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Is Your Tax Bill Larger Than You Expected?

Matthew Costigan, CFP®, CPA/PFS


I have yet to meet anyone who enjoys writing a check to the IRS, or for that matter, any tax authority. But many people filing their 2021 tax returns found themselves having to pull out their checkbooks and, unexpectedly, surrender another “pound of flesh” to the government.

What can you do to avoid the shock of a larger than expected tax bill? Tax planning is always time well spent. With the help of a tax professional, you can limit unhappy surprises and prevent unnecessary tax penalties and interest. Let’s review some planning steps you can take to be well prepared for next tax season:

Review tax withholdings. The reason most people owe more when filing a return is insufficient tax withholdings from IRA distributions, pension distributions, W-2 earnings, and other sources of income. Deciding how much to have withheld can be complicated and becomes more complicated with two working spouses. Keep in mind that federal taxes are progressive: as your income increases, you pay a higher marginal tax rate. If you receive bonus income, for example, the withholding is generally at a statutory rate of 24 percent. But if your personal marginal tax rate is 35 percent, you’ll owe more tax on that bonus. Ask your employer to increase your withholdings to avoid such surprises.

Review taxable capital gains. Equity markets performed well in 2021. If you sold some of your winners and realized gains, you likely incurred additional taxes. Look for some unrealized losses to offset realized gains, but be careful to avoid the wash-sale rule, which prohibits you from taking a loss if you buy back the investment, or something substantially the same, within 61 days of selling it.

Review available tax deductions before the end of the year. You can lower your tax bill by contributing more to your company retirement plan through payroll deferrals. Also, if you itemize your tax deductions, you can deduct charitable contributions. The increase in standard deductions a few years ago has fewer and fewer taxpayers itemizing. However, “bunching” contributions of cash or appreciated securities directly to charities or a donor-advised fund in a single tax year could produce additional tax deductions even if you take the standard deduction.

Review available tax deductions after the end of the year. You can attribute a contribution to your IRA to the prior tax year if you do so by April 15 of the current year. If you are self-employed, you can also make solo 401k and SEP-IRA contributions after the end of a year. If you have a high-deductible medical plan, you can make deductible contributions to a Health Savings Account for the prior year up to April 15 of the current year.

Owing additional taxes at the tax deadline is not entirely a bad thing. After all, you held on to your money longer than if you have given it to the government earlier. But working with your financial advisor to do tax planning for the coming year will prepare you for what to expect at tax time, eliminate the chance of an unhappy surprise, and could even save you a substantial amount of tax dollars.


The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

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