Answer These 3 Questions Before You File Your Taxes

Every single year when you get your taxes done, you have to ask yourself these three questions. 

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Every year my firm helps thousands of people file their taxes, and over the years the ones who have a good result do something different than the ones who have a bad result. With the help of their Certified Financial Planner™, the ones that have a good result answer three important questions every year before they file their return. I’m going to go through those questions with you today so you can begin taking this wise approach as well.

So your return is done, but before you sign that efile and submit it, the first question you need to ask is “Do I understand why I got the result that I got?” Taxes are confusing, in fact, I would argue that the US tax system is the most complicated tax system on the planet. Still, it’s crucial to pause and take a moment to look at your return and say "yes, that was the amount of income I made", "yes, those are the correct deductions", "yes, I got every deduction and credit that I’m eligible for", "that’s how much I had withheld for taxes and therefore I understand why I am getting that size refund or why I still owe this amount."

The great news is that getting this little bit of clarity doesn’t take much time and you don’t need to be a tax expert to do it. For our clients, we just point out what we’re showing as income, here’s what we’re showing are your deductions, that means you’re in this tax bracket, with this tax, and here is what you had withheld. 

My favorite way to help answer this question is to simply just compare your return this year side by side to your tax return last year. This makes it very easy to spot inconsistency and potential mistakes.

9 times out of 10 everything is correct and you can move on. But in those 1 out of 10 situations, this brief review reveals, "oh, I thought I was supposed to get a credit for my college expenses", or "wait, is that the right amount of withholdings" and you can catch something that could have easily been missed.

The online tax preparation services are notorious for missing these things, and people rarely take a moment to review their return before they sign the efile. We find small mistakes every single year from the online tax prep services that cost people thousands, so whether you do your return yourself online or have someone else do it, ask yourself "do I understand why I got the result I got" before you sign your return.

Alright, now that that geeky question is out of the way, the second question you need to ask is “Is there anything I should do right now to improve my tax return before I file it?”

Once you understand why your return turned out the way it did, you now have the context to evaluate whether you should implement any number of tax planning strategies. And since many of these tax planning strategies can be done up until April 15^th, you have an opportunity to look at your return and capture some of these opportunities before you finalize and file your return.

Should you contribute a little more to your HSA, should you fund an IRA or a Roth, or a backdoor Roth? What opportunities exist for you to improve your tax return before you file it, and which of those ideas should you jump on?

Obviously online tax software fails miserably here, it never offers any ideas on how you can improve your tax picture. In truth, many tax preparers don’t help their clients with this either, so be sure you’re working with a Certified Financial Planner™ as they are the ones who should point out what opportunities exist and guide you on which ones to implement.

So, now you know why your return turned out the way it did, and you’ve reviewed and implemented all of the best tax planning opportunities to improve your tax return. Lastly, you now need to ask yourself “what changes are taking place in my life this upcoming year that will impact my taxes a year from now, and are there any new tax planning strategies I need to consider.”

A job change, the birth of a child, a child turning age 17, going to college, graduating, the building campaign at church, moving, side income. All sorts of things impact your taxes and can make one year look very different from the next.

To avoid surprises, and also to capture the best tax opportunities, ask yourself what might be changing and then your Certified Financial Planner™ can help discuss what the potential impact is. Last year I had a client with twins turn age 17. This caused a $3,000 reduction in their tax credits and would have been an awful surprise when they filed their return. But because we reviewed what would be changing ahead of time, we were already aware that this was going to occur and changed their tax strategy in advance to avoid the surprise.

In light of those changes, should you still contribute pre-tax or should you shift to a Roth, should you do a Roth conversion, should you donate more, or less, or change your withholdings? Those questions and more help you ensure you’re using the right tax strategy early in the year while it can still make a big difference throughout the upcoming year.

There you have it, it takes just a moment, but before you file your taxes, you have to answer those 3 questions. When you do, you’ll have clarity and confidence with your taxes, and you’ll be setting yourself up to avoid surprises and pay the least amount of tax over your lifetime, which are my two goals every year with my taxes.

Alright, until next time! My name is Mike Bernard, now go out and take your next wise step in your financial life.