What’s better than a large refund?
March 18, 2021

If you think a large tax refund is a good thing, you may want to reconsider. Why would you want to let the federal government control your money when you could be putting that money to work for you?

By better managing your withholding taxes, you can stop overpaying the IRS, essentially giving it an interest-free loan with your hard-earned money. Rather, we can help you with tax planning that guides you to invest that money in a variety of ways, including a high-yield savings account or an investment account.

By using the IRS’ tax withholding estimator, you can anticipate your likely tax liability and be sure your current withholding is what it needs to be – not too much and not little. Doing so will allow you to stop formulating your savings and spending plans around a tax refund and instead use your monthly earnings to set those objectives.

Tax advisors caution that focusing on a big April refund might cause you to overlook planning opportunities that could be beneficial to you as you look toward the future.  It’s better to plan now and understand just what your tax liability is.

Instead of zeroing in on a potential refund, consider a different, more proactive strategy. We can help you evaluate your effective tax rate, marginal bracket and total tax liability, enabling you to more fully understand your complete tax situation.

For example, your effective tax rate is determined by dividing your total tax due by your taxable income, which basically is your average marginal tax bracket. This is helpful to know because you can use that information to compare your tax positions from year to year.

When you understand your marginal tax bracket, you’re better positioned to guide your tax planning. The higher your tax bracket, the greater the potential payoff when you manage your tax deductions and plan accordingly.

Additionally, don’t overlook what you can do in the current tax year. Talk with your tax advisor about what planning opportunities and tax reduction strategies might be available to you now, while taxes are at the front of your mind.

As you plan, you may also want to discuss “bunching deductions,” asset location (allocating your assets among investments that are taxed differently), donating appreciated securities and maxing out pre-tax contributions to retirement accounts, suggest financial planners.

If you’re self-employed or own a business with employees, starting a retirement plan also may be well-advised.

The bottom line is that planning ahead and making changes to your withholding now can help you avoid the pitfalls of overpaying.  As in all financial tax planning matters, we encourage you to schedule a call or meet with one of our expert advisors to help you review your options and make decisions that best fit your estate and tax planning needs.


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