Why Many Taxpayers Overpay — Even When Their Return Is Filed Correctly

Most people assume that if their tax return is filed correctly, they must be paying the right amount of tax.

That assumption is wrong.

In reality, many households legally overpay thousands of dollars in taxes every year—not because of mistakes, but because tax filing and tax planning are not the same thing. Even sophisticated tax software and many traditional tax preparers focus almost entirely on filing accuracy (compliance), not on long-term tax strategy.

In the rest of this article I'll explain the difference, why it matters, and what you can do about it.

Tax Filing vs. Tax Planning: A Critical Distinction

Tax filing answers one question:

“What do I legally owe based on what already happened?”

Tax planning answers a different question:

“What should I do before year-end and on an ongoing basis to legally reduce what I owe?”

Most tax software—and many preparers—only engage after the year is over. At that point, your options are limited. The tax return becomes a historical record, not a strategic tool in many cases.

In reality… once December 31 passes, most meaningful tax decisions are already locked in.

Why Tax Software Misses Opportunities

Tax software is excellent at:

• Calculating numbers

• Following IRS rules

• Catching math errors

It is not designed to, and typically doesn’t have the information available to it to:

• Understand your long-term financial picture

• Optimize decisions across multiple years

• Inform you about strategies you didn’t know existed

• Coordinate detailed tax decisions with retirement, investing, estate or business planning

The software can only react to inputs. It cannot proactively advise in most cases.

For example:

• It will tell you whether you qualify for a deduction—not whether you should restructure your finances to qualify next year.

• It will calculate taxes on a Roth conversion—but it will not tell you whether converting $20,000 this year and $20,000 next year would save more tax than converting $40,000 all at once. It also won’t tell you whether a Roth conversion strategy in the future warrants Traditional or Roth contributions today.

• It will record your withholding—but it will not tell you that you gave the IRS a large interest-free loan and what you could do to legally minimize this gift to the IRS next year. 

Common Ways People Overpay Without Realizing It

Below are real, recurring issues I see when reviewing returns.

1. Over-Withholding and Large Refunds

A large refund feels good, but it usually indicates:

• Poor withholding selections

• Lost cash flow during the year

• Missed planning opportunities

A refund is not a bonus—it is your money coming back without interest.

Actionable step: Review your withholding annually, especially after raises, bonuses, life changes or job changes.

2. Retirement Contributions Without Strategy

Many people contribute to retirement accounts each year, and that is a wonderful thing, but a large percentage of them do so with little or no strategy - leading to inefficiencies.

Examples:

• Contributing to a Roth when current tax rates or personal tax rates and long term tax strategy may favor Traditional contributions instead

• Missing employer matches due to poor allocation or underfunding

• Not coordinating IRA contributions with income thresholds

• Ignoring spousal IRA opportunities

Actionable step: Retirement contributions should be evaluated in the context of current and future tax brackets, not just made by guessing or only with this year’s tax liability in mind. 

3. HSAs Used Only for Current Medical Bills or Not Considered at All

Health Savings Accounts are one of the most tax-advantaged tools available. In fact, HSAs are one of the only accounts regularly available with three distinct tax advantages. The triple tax advantage:

• Deductible contributions

• Tax-free growth

• Tax-free withdrawals for qualified expenses

Many people misunderstand HSAs, or are afraid to enroll in a HSA eligible health plan. Of the people who do have HSA accounts, many drain them annually instead of using them strategically to build a larger tax advantaged account that can play a material role in your retirement to cover medical costs and as a potential source of retirement income.

Actionable step: If cash flow allows, treat HSAs as long-term planning tools—not medical expense checking accounts.

4. Small Business and Side Income Missteps

Side income is common—and often mishandled:

• Missed deductions causing you to pay more taxes

• Improper expense classification possibly causing you to pay more in taxes or face penalties and interest

• Poor estimated tax planning potentially causing overpayment or penalties and interest

• Incorrect entity structure for income level and business activities

Even modest errors can compound year after year.

Actionable step: Once side income becomes consistent, it deserves proactive planning—not just reporting.

5. One-Year Thinking in a Multi-Year Tax System

The tax code rewards timing, not just totals.

Examples:

• Spreading income over multiple years

• Timing deductions strategically

• Managing capital gains exposure

• Planning Roth conversions gradually

• Managing retirement account withdraws

• Traditional vs Roth contributions

• Required Minimum Distributions (RMDs) planning

Focusing only on “this year’s refund” often increases lifetime taxes.

Actionable step: Evaluate tax decisions over a 3–10 year horizon, not just this current year.

Why Tax Software and Tax Professionals Still Miss Planning Opportunities

This may surprise people, but many traditional tax professionals:

• Are overwhelmed during tax season

• Focus on compliance and throughput

• Do not offer proactive planning unless specifically requested

• Work in silos from financial planning, investment strategy and estate planning

This is not a criticism—it is a structural reality of how most tax practices operate.

What a Better Approach Looks Like In My Opinion

An effective tax process should include:

• Accurate filing (compliance) first and foremost

• Proactive, year-round planning is ideal for clients with any amount of complexity (Side income, business owners, retirement income, retirement contribution/ withdrawal, capital gains/ losses expected…etc)

• Coordination with retirement and investment decisions either in-house or with external financial professional

• Clear explanations (not just numbers) and education on tax specific items and strategy

• Accountability and documentation

The goal is not aggressive tactics or picking a proverbial fight with the IRS—it is clarity, legality, and efficiency around one of your largest lifetime expenses. 

Final Thought

Paying taxes is unavoidable. Overpaying is optional.

If your tax strategy begins and ends in April, you are almost certainly leaving money on the table—not because you did anything wrong, but because no one helped you plan ahead.

Brookwood Financial Services offers tax preparation and tax planning services for individuals and families who want a clearer understanding of how today’s tax decisions affect long-term outcomes.

If you’d like to better understand how these concepts apply to your own situation, you’re welcome to request a brief introductory call.

Disclosure

The content provided is sourced from reliable sources to ensure accuracy. However, the information presented is for general informational and educational purposes only and is not intended as individualized legal, tax, or investment advice. The opinions expressed and information provided should not be construed as a solicitation for the purchase or sale of any security.

Brookwood Financial Services, LLC is registered as an investment adviser in the State of Michigan. It is authorized to conduct business solely with residents of this state or residents of other states where permitted by law, subject to exemptions or exclusions from registration requirements. Registration with the United States Securities and Exchange Commission or any state securities authority does not imply a specific level of skill or training.

Brookwood Financial Services, LLC provides tax preparation and tax planning services. Investment advisory services are offered separately. This article is for educational purposes only and does not constitute individualized tax advice. Tax strategies discussed may not be appropriate for all individuals and should be evaluated based on your specific circumstances.