Now that tax season is over, you’re probably tempted to not think about taxes again until next year. That could be a costly mistake. Asking the right questions throughout the year could help you financially come next tax season. In the long run, this could have a substantial impact on your wealth.
Here are six common ways taxpayers get off track and the questions they should ask themselves during the tax year.
Taxpayers often default to “same as last
year” thinking. But tax outcomes depend on variables that shift constantly, like income, markets, tax laws, interest rates, and personal circumstances.
Consider these examples:
1. Home office deduction: The calculation method can vary. One approach is based on square footage, but allocating based on number of rooms might be better. The method chosen last year may not be optimal this year.
2. Vehicle expenses: The choice between standard mileage and actual expenses can change if driving patterns or vehicle costs change.
3. Standard versus itemized deduction: This should be calculated every year. Taxpayers can — and should — choose the better option annually. For example, a year with significant charitable giving, mortgage interest, or taxes paid may favor itemizing, while another year may not.
The question to ask is: “Given my situation this year, what approach produces the best tax outcome for me?”
By the time a return is prepared, most tax outcomes are already decided. Tax efficiency is not a once-a-year exercise; it’s an ongoing discipline.
Key areas where year-round planning matters:
4. Retirement contributions –Rothversus traditional: Choosing between a Roth 401(k) and a traditional 401(k) is fundamentally a tax decision: Should you pay taxes now (Roth), or defer taxes (traditional)? The right answer depends on both current and expected future tax rates.
5. Charitable-giving strategy: The tax benefit depends heavily on how you give. Donating appreciated securities instead of cash can eliminate capital gains tax. Bunching contributions into a single year can increase the likelihood of itemizing—at least every other year.
6. Bonus and supplemental income withholding: Bonuses are often withheld at flat rates that may not reflect actual tax liability. This can create either cash flow drag or underpayment risk.
7. Investment decisions: Realizing gains, harvesting losses, and holding periods all affect after-tax returns.
The question to ask is: “What decisions throughout the year will improve my after-tax outcome?”
Many taxpayers still equate a tax refund with success. In reality, a refund simply means you paid more than you should have, and that you gave an interest-free loan to the government. That capital could have been invested or deployed elsewhere during the year.
The question to ask is: “Am I aligning my tax payments with my actual liability?”
Efficient cash flow is part of overall good tax planning.
Tax considerations should inform decisions, not drive them. A deduction reduces the cost of an expense, but it doesn’t eliminate it. Spending $1,000 to save $300 in taxes still results in a net outflow of $700.
This is particularly relevant for charitable contributions and investment decisions made for tax reasons rather than economic merit.
The question to ask is: “Does this decision make sense on its own, before considering taxes?”
Tax software has improved accessibility, but it hasn’t replaced expertise.
For taxpayers, complexity often includes:
8. Capital gains and losses coordination
9. Multi-account asset location
10. Timing decisions across tax years
11. Interactions between income, deductions, and credits
Errors or missed opportunities can be subtle but costly over time.
The question to ask is: “What is the long-term cost of suboptimal tax decisions?”
Some of the most valuable tax strategies begin with simple questions, many of which initially seem unlikely.
For example, can I deduct my pet expenses? Usually no. But in specific cases, such as a legitimate service animal, these expenses may qualify as medical deductions.
The key is not whether a question leads to a “yes,” but whether it uncovers possibilities or clarifies boundaries.
The question to ask is: “Is there any situation where this could apply to me?”
For taxpayers, tax planning is not about chasing deductions or minimizing a single year’s bill. It’s about maximizing after-tax wealth over time.
The most valuable questions:
12. Challenge assumptions
13. Focus on strategy, not just transactions
14. Integrate taxes into broader financial decisions
A simple shift from “What can I write off?” to “How should I plan?” can materially improve long-term outcomes. And that’s where thoughtful tax planning delivers its greatest value.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance.
Sheryl Rowling, CPA, is an editorial director, financial adviser for Morningstar.
Related Links:
5 Smart Ways to Use Your Tax Refund: https://www.morningstar.com/personal-finance/5-smart-ways-use-your-tax-refund
3 Big Questions to Ask Your Aging Parents: https://www.morningstar.com/personal-finance/3-big-questions-ask-your-aging-parents
5 Money Questions Every Couple Should Ask: https://www.morningstar.com/personal-finance/5-money-questions-every-couple-should-askespecially-before-valentines-day
