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Top 3 Actions to Take if Your Tax Outcome Was Unexpected

Receiving a tax refund larger than expected or owing more tax than anticipated can both be surprising. Such scenarios often indicate discrepancies in your tax planning or withholding. Whether you’re puzzled by a hefty refund or a significant tax bill, here are three practical steps to manage and adjust your tax situation for future financial stability.

1. Reassess Your Withholdings

If your tax refund is larger than expected, it could mean that too much tax is being withheld from your paycheck. While a large refund might seem like a boon, it’s essentially an interest-free loan to the government. To optimize your cash flow throughout the year, consider adjusting your withholdings. You can do this by filling out a new W-4 form with your employer to decrease the amount of taxes withheld from your salary. This adjustment will increase your take-home pay, allowing you to invest, save, or spend those funds throughout the year instead of waiting for a lump sum refund.

Conversely, if you owe more tax than you anticipated, this could be a sign that not enough tax is being withheld from your earnings. In this case, you might want to increase your withholdings by updating your W-4 form. For instance, even if you’re married with kids, it may make sense to claim “Single” to ensure more dollars are paid in through payroll. This can help avoid owing a large sum when you file your next tax return, and it can also prevent potential penalties for underpayment throughout the year.

2. Review and Adjust Estimated Tax Payments

For freelancers, self-employed individuals, or those with additional income sources (such as rental income or dividends), large discrepancies in expected tax outcomes may suggest that estimated tax payments need adjustment. If you owe a significant amount, consider recalculating your estimated payments for the current year to better align with your actual income. This proactive approach can help manage cash flows more efficiently and avoid surprises in the next tax season. Conversely, if your payments are too high, reducing them can free up monthly resources for other financial priorities.

3. Consult a Financial Planner and a Tax Professional

Changes in income, life events (like marriage or having a child), or changes in tax law can all affect your tax liability. If you receive a much larger refund or owe more than expected, it may be time to consult with a financial planner and a tax professional. A professional can help you understand why your tax outcome was different than expected, provide guidance on adjusting your withholdings or estimated payments, and help you plan for future tax implications of any major financial decisions you anticipate making in the upcoming year.

In conclusion, an unexpected tax outcome, whether it’s a larger refund or a bigger tax bill, often signals a need for adjustments in your financial planning. By taking these steps, you can ensure that your tax withholdings or payments align more closely with your actual tax liability, avoiding surprises and optimizing your financial strategy for the year ahead. This approach not only helps in better managing your finances but also in making informed decisions that enhance your overall financial well-being.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.


By William Jackson, CFP®

When discussing successful wealth management, most will typically include investment management/asset allocation, cash management, risk management, and other predictable factors. What is typically omitted or minimized relates to behavioral psychology.  How one reacts to adversity is arguably more impactful to long-term success than all the other factors combined.  Specifically, having the courage to stay the course during uncertain times is often the greatest determinant of long term success.

Holistic financial planning permits a good advisor to focus every conversation on the client’s long term plan.  This approach enables the advisor to provide a service that truly helps clients lead their lives with greater financial clarity.  The challenge is that we work in an industry that is intentionally opaque.  Having a plan and staying the course is not standard operating procedure for the majority of industry participants.  These firms have a strategy of offering reactionary products to clients that attempt to solve the problem of the day.  They bombard our inboxes with updates to make us aware of solution “de jour”.  Frequently, these products are of a complex nature, and render the buyer feeling underqualified to understand but worried about missing out.  These firms are well aware that when clients are overwhelmed with “over their head” concepts, they might feel hesitant to ask questions. This ultimately results in many clients agreeing to purchase products that are often unnecessary or even inappropriate for their personal plans.  A good advisor who is “fee-only” and focused on financial planning serves as an agent of clarity with the mission of helping clients understand why any products chosen for them are beneficial and necessary.  This might sound simplistic, but the rewards are real.

The foundation of Cahaba Wealth was built on knowing our clients and their financial goals.  We provide comprehensive financial planning in a way that leads clients to have greater understanding of their financial lives.  The financial plan dictates the investment plan. The investment plan and process are intentionally designed to encourage a discipline that has shown to be beneficial to long term wealth creation.  In asking you to trust in the process and have the courage to take a road less traveled, we are demonstrating our commitment to your success. We are aware of the magnitude of this request and are grateful for the faith shown.

Eleanor Roosevelt wrote, “You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You are able to say to yourself, ‘I have lived through this horror. I can take the next thing that comes along.’ You must do the thing you think you cannot do.”

We are proud to call you clients and thankful for the opportunity to serve.