Your 2023 filing can be a perfect tool in guiding your future tax-saving strategies

You can use your annual tax filing as a valuable feedback loop for tax-saving strategies. Many Americans are missing opportunities to learn more about their tax situation. These insights can help you build strategies to save on taxes throughout your lifetime — not just year to year.

Differences in refunds vs. owed taxes: What does it mean if you received money back this year from your tax return? You may have heard this is like giving Uncle Sam an interest-free loan. This has truth to it, but you can gain many other insights from your tax return.

To be clear, if you overpaid (received a large tax refund) or underpaid (owed taxes), you should consider adjusting your withholding and estimated tax payments. Using your money throughout the year is typically better than locking it up with the IRS until tax season.

However, the real goal in tax planning is to reduce your total tax bill using tools and strategies allowed by law. You want to pay all the taxes you owe, but you’re not trying to overpay either.

Effective tax rate vs. marginal tax rate: Another thing to consider is your effective tax rate. The effective tax rate is the total amount of tax paid divided by your income. It differs from your marginal tax rates, which are commonly called tax brackets.

You pay less tax on the first dollar earned and more on the last dollar earned. In other words, only income over the limit for each tax bracket gets taxed at the higher rates. Once you calculate your effective tax rate, this shows your tax rate across all income.

So, if you have some income in the highest tax brackets, most of your income may still be taxed at the lower tax rates. Even though it may seem you’re paying more taxes, your effective tax rate (based on total taxes paid) may be lower once you factor in all deductions, credits, etc.

Analyzing tax return insights: You can find ways to save on taxes by carefully examining your income sources for the year. It may be possible to shift some income or employ tax-saving strategies to lower your total tax bill. Sometimes, you can “front load” taxes through strategies like Roth Conversions or tax-gain harvesting.

Implementing tax strategies for future: Your tax liabilities will change over time. Reducing your taxable income to help qualify for student aid might be more beneficial in earlier years. In later years, you may have a dip in income between jobs to harvest some investment gains at lower rates.

However, when we zoom out to look at your total taxable lifetime, we want to use the full range of tools available. For example, if you normally give to charity but don’t normally itemize deductions, a bunching strategy or gifting appreciated stock may be useful. The result is the same in both cases, but you pay less in taxes.

The ultimate goal is to find ways to optimize taxes for your lifestyle – not the other way around.

Maximize tax-advantaged accounts: You’ll want to ensure you’ve properly leveraged tax-advantaged accounts like retirement, college savings or even donor-advised funds. These accounts can help you qualify for tax deductions or shift income to years that are most helpful to you, allowing you to achieve your financial goals more efficiently.

Start planning now: Each tax return is just one data point among many other key factors. To reduce your tax liabilities over your lifetime — not just one year — it’s best to zoom out and look at your whole financial picture. Don’t wait. Start planning and taking action to save on taxes today.

Clint Haynes, CFP is a member of the Financial Planning Association of Greater Kansas City. He is also the Founder and President of NextGen Wealth in Lee’s Summit, Missouri.