RTS #014 – Getting a refund doesn’t mean you are winning

For too many taxpayers, taxes are a once-a-year consideration. As a result, most taxpayers are intimately familiar with what happened at tax filing time; “Did I get a refund or make a payment”. While it can be exciting to get a refund, and it hurts to owe the IRS in April, that is the wrong number to be focused on. Imagine going to the grocery store and having your total come to $287. If you hand the cashier $1,000, you would never brag to your friends about the $713 refund they gave you back. The $713 refund tells you nothing about whether you got a good deal on what you actually received for the $287 you spent. The same thing applies to taxes.

We all intuitively know that when it comes to the grocery store, but for some reason, too few people apply this same logic to their tax returns. Getting a refund or making a payment is only an indication of how well you anticipated how much you would owe for the year; it tells us nothing about whether there is an opportunity to pay less through proactive tax planning. The more important number to know and focus on is line 24 of IRS 1040, this is the amount of a taxpayer’s hard-earned money the IRS kept for the year: their total tax. That is the number we want to bring down over time through proactive tax planning.

While lifetime tax minimization is the primary goal, reducing the pain and stress, and tax time is also a great way to add value to clients. Each year as the RTS team reviews draft tax returns with our clients, we ask about the amount of their refund or payment and if they would like us to help them adjust it. We ask about it during filing season, but in the fall (a.k.a; right now!) is a great time to check in and make sure something got done about it.

What can you do about it?

Especially for clients who chronically complain about the result of their tax return or regular pay underpayment penalties, do something now to help change the outcome this year. For clients who are still working, this might include getting a year-to-date pay stub to see where they are at on their tax withholdings. For retired clients, this should include checking whether taxes are being withheld from their social security and if the right amount is being withheld from their retirement plan contributions.

Yes, software can make this easier, but if you can get the data and have access to Excel, you can at least get a rough idea that will help in the majority of cases. Most taxpayers aren’t under the impression that they won’t pay taxes; they just hate being surprised. So even being able to tell a client in September or October that they might owe taxes come tax time can be a win.

Happy Tax Planning!

P.S. This month, in place of an RTS Member’s webinar, we will be live streaming our first annual Tax Planning Summit. All existing RTS members can join the live stream for free, but we do ask that you register so we know who to provide the link to when everything kicks off later this month. You can register here; a limited number of in-person tickets are also still available, but all in-person tickets must be purchased before September 15th.

About The Newsletter

The tax code is 80,000+ pages and Google has 875,000,000 results when you search “Tax Planning”, so each week we are going to help you wade through all of that noise and get to the Relevant Tax Stuff.