Financial Insights

Which is Better on Tax Day, a Refund or Owing Money?

With April upon us, this marks not just the beginning of longer sunny days or warmer weather, but the final few weeks for folks to file their taxes before April 15th (or choose to delay if an extension is appropriate). For those existing clients who are proactive and chose to file early, we’re already reviewing 2023 completed tax returns and updating tax projections for the upcoming year. We’ve observed that it’s an even split between folks receiving a refund or having to owe money at the Federal and/or State level, which leads us to the crux of our commentary. Which is better – owing money or receiving a refund?

There’s no right or wrong answer and the favorite Wealth Advisor response is, “it depends”on each individual circumstances. Some folks may view a refund as a forced way of savings each year while others view a refund as a 0% interest loan to the government. Those choosing to receive a refund may have been previously burned in a prior year by poor tax planning or a misunderstanding with their W-2 or 1099 withholdings/tax payments. If you’ve had to write a large check to the IRS in the past, it’s understandable that you don’t want to be put in that painful situation again.

It is easy for everyone to get caught up in daily headlines from various media outlets as we’re inundated by technology and the AI craze. Constant alerts on your phone, emails and on TV highlighting red hot inflation, the threat of war, divisive politics, an upcoming Presidential election, indictments, etc.  The majority of the time, it’s clickbait designed to pique your curiosity and encourage you to further explore something that you have no control over.

On the contrary, income taxes are an aspect of financial planning you can thoughtfully manage over a lifetime which we can review with you here at ACM.

Tax planning begins with transparency and by being proactive.  You should review your tax return every year to understand your current gross/total/adjusted and taxable income, withholdings, deductions and credits. Once you’ve done this, then review all your sources of projected income for the upcoming year, existing or expected tax withholding amounts, and deductions and credits so that you can proactively plan for the upcoming tax year.

Instead of hoping for the best when you self-file or work with your CPA, you’ll feel more in control if you understand the tax implications of an event before it happens. I’ve learned from personal & professional experience it is cheaper to learn from other’s mistakes. The above is a process you should repeat every year.

We’re here to help. Income taxes are a complicated area for most of us as the IRS and individual state income tax codes are constantly changing.  At ACM, we look to be proactive and communicate how each IRS or tax code change may affect your individual situation. For instance, recent changes were made to RMD ages, as well as annual contribution amounts into retirement plans.Most folks don’t realize taxes are your largest expense over your lifetime and it is the small actions added up over time which could save you thousands each year or hundreds of thousands over your lifetime.

Again, individual investors cannot control who invades what country and/or when the stock market goes up and down, but we can control our annual and lifetime tax planning strategies with effort. Depending on the situation, it doesn’t have to be complex but keeping it simple and doing the small things right over time.

To answer the first question, which is better owing money or receiving a refund, my answer is simple. Neither. What is more important is to know what to expect so that when you file your taxes each Spring, you don’t have to be holding your breath and wishing for the best.

If you have any questions, please reach out to your ACM Wealth Advisor.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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