Paying more in taxes than necessary is a common issue that often goes unnoticed. Many people celebrate when they receive a large tax refund, seeing it as a win, but it actually means they've been overpaying throughout the year. The average tax refund for the most recent season was $3,138, which is essentially an interest-free loan to the government. Adjusting your withholdings can keep more money in your paycheck all year long rather than waiting for a hefty refund at tax time.
Selecting the correct filing status is another area where people pay more than they should, especially single parents who qualify as 'head of household' but mistakenly file as 'single'. The difference in the standard deduction between these statuses can be significant, resulting in lower taxable income and a reduced overall tax bill. For instance, a single mom earning $60,000 would receive a much higher deduction and pay almost $1,400 less in taxes if she files as head of household rather than single.
Investment decisions also play a big role. Many investors sell assets without understanding the tax implications or fail to practice strategies like tax-loss harvesting, which can offset gains and reduce taxable income. Additionally, periods of unemployment or job changes can present an opportunity to do a Roth conversion, paying taxes now at potentially lower rates and avoiding higher taxes in retirement.
Tax-advantaged accounts are often underutilized. Some individuals begin investing through taxable brokerage accounts without first maximizing contributions to retirement accounts like IRAs or 401(k)s, which provide tax benefits. Prioritizing these accounts not only builds savings but can also lower current tax liability.
Business owners and side hustlers frequently leave money on the table by not tracking business expenses or making use of all possible deductions. Expenses such as part of a cell phone bill, subscriptions, mileage, and home office costs could be deductible if used for business purposes, and contributing to a SEP IRA or Solo 401(k) is another way to reduce taxable income while saving for retirement.
Finally, going it alone during tax time can be costly. Even those with a strong understanding of finances benefit from working with a knowledgeable tax professional, especially when life gets complicated—running a business, investing, or experiencing major life changes. The right tax advisor understands unique situations and helps uncover opportunities for savings that might otherwise be missed.
Paying only what you owe—and not a penny more—keeps your money working for you. Proactive tax strategy is a key part of strong financial planning, freeing up additional funds for your goals and your future.