the year, you could be assessed an underpayment penalty. You can avoid this by tax planning throughout the year to know what amount should be paid and when.

To avoid under and overpaying the government, I suggest employing these strategies:

  • Instead of letting the government hold onto your hard-earned money throughout the year, it’s a wise idea to open a savings account and make a deposit each paycheck. This can be set up to happen automatically like clockwork. It’s a great way to bankroll your vacation, save up for a car or pay for higher education. By doing this, you have control over your money. You do not have any control over your funds on deposit with the government/IRS.
  • Be intentional about your money. You get a gold star if you start planning now for 2022. Since you are already in “tax mode” working on your 2021 tax returns, you might as well improve things for this year. You get to decide how much of your income is withheld for taxes. Estimate what you will owe for 2022 and adjust your withholding now for the rest of the year. Don’t forget to complete a new W-4 and turn this into your payroll department. If your income or deductions change during the year, you can make further adjustments at that time.

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As a citizen of the United States, we all need to pay what we owe — but we don’t need to overpay. Do some upfront planning to minimize your tax liability. This can be done by:

  • Bunching charitable deductions into every other year to exceed the new increased standard deduction.
  • Deferring some income into the following year when you expect to be in a lower tax bracket.
  • Doing a Roth conversion or taking more than your required minimum distribution (RMD) from your traditional IRA to take advantage of low tax brackets.
  • Multiple-year tax planning may allow you to use the tax law to your advantage. The goal is to pay the least amount of tax legally possible over your lifetime. If you don’t strategize over multiple years and only concentrate on this year, you may pay more tax than you need to.

Being in the driver’s seat by managing your own taxes is smart! However, if you don’t want to become an expert on income taxes, hire a tax professional (CPA or EA) and consult your financial advisor. Happy filing!

About the author: Connie Brezik, CFP®, CPA, PFS

Connie Brezik is a Casper-based wealth advisor with Buckingham Strategic Wealth.

For educational purposes.

Got Questions About Your Taxes, Personal Finances and Investments? Get Answers!

Email Jeffrey Levine, CPA/PFS, Chief Planning Officer at Buckingham Wealth Partners, at: [email protected].