Tax season isn’t over, but smart planning for next year begins now

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It’s tax season. That can bring a sense of relief or… frustration, especially if a refund was smaller than expected or a tax bill came as a surprise. While the April 15 tax deadline may leave a little time for last minute changes to this year’s return, now’s the perfect time to start planning for the next one. 

A tax refund can become a powerful opportunity to build savings, reduce future tax liability or strengthen long-term investments. At the same time, understanding strategies like tax-advantaged accounts, withholding adjustments, and smart investment placement can help folks avoid unpleasant surprises when the next filing season arrives. 

To help our communities think strategically about tax refunds and long-term financial planning, we spoke with Thomas Korankye, assistant professor of personal and family financial planning at the University of Arizona, where he also serves as the CFP Board Program Director within the Norton School of Human Ecology. His research focuses on financial decision-making, financial literacy, retirement planning, and household financial well-being, with particular attention to issues such as student loan debt, savings behavior, and retirement security.
 

Many people celebrate receiving a large tax refund. However, some financial experts describe refunds as an “interest-free loan” to the government. Is a big tax refund a good thing? 

A large tax refund is considered an “interest-free loan” to the government because you could have used the money to support your financial goals during the year instead of waiting until tax season. That said, people deserve to celebrate a large tax refund because, after all, it is better than owing a large tax bill during tax season. The best strategy, however, is to strike a balance by accurately estimating your tax liabilities and making withholdings throughout the year to ensure you have a small refund or small tax bill during tax season. 

A tax refund often feels like a windfall or a bonus. How can people reframe this “found money” mindset so they use their refund intentionally rather than letting it disappear into everyday spending? 

A good strategy is for people to view their tax refund as part of their annual income and include it in their spending plan or budget. This can help prevent a person from making unplanned spending decisions that may later lead to feelings of regret or unfulfillment. When included in a spending plan, the tax refund becomes part of the overall plan that helps people accomplish their financial goals.

For someone who already has an emergency fund in place, what are some of the most tax-efficient ways to put a tax refund to work? 

Having an emergency fund already in place is great. The refund can be invested in tax-advantaged accounts to ensure the money grows tax-efficiently while using it to build long-term wealth. For instance, part of the refund can be used to open and fund children’s education savings plans to pay for college in later years without any tax consequences. Other tax-efficient uses include investing in Traditional and Roth IRAs, 401(k)s, and Health Savings Accounts for a qualified individual. Part of the refund can even be invested in a taxable brokerage account so long as the focus is on investments that grow tax-efficiently over time. 

Health Savings Accounts (HSAs) are often described as offering a “triple tax advantage.” What does that mean? 

Yes, Health Savings Accounts (HSAs) offer three tax benefits to participants, making them a tax-efficient vehicle for saving for future health costs. First, contributions to the account are tax-deductible or made with pre-tax dollars. Second, the money invested grows tax-free, meaning any earnings or capital gains in the account are not subject to tax. Third, withdrawals from the HSA are tax-free as long as they are used for qualified medical expenses.    

Can a tax refund today help reduce next year’s tax bill? For example, how might someone use their refund to contribute to a retirement account such as an IRA for the upcoming tax year? 

Yes, a person can use this year’s tax refund to lower their tax bill for next year and beyond. Opening and contributing to a traditional IRA is one avenue, as contributions to this account are tax-deductible for a qualifying individual, up to the overall contribution limit. A person can also invest the refund in a Roth IRA, which ensures that the money invested grows tax-free and qualified withdrawals are non-taxable. 

Many households are balancing debt repayment with long-term investing. With interest rates where they are today, should people use their refund to pay off debt or invest? 

The simple answer is it depends on a person’s balance sheet, financial goals, and the level of interest rate. It is prudent to pay off high-interest debts to minimize excessive interest payments and financial stress. At the same time, investing is essential because it helps people build wealth over time. Some individuals and families may aim to strike a balance, using part of the refund to pay off debt and another part for investment purposes. 

If someone was surprised, or frustrated, by their tax bill this year, what steps should they take now to adjust their withholding and avoid the same situation next year?

It is important for a person to review their tax situation and use Form W-4 to adjust withholdings accordingly. Before doing this, a person can visit the IRS website and use the Tax Withholding Estimator to estimate a more accurate amount of tax for an employer or pension provider to withhold. Changes in life circumstances, such as marriage, childbirth, and additional income, can affect tax liability, requiring withholding adjustments as soon as they occur. In addition, people with multiple income streams may benefit from making quarterly estimated tax payments to avoid tax bill surprises during tax season. 

We often hear about “asset allocation,” but financial planners also talk about “asset location.” What does that mean, and how can placing certain investments in taxable versus tax-advantaged accounts help reduce taxes over time?

Asset location refers to where investments are held, which can be in taxable, tax-free, or tax-deferred accounts. To minimize taxes, an investor can avoid placing income-generating assets in taxable accounts and instead hold them in tax-advantaged accounts. Investments such as index funds and growth stocks can be tax-efficient when held in taxable accounts for more than one year. Overall, making a tax-efficient investment decision involves examining an investment's tax characteristics before deciding whether to place it in a taxable account, given that tax-advantaged accounts are generally designed to defer or reduce taxes and can hold investments with different tax profiles. 

For investors whose portfolios include both gains and losses, how does tax-loss harvesting work? How can strategically realizing losses help offset taxes on investment gains?

All else equal, investors with realized taxable capital gains are required to pay tax on those gains. To minimize this tax obligation, an investor may sell investments that have lost value to offset their capital gains. This practice is called tax-loss harvesting. Through a netting process, an investor will owe no tax on capital gains if the capital losses equal or exceed those gains. If capital losses exceed capital gains, up to $3,000 can be used to offset a person’s ordinary income each year, while any remaining losses are carried forward to future years. To take advantage of tax-loss harvesting, investors must also follow the wash-sale rule. This rule will disallow claiming a capital loss if the same or substantially identical security is purchased within 30 days before or after the sale. 

Are there any tax credits – such as those related to energy-efficient home improvements or electric vehicles –that people might overlook but could significantly reduce their tax bill?

Yes! One example is the “No Tax on Car Loan Interest.” Under the One Big Beautiful Bill Act, a person can deduct up to $10,000 annually (for the 2025 to 2028 tax years) of interest paid on qualifying new car loans, subject to income phaseouts and vehicle gross weight. The vehicle must be assembled in America, and the deduction applies regardless of whether a person itemizes or takes the standard deduction. Another available credit relates to the “Alternative Fuel Vehicle Refueling Property Tax Credit.” This credit allows up to 30% off the cost of installing an electric vehicle charging equipment in a person’s home, provided it is placed in service before July 1, 2026, subject to phaseouts. Previously allowed federal energy-related tax credits are no longer available for new projects. 

A lot of folks earn income from freelance work or side hustles that generate 1099 forms. What are some of the most common mistakes people make with side income during tax season?

One common mistake is not making estimated tax payments during the tax year or adjusting their W-4 withholding to account for the additional income they are earning. This mistake can cause penalties. Another mistake is failing to keep adequate records of business-related expenses, such as business mileage, gas purchases, vehicle repairs, and maintenance. This error can lead to disallowed deductions. A third mistake is failing to contribute to a SEP-IRA or other applicable retirement plan, which can reduce a self-employed person's taxable income. Lack of these could increase a person’s tax bill during tax season.    

For individuals with freelance or contract income, how can tools like SEP-IRAs or other retirement accounts help them manage taxes and build long-term savings more effectively?

Applicable retirement plans such as SEP-IRAs, Solo 401(k)s, or SIMPLE IRAs can help reduce freelancers’ taxable income. Contributions to these plans are tax-deductible, and the money invested grows tax-deferred. The tax-saving benefits of these plans enable participating freelancers to build long-term wealth while reducing the impact of self-employment taxes. 

About Thomas Korankye, Ph.D., CFP®, EA

Korankye leads the Financial Decisions and Well-Being (FINDWELL) Lab, where he studies how financial knowledge, behavioral factors, and institutional structures influence individuals’ and families’ financial outcomes. His work has been published in peer-reviewed journals including the Journal of Financial Counseling and Planning, Managerial Finance, and the Journal of Retirement.