Leyder "Aiden" Murillo, MBA
Updated: Surprised With This Year’s Taxes? Review These 5 Things + Free Sample Financial Plan
Updated: Mar 7
The link to a FREE sample of a single-page financial plan that we use with our clients is at the end of the article!
When tax season comes around, it's common to be surprised by the amount you owe or the refund you're receiving. If you've experienced this before, it might be time to review your financial plan to ensure you take advantage of all possible tax benefits. In this blog post, we'll discuss five things you should review to help you prepare for taxes and potentially avoid any unwelcome surprises.
Explanation of Why Taxes May be Surprising
One reason taxes can be surprising is due to changes in tax law. The tax code is complex, and new regulations that affect your taxes unexpectedly can be enacted. Changes in your income, deductions, and investments can also impact your tax liability. Failing to review and adjust your financial plan accordingly can lead to an unwelcome surprise come tax time.
Importance of Reviewing Financial Plan
Reviewing your financial plan regularly is crucial to ensure you're making the most of all available tax benefits. By examining your income, deductions, investments, retirement contributions, and state and local taxes, you can identify areas where you can save money on taxes.
Additionally, reviewing your financial plan can help you make informed decisions, such as how much to contribute to your retirement accounts and how much to save for a rainy day. Finally, reviewing your financial plan can help you make the most of your money, both now and in the future.
*A financial plan can run into the 100s of pages in length. We simplify that for our clients. Check out our sample one-page financial plan summary that we provide clients.*
1. Check Your Income
Your income is a critical factor in determining your tax liability, so it's essential to review it carefully. Here are three things you should consider when reviewing your income:
Sources of Income
Start by identifying all sources of income you received during the year, including wages, tips, and bonuses. This may include income from investments, rental properties, and freelance work.
Review of W-2 and 1099 Forms
Your employer should provide you with a W-2 form detailing your annual earnings and withholdings. If you received income as an independent contractor, you should receive a 1099 form. Make sure to review these forms carefully to ensure accuracy. If you notice any errors, contact the appropriate party to correct them.
Additional Sources of Income
Be sure to include any additional sources of income you received during the year, such as interest or dividends from investments. While these may not be your primary source of income, they can still impact your tax liability.
By carefully reviewing your income sources, you can ensure that you accurately report your income and avoid any tax-related surprises.
2. Review Deductions
Deductions can significantly impact your tax liability, so reviewing them carefully is essential. Here are three things you should consider when reviewing your deductions:
Types of Deductions
There are two types of deductions: above-the-line and below-the-line. Above-the-line deductions, also known as adjustments to income, are deducted before your adjusted gross income is calculated. Some standard above-the-line deductions include contributions to a traditional IRA or Health Savings Account (HSA). Below-the-line deductions, also known as itemized deductions, are deducted after your adjusted gross income is calculated. Some standard below-the-line deductions include mortgage interest, charitable contributions, and state and local taxes.
Changes to Tax Code
The tax code is constantly changing, so it's crucial to stay up-to-date on any changes that may impact your deductions. For example, the Tax Cuts and Jobs Act of 2017 increased the standard deduction and eliminated or limited some itemized deductions. Therefore, reviewing these changes and their impact on your tax liability is essential.
Itemized vs. Standard Deductions
When reviewing your deductions, you'll need to decide whether to take the standard or itemize your deductions. The standard deduction is a flat amount that reduces your taxable income, while itemizing allows you to deduct specific expenses, such as mortgage interest, charitable contributions, and medical expenses. Generally, you'll want to itemize if your itemized deductions are greater than the standard deduction.
By reviewing your deductions carefully, you can ensure that you're taking advantage of all available deductions and potentially reducing your tax liability.
3. Review Investments
Investments can impact your tax liability in several ways, so reviewing them carefully is essential. Here are three things you should consider when reviewing your investments:
Capital Gains and Losses
When you sell an investment, you may have a capital gain or loss, which is the difference between the purchase and sale prices. Short-term gains, which occur when you sell an investment you've held for one year or less, are taxed at your ordinary income tax rate. Long-term gains, which occur when you sell an investment you've held for more than one year, are taxed at a lower rate. Therefore, if you have capital losses, you can use them to offset capital gains and reduce your tax liability.
Impact on Taxes
Your investments may also impact your tax liability in other ways. For example, if you receive dividends or interest from your investments, this income is generally taxable. Additionally, you'll need to report the rental income and expenses on your tax return if you own a rental property.
Beware of Wash Sales
A wash sale occurs when you sell a security at a loss and then purchase the same or substantially similar security within 30 days of the sale. If you engage in a wash sale, you may be unable to deduct the loss on your tax return. To avoid a wash sale, wait at least 31 days before repurchasing the security.
By reviewing your investments carefully, you can ensure that you're taking advantage of all available tax benefits and potentially reducing your tax liability. However, it’s also important to be aware of potential pitfalls that could impact your taxes, such as wash sales.
4. Review Retirement Contributions
Retirement contributions can significantly impact your tax liability, so reviewing them carefully is essential. Here are three things you should consider when reviewing your retirement contributions:
Types of Retirement Accounts
There are several types of retirement accounts, each with its own tax benefits. For example, contributions to a traditional IRA are generally tax-deductible, while contributions to a Roth IRA are made with after-tax dollars but grow tax-free. In addition, employer-sponsored retirement plans, such as 401(k)s 403(b)s or 457 plans, may also offer tax benefits.
There are limits to how much you can contribute to retirement accounts each year. For example, in 2023, the maximum contribution to a 401(k) is $20,500, while the maximum contribution to a traditional or Roth IRA is $6,000 (or $7,000 if you're 50 or older). It's essential to be aware of these limits and ensure you're not overcontributing.
Your retirement contributions may also impact your tax liability in other ways. For example, if you contribute to a traditional IRA, your contributions may be tax-deductible, reducing your taxable income. However, you'll need to pay taxes on the money when you withdraw it in retirement. If you contribute to a Roth IRA, your contributions are made with after-tax dollars so that they won't reduce your taxable income. However, you can withdraw the money tax-free in retirement.
By reviewing your retirement contributions carefully, you can ensure that you're taking advantage of all available tax benefits and potentially reducing your tax liability. It's also essential to know each type of retirement account's contribution limits and tax implications.
5. Review State and Local Taxes
State and local taxes can impact your tax liability, so reviewing them carefully is essential. Here are three things you should consider when reviewing your state and local taxes:
State Income Tax Rates
Most states have an income tax, and the rates and brackets vary by state. Therefore, reviewing your state's income tax rates and brackets is essential to ensure that you're paying the correct amount of taxes. Additionally, if you earn income in multiple states, you may need to file a tax return in each state.
You'll need to pay property taxes if you own a home or other real estate. Property taxes are based on the property’s value, and the rates vary by location. Therefore, reviewing your property tax bill to ensure you're being charged the correct amount is essential. Additionally, you may be able to deduct property taxes on your federal tax return.
Most states also have a sales tax, which is a tax on goods and services. The rates vary by state; some states have additional local sales taxes. It's essential to be aware of the sales tax rates in your area and factor them into your budget.
By carefully reviewing your state and local taxes, you can ensure that you're paying the correct amount of taxes and potentially reduce your tax liability. Additionally, being aware of the various taxes you're paying can help you make informed decisions about your finances.
As tax season approaches, you must review your financial plan to ensure that you take advantage of all possible tax benefits. Here are three things to keep in mind as you prepare your taxes:
Recap of the Five Things to Review
When reviewing your financial plan, be sure to check your income sources, review your deductions, review your investments, review your retirement contributions, and review your state and local taxes. By carefully examining these areas, you can avoid any tax-related surprises and reduce your tax liability.
Importance of Seeking Professional Advice
While reviewing your financial plan can be helpful, seeking professional advice is also essential. A financial advisor or tax professional can help you identify areas where you can save money on taxes and make informed decisions about your finances. Additionally, tax laws are complex and constantly changing, so staying up-to-date on any changes that may impact your taxes is crucial.
Final Thoughts on Tax Planning
Tax planning is an integral part of financial planning, and reviewing your financial plan regularly can help you make the most of all available tax benefits. By carefully checking your income, deductions, investments, retirement contributions, and state and local taxes, you can reduce your tax liability and keep more of your hard-earned money. Remember, seeking professional advice and staying up-to-date on tax laws can help you make informed decisions about your finances.
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