Unhappy With Your Tax Return? Make These Changes Immediately

By Maurie Backman Markets Fool.com

Now that the U.S. income-tax filing deadline has finally passed, many of us are eager to think about something other than taxes for a change. That said, if you're disappointed with the outcome of your return, taxes might still be at the forefront of your mind. But rather than harp on your displeasure, you can instead focus your energy on finding ways to improve your tax situation in the future.

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If you owed too much money

Though a good 75% of tax filers end up getting a refund, things don't always work out that way. Owing the IRS money can be a harsh blow, especially if you weren't expecting to write out a check. Here are a few strategies for avoiding a repeat, come this time next year:

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  • Adjust your withholding. The good thing about W-4s is that you can usually make changes to them any time during the year. If you owed the IRS a lot of money this past year, it could be because you were claiming too many allowances, thereby not withholding enough. Figuring out how much to withhold can be tricky, but you can use this handy calculator to help.
  • Contribute more to a retirement account. If you've been meaning to ramp up your contributions to a traditional IRA or 401(k), now's a good time to do it. The more money you put into either account, the more of your income you get to exempt from taxes. Say your effective tax rate is 25% and you contribute an additional $3,000 this year: You'll automatically shave $750 off your tax bill.
  • Consider tax-free investments. Dividend-paying stocks are a great way to generate extra income throughout the year, as are interest-paying corporate bonds. But if you receive a large amount of investment income during the year and don't make estimated tax payments, it's easy to end up in a situation where you owe the IRS a chunk of money. To avoid this, you might think about shifting some of your investments into a tax-free earnings opportunity -- namely, municipal bonds. Municipal bonds are triple tax-exempt (at the local, state, and federal levels) if you buy bonds issued by your home state, and they provide the same reliable income stream as their corporate counterparts.
  • Hold investments longer. Hanging onto investments for at least a year and a day can be quite beneficial from a tax perspective. That's because investments held that long and sold at a profit are subject to long-term capital gains, which cost most taxpayers only 15% in taxes. Short-term gains, by contrast, are taxed as ordinary income, and if you have a number of them, you could easily wind up owing money.

If you got a large refund

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If you got a small refund -- say, a few hundred dollars or less -- on your 2016 taxes, it means you did a pretty good job of estimating how much tax to pay during the year. But if your refund exceeds the $1,000 mark, it means you overpaid in a major way. Here's what to do if you'd rather not give the IRS the same sort of interest-free loan the next time around:

  • Adjust your withholding. Yep, this tip goes both ways. If you're a salaried employee without much in the way of outside income, and you were due a significant refund, it probably means you aren't claiming enough allowances. Take a look at your W-4 and see what claiming one additional allowance does for your paycheck. If you want access to more of your money up front but are worried about underpaying the IRS, you could always put that additional cash into a separate savings account earmarked for taxes. If, come next April, you find that you didn't withhold enough, you could always dip into that account to pay your tax bill. And if you find that things worked out perfectly, that money -- along with whatever interest it earned -- is yours to keep.
  • Defer some business deductions. Self-employed individuals are tasked with estimating their taxes and making quarterly payments to the IRS. If you came away with a large refund this year, it could mean that you did a good job of maximizing deductions, thus lowering your taxable income. And while that's a good thing in theory, to avoid a repeat, you might consider spreading out some of your available deductions to future tax years. Say you buy a piece of equipment for $1,000 with a useful life of five years. You may be tempted to accelerate that deduction and take it all up front, but if you spread it out instead, you'll protect yourself from the opposite scenario of owing money down the line.

Most of us won't ever manage to get our taxes just right. Rather, we'll inevitably end up owing a bit, or getting some money back, each tax season. But if you follow these tips, you can get much closer to that magic breakeven point where everyone comes away happy.

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