Here are three tax-planning missteps I often see clients make—and how you can avoid them in your own financial life.
1. Having too much tax withheld from your paycheck: According to IRS data, nearly 75% of Americans received tax refunds in 2019, with the average refund totaling just over $3,000. Many taxpayers appreciate receiving a windfall each spring, but having too much tax withheld from your paychecks is like giving the U.S. government an interest-free loan until you receive your refund. In a perfect world, your withholding amounts would equal your tax liability for the year, resulting in neither a tax bill nor a refund. It’s hard to get it exactly right, but the IRS Tax Withholding Estimator (irs.gov/w4app) can help calculate whether you should adjust your withholding.
2. Letting taxes eat into your returns: A dollar saved from taxes isn’t just a dollar earned—it’s a dollar that can continue to potentially grow over time thanks to the power of compounding. That’s why you should be especially careful when it comes to your taxable brokerage and savings accounts, because over time taxes can have a huge effect on your after-tax returns.
3. Going it alone: You may be capable of mastering the tax code on your own, but do you really want to? After all, there’s a world full of experts out there who can help ensure you pay your fair share but not a penny more—and who may even be able to help save you a bit of money in the process.
Donald Daigle is an Independent Branch Leader and Financial Consultant at Charles Schwab with over 29 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab. Charles Schwab & Co., Inc., Member SIPC.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
