01 May 2025 Taxes are (maybe) done – now what?

For those of us with 2024 taxes in the rearview mirror, now is a great time to think about your tax outcome and consider a few questions to set yourself up well for 2025. Perhaps you owed more than you planned, and had to dip into your savings to pay the bill. Or maybe you were pleasantly surprised by a larger than expected refund. Or, you “won” the tax game and were pretty darn close to paying in exactly what you owe.

People often have strong preferences about whether they prefer to receive a refund or owe when filing taxes. Refunds could be seen as a windfall, free spending money, or a savings boost. Or the anti-refund camp views it as an interest free loan to the government, preferring to keep control of funds as long as possible, either earning interest on savings or using funds in other ways throughout the year, before it comes time to send a payment to Uncle Sam.

Of course, both of these perspectives require discipline in our behavior when the money is in our hands. If we make a big payment at tax time, have we had the discipline in keeping funds in an interest bearing savings account throughout the year? Or was that money burning a hole in the pocket and spent on other wants or needs? Or in a riskier move, was the money invested elsewhere, and you counted on additional income to come in to pay the future tax bill? If we receive a refund, are we wise about how to allocate or spend the funds when the refund arrives? Money inherently is not free but often we view refunds as money we never had, therefore, we can spend it however we want. In reality, a refund was your income that you just didn’t see until it was transferred back to you!

So, here are some questions to help guide your reflections…

Are there any ways to reduce the friction in paying my tax liability?

• If you are working and had a big tax payment or large quarterly estimates, perhaps it is time to revisit your tax withholdings and pay more throughout the year from your paychecks. Quarterly payments are calculated to help you make your safe harbor amount, which is how much to pay via withholding and estimated taxes to avoid an underpayment penalty. You may still need to make quarterly payments depending on your overall tax picture, but maybe a lesser amount each quarter if you have more withheld from paychecks. Changes in income or family status may also warrant adjusting your withholdings.
• Or, if you have are self employed and/or have variable income, you might benefit from communicating with your CPA throughout the year to adjust your quarterly payments. The timing of estimated tax payments should correspond to when the income was earned, and a CPA can help you with that.
• If you are retired, you may have income from a variety of sources like Social Security, your IRA, a pension, or a brokerage account, You can have taxes withheld directly from your Social Security, pension, and your IRA. You may not need to from every source! But instead of paying quarterly taxes, you can reduce friction throughout the year by having it automatically withheld from the source. It could also be a combination of the two, where you have some withheld and pay smaller quarterly estimates.

What is the best way to use a refund?

• Are there any short-term goals that a refund would help you accomplish sooner? This looks different from person to person and ideally is answered within the context of your financial plan. A refund could help build your emergency fund, or increase it if it’s been a while since you reevaluated the amount. It could also help you make a larger planned purchase sooner than planned, or make improvements to your home to take care of your investment and allow you to enjoy your space. You could give in unexpected ways to people in your life or charities doing important work. If you have previously identified short-term goals, then you have a framework to help guide where to allocate funds.
• What about long-term goals? Does a refund allow you to increase your savings to either a brokerage account, HSA, or retirement account? Last year, my tax refund was almost an exact match for how much we intended to save into our HSA for the year, so we just immediately contributed the funds and checked that savings goal off our list.
• And maybe the answer is the fun one – to spend the refund on things or experiences to enjoy now! This isn’t inherently a wrong answer, as some financial articles may suggest, because what is right varies from person to person. Our goal is to be mindful and try to make that decision within the context of your financial plan. If the answer isn’t obvious at first, reach out. We are happy to talk through this decision with you.

How will this year look different from last year, if at all?

• We help clients pay attention to some elements of this question, like if you are approaching any milestone birthdays. RMDs could be in your near future, or you reach an age that allows you to save additional funds via catch-up contributions. Then there are changes to your income, like the addition of Social Security or a pension, or employment changes that impact the bottom line.
• Depending on how much your return may change from last year, we may suggest some changes or strategies to optimize your tax outcome. In lower income years, you may be able to realize capital gains at a lower tax rate, or convert some of your IRA to a Roth IRA. We also consider whether to save into pre-tax or Roth or taxable brokerage accounts, or a combination of all three. Spending time doing tax projections can help identify proactive adjustments.

Thankfully, you don’t have to navigate this alone. We would love to be listening ears as you consider these questions. If you filed an extension, or are using the disaster relief deadline extension for 2024, you likely don’t have the final picture of your 2024 return. That’s okay – you could still take time to reflect on these questions and see if there are any areas of your financial life you’d like to discuss.

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