Are You Overpaying Income Taxes?

Each year, as part of our tax planning process, we find that many of our new clients have been overpaying their income taxes.

The actual overpayments can be significant and, in most cases, entirely avoidable.

Below are the top 7 most common mistakes that can cost you thousands in taxes.

1.) Entered Information Incorrectly

This is one of the most common issues for those who self-prepare their tax returns. 

Depending on the complexity of your tax situation, there is always a risk of entering at least some information incorrectly. 

If you work with a larger CPA firm, please realize that a lot of the data entry is usually done by entry-level staff or even outsourced to foreign countries.

We’ve seen some tax returns released with misspelled names, missed zeros, and other easily recognizable issues.

2.) Forgot to Harvest and/or Report Investment Losses

Harvested investment losses can be used to offset your capital gains in the current or future years.

Even in positive market years such as 2023 and 2024, there is always a possibility that some of your investments underperformed.

You need to be proactive with your tax-loss harvesting strategy and preferably not wait until the end of the year to implement it.

3.) Neglected to Make Full 401(k) Contribution

Many people set their 401(k) contribution as a percentage of their income.

The problem is they forget to periodically adjust this percentage as their income and/or goals change. 

As a result, they undercontribute for many years. To give you an idea, each $1,000 in undercontributed 401(k) funds can cost you $300 in tax overpayment.

4.) Self-Employed: Neglected to Open a Solo 401(k)

This is one of the most common mistakes for self-employed people with above-average income.

You can contribute up to $69,000 into your solo 401(k) ($76,500 for those over age 50).

This can save you thousands in taxes each year.

5.) Forgot to Pay Estimated Taxes

In some cases, people simply forget to make the estimated tax payments.

It can cost you thousands in penalties depending on your income level.

We advocate for automatic tax payments and/or withholdings to keep it as simple as possible for our clients.

6.) Forgot to Make IRA Contribution for Yourself and/or Spouse

As long as you have earned income, you are likely qualified for IRA contributions.

They may or may not be deductible, but it’s worth checking.

Also, you can contribute to your spouse's IRA based on your joint income even if they don’t have any earned income of their own.

7.) Failed to Adjust Withholdings

This is one of the most common issues when people get married, promoted, or receive significant bonuses.

Just like with estimated taxes, this can potentially lead to penalties and additional unpleasant payments to the IRS when you file your taxes. 

What’s the moral of the story?

Double-check your tax return and stay on top of your taxes.

Ask your financial planner to take a look at your tax return. It won’t hurt to have a second set of eyes.