Reflections on the 2023 tax season

First, the big wins.

One couple trying professional preparation for the first time because they thought they owed, and didn’t understand why. While prepareing their return, I was able to explain to them what had “gone wrong” with their attempt at self-preparation, which is entirely routine — do tax work all day every day and many common issues are easy. They didn’t owe, but had a modest refund for 2022. For these taxpayers, the real reward was the error I found on their self-prepared 2021 return. They’d overpaid their taxes by more than $3,000. When you engage the Wealth Geek to prepare your tax return for the first time, a comprehensive review of your prior 2 year’s returns is included. What might I find for you?

Next was a more complex issue to resolve, but also began with the prior year return. This taxpayer’s withholdings and income were very similar year over year, but the prior year’s return had resulted in a refund, and this year’s had a substantial balance. Turns out, in this taxpayer’s state, child credits are eliminated at $150,000 of income, and this taxpayer had earned a few hundred more dollars more than that for the first time. What a nasty shock to owe thousands! The Wealth Geek was able to come to the rescue, by suggesting a spousal IRA. Understand, most tax savings requires acting during the tax year, so discussing changes in your situation with a tax professional can ensure you understand what to expect when you file well before December 31st, so you can implement strategies as soon as you need them. I love to say, “we can fix this for next year”, but I’d rather help you get it right the first time with proper tax planning.

And now for the biggest problem of the year — inadequate witholding!

Confusion over the difference between a tax return and a tax refund is one of the most common confusions in tax. Your annual filing of a tax return is a reporting of all of your worldwide income, and calculation of your total tax for the year. Then, the amounts you have paid in tax for the year, from withholding, estimated payments and any tax credits are added together and subtracted from your total tax. If that number is positive, you owe a balance. If it is negative, you are owed a refund. If your friend, cousin, or barber got a bigger refund than you did — they either paid more tax or qualified for additional credits, usually the former. Which means they loaned money to the government, and didn’t earn any interest. Doesn’t sound so great when you understand why it happens, does it?

The old claiming of a number of exemptions hasn’t been used since 2018, but many of you haven’t filled out a W4 in that period, because you’ve been at the same job. But you can fill out a new W4 with your employer anytime, and should, anytime there are significant changes in your tax situation. If you have a baby, get married or divorced, or launch an adult child, it is time to review your W4 and make adjustments. If you got a large raise or started a side hustle, you need to review your W4 to see if you need to make adjustments. If you get bonuses or stock incentives, you may want to make a one time payment, or adjust your W4.

When you have wrap around service with the Wealth Geek, we’ll check in with you mid year or quarterly, to ensure that you have adequate withholding and/or estimated payments so there are no large bills when you file your tax return.