Lessons Learned from Your Tax Return

The annual tax return ritual is not something people look forward to. In fact, I would argue that unless you anticipate a tax refund, there are very few people who enjoy the process. It can be time-consuming, expensive, and financially painful if you owe the government large amounts of money. While I share in this sentiment, the tax return can provide valuable information to someone not constantly in tune with their financial situation. Here are a few lessons you can take away from your tax return to make the process a little less painful moving forward.

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Maximize Tax-Deferred Opportunities

I often ask potential clients what they contribute annually to their company 401(k)’s and I am always surprised to find most do not know the answer. The 401(k) deferral is important because traditional contributions help save for retirement and are also deductible against your taxes. For 2021, the maximum deferral amount was $19,500 for those under 50 years old, with an additional $6,500 catch-up for those over 50 years old. In 2022, the maximum deferral amount increased to $20,500 for those under 50, with an additional $6,500 for those over 50 years old. So, check your 2021 tax return to verify your 401(k) deferral amount and ensure, if you have the capacity, you are taking advantage of this opportunity to save for retirement and become more tax efficient.

Itemized Deductions vs. Standard Deductions

Another key focus area of the tax return is whether you itemize your tax deductions or use the standard deduction. Why so important? I recently had a case where a new client, married and over the age of 72, assumed their charitable giving was tax-deductible at the federal level when it was not. Why? This person’s itemized deductions totaled $20,000 when adding the $10,000 deductible limit for state and local taxes, the $10,000 charitable gift, and the fact they had no other deductions related to home mortgage interest or healthcare. With the 2021 standard deduction totaling $25,100 for a married couple filing jointly, they used the higher standard deduction amount, which eliminated any tax benefit from their gift! In hindsight, if they knew they were utilizing the standard deduction, the use of alternative gifting strategies such as Qualified Charitable Deductions (QCDs), or the front-loading of donations to a Donor Advised Fund, would have saved them thousands of dollars.

Tax Efficiency of Investments

The tax efficiency of any investment strategy is a key component in determining its overall effectiveness. While tax documents issued by custodians (like Charles Schwab, etc.) detail this information, people often ignore these documents and simply pass them on to accountants for processing. Whether you engage a financial advisor or manage your own assets, pay particular attention to the utilization of investment products, such as actively managed mutual funds. These can be grossly inefficient through the distribution of taxable capital gains even if the investor executed no sell orders. This is due to the ownership structure of mutual funds and can lead to investors paying a lot more tax than necessary. If this is you, look at the realized capital gains section on your tax return to determine if a change in your investment strategy is needed.

Before you make changes or complete your tax returns, be sure to consult with a financial planner to make sure the process is as pain-free as possible.


certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.


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