Tax season has a way of making people feel overwhelmed and behind. There are forms to gather, deadlines to meet, and anxiety that persists about whether you have done everything right. By the time April arrives, most people simply want it to be over.
However, your tax return is not just a form – it is a financial report card that highlights your income, expenses, and opportunities for improvement. Every year, we encourage our clients to send us a copy of their tax returns. This enables us to conduct a comprehensive review and highlight areas of focus for the following year. Below are some of the key discussion points we emphasize with clients.
Is it “good” or “bad” to have a refund or owe taxes?
Most people feel positive when they receive a large refund from the IRS. However, receiving a refund simply means that you provided the federal government with an interest-free loan. Therefore, owing taxes is not necessarily a bad thing, despite the inherently negative association with the word “owe.” Ideally, we encourage our clients to neither owe nor receive a refund for a significant dollar amount through accurate tax planning with their CPA.
How do you accurately calculate your anticipated tax burden? Your CPA will need to know several factors, including your marital status, number of dependents, income, retirement and HSA contributions, anticipated annual dividends and interest, capital gains, and so on. Your employer may not automatically withhold the appropriate percentage for your situation. A common cause of this discrepancy is if one spouse earns significantly more than the other, or if there has been a sale of a significant asset, for example. Your CPA can help determine the appropriate percentage to communicate with your employer or to set aside for estimated taxes.
How do total tax estimates differ from penalty avoidance estimates?
A common misunderstanding that we observe between clients and their CPAs relates to a tax estimate that is intended to avoid tax penalties only, rather than an estimate that is intended to pay the full amount anticipated to be owed. To avoid tax penalties, clients must generally pay at least 90% of the current year’s tax liability or 100% of the prior year’s tax (110% if AGI exceeds $150,000) through withholdings or estimated payments. If the prior year was a relatively lower-income year, taxpayers can avoid penalties by simply paying at least 110% of the prior year’s tax amount. However, this amount may not necessarily cover the full amount anticipated to be owed. At the filing deadline, taxpayers must pay any remaining balance due. This can often lead to clients making an outsized payment in April to cover both the prior year’s taxes and the Q1 estimate for the current year. We encourage clients to understand both the (1) penalty avoidance number and (2) the number required to satisfy the total anticipated liability. We then work with clients to understand their cash flow needs to set aside the appropriate amount. Clear communication between our team and clients’ CPAs further supports this goal.
Am I maximizing my opportunities on my retirement contributions?
The most efficient way to save on taxes today is to maximize your retirement contributions. For most W-2 employees, this equates to maximizing 401(k) contributions. For 2026, the maximum employee contribution is $24,500. This number adjusts annually. The maximum employee + employer contribution is $72,000 for 2026. Employer contributions do not “count against” the $24,500 maximum employee number. For employees age 50 and older, there is an $8,000 “catch-up” contribution available. Additionally, in accordance with the SECURE Act 2.0, there is now a new “super catch-up” contribution for employees ages 60 – 63 as of 12/31 of the tax year. This super catch-up is $11,250 for 2026.
Self-employed individuals have several retirement plan options available. Entrepreneurs should consider factors, including the number of employees that would participate, cash flow available for contributions, and the administrative hassle and fees associated with forming and operating a plan. We encourage discussions regarding the nuances of these plans to help clients select the plan that is the right fit for their businesses.
How does my investment activity impact my taxes?
There are two general buckets of investment accounts: (1) taxable brokerage accounts, and (2) retirement accounts. Neither trading activity nor dividends and interest earned within retirement accounts generates a tax liability. Instead, only distributions from pre-tax retirement accounts drive a tax impact.
On the other hand, taxable brokerage accounts generate tax liabilities through dividends and interest earned and capital gains realized through trading activity, regardless of whether any distributions were taken from the account. How can we minimize these tax drivers within a brokerage account?
- Target long-term gains over short-term gains when trading – While short-term gains are taxed at the ordinary income rate (generally higher), long-term gains are only taxed at the capital gains rate (generally lower). Therefore, monitoring which positions have short versus long-term gains is important.
- Prioritize tax loss harvesting – During periods of downside volatility, it can be strategic to sell a position with a loss and immediately buy a comparable position. This allows investors to lock in a tax loss to offset future gains while still participating in the market with a substantially similar position.
- Utilize tax-free bonds and money market funds where applicable – For investors in higher tax brackets, utilizing tax-free municipal bonds and money market funds can be strategic.
- Target qualified dividends over ordinary dividends – Qualified dividends are dividends paid on a stock held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Qualified dividends are taxed at the (generally lower) capital gains rate. Ordinary dividends are any dividends paid that do not meet the qualified requirements and are taxed at the (generally higher) ordinary income rate.
While stock and fund selection are often top of mind for investors, appropriate tax management within brokerage accounts is also of high importance.
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Final Thoughts
Your tax return provides valuable information regarding your financial performance today and areas to improve going forward. As advisors, we encourage conversations with your CPA to create a collaborative approach to your planning. We are open to joining meetings with your CPA or to communicating with them directly. We wish everyone a smooth and productive tax season, and we are ready to use what we will learn from the tax return as a starting point for next year.