Last year, a new client and I were reviewing her expenses.
I pointed out that her largest expense (by far) was her Federal/State income tax liability at nearly $20,000 a year. In fact for many people, their largest lifetime expense is income taxes.
She looked at me quizzically and exclaimed “But I always get big refunds!”
I wanted to weep.
Generally when you get a refund, it is because you paid in more than you actually owe.
Most taxpayers pay their tax liability throughout the year in the form of tax withholdings.
Your employer withholds tax from your paycheck and sends it to the government during your working years. In retirement tax can be withheld from your pension, Social Security, and IRA distribution payments.
It’s easy to lose track of your total tax liability when taxes are paid through withholdings. You don’t ‘see’ the payments. When you get a refund it feels like a present. But it’s your money that you’re getting back. You sent it on a round trip to the government.
I believe every American should know how much income tax they actually pay each year.
Before we begin, take a guess how much income tax you actually pay.
Then, when you’ve filed your taxes for 2022, look at your Form 1040. If you are over 65 look at your 1040-SR which is the same form with larger print.
Look at line 24:
This is your Federal income tax liability.**
If you paid in more than this during the year you get a refund.
If you paid in less, you make an additional payment by April 18th.
**If you are self-employed this includes your self-employment taxes.
If you live in Massachusetts you also pay state income tax.
To find out how much you actually pay Massachusetts look at Form 1, Line 32:
Add these numbers together for your total income tax liability.
Is it more or less than you thought?
If it’s more than you thought and you are interested in reducing your tax liability – ask your tax advisor what options you have to reduce your tax liability!
