Readers with personal finance questions can now get expert insight through the Lebo Beat. John McGowan, financial advisor with Carson Wealth will answer select reader-submitted questions and provide professional guidance on topics such as investing, retirement, estate planning, taxes, and other financial matters. If you have a question, you would like considered for a future column, email it to info@lebobeat.com. Here is the first answer to question submitted by a Lebo Beat reader. 

Hi, I recently completed my taxes, and I owed a significant amount more than I was expecting.  Is there anything that I can do to make sure that this doesn’t happen again?”

-Chris Kowalski

Hi Chris, thank you for your question. Having to write a surprise check to the IRS is something that nobody ever wants to do. The good news is that, in many cases, this can be avoided with proactive planning throughout the year – not just during tax filing season.

One of the biggest reasons people end up with an unexpected tax bill is because their income changes during the year, but their tax withholding does not adjust accordingly. Perhaps you received a bonus, exercised stock options, sold investments, took an IRA withdrawal or simply earned more than you did the previous year. Even retirees run into this issue more often than people realize.

Another challenge is that not all income is taxed, or withheld, in the same way. Bonuses, investment income, pensions, Social Security benefits and retirement account withdrawals can all have different withholding rules. Sometimes not enough taxes are automatically withheld, and people don’t realize there’s an issue until tax season arrives.

We also see situations where quarterly tax estimates were based on the prior year’s income using IRS “safe harbor” rules. While that approach could help taxpayers avoid penalties, it does not necessarily mean they won’t owe additional taxes if their income increased during the year. That is why it’s important to communicate major income changes to both your CPA and financial advisor before year-end rather than after the fact.

Investment accounts can also surprise people at tax time. Many investors assume they only pay taxes when they sell something, but that is not always the case. Mutual funds, for example, can generate taxable gains even if you never sold a single share. That is why where you hold your investments can matter just as much as what you are invested in. Ultimately, it’s not just about what you earn, but also about what you get to keep after taxes.

On the flip side, overwithholding can also be an issue. While receiving a large refund may feel good in the spring, it often means you gave the IRS an interest-free loan throughout the year instead of keeping that money working for you month to month.

To help avoid another surprise next tax season, consider these suggestions:

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Keep your CPA and advisor updated on income changes.

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Review investment-related tax exposure before year-end.

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Adjust withholding or estimated tax payments proactively throughout the year.

Tax planning works best when it’s an ongoing process rather than a once-a-year conversation during filing season. Small adjustments made throughout the year can often make a meaningful difference when tax time arrives.

If you would like to have your question answered in a future edition of Lebo Financial Answers, email Pittsburgh@carsonwealth.com. 

Questions answered in Lebo Financial Answers are provided by John McGowan, CFA MBA at Carson Wealth.