Financial planning mistakes that could cost you more in taxes
Credit: Pexels
Nobody likes giving away their hard-earned money, but lately, the frustration around tax season feels heavier than usual.
According to Pew Research, around 60% of U.S. adults believed their taxes were too high in 2026, up from 51% in 2019. An April 2026 Gallup survey echoed those findings, with 59% of respondents saying they pay too much in taxes.
Experts believe much of this growing dissatisfaction is tied to the lasting effects of inflation, as many households continue to feel the financial strain of higher living costs.
When every dollar counts, the last thing you want to do is hand over more to the government than you strictly owe. Yet many people unknowingly make simple financial planning moves that lead to a much higher tax bill. Recognizing these common blind spots early can help you keep more money in your pocket and protect your budget from unnecessary leaks.
Not making the most of tax-advantaged retirement accounts
Overlooking tax-advantaged retirement accounts can increase your tax bill both now and in the future. Contributions to a 401(k) or Traditional IRA lower your current taxable income, while Roth IRAs offer tax-free withdrawals later. Yet many people forgo these benefits, often because they do not have a work-sponsored retirement plan.
Addressing this gap, Yahoo! Finance notes that tens of millions of Americans still lack access to employer-sponsored plans. To help, a recent executive order calls for the creation of the website – TrumpIRA.gov. This website will help people find eligible retirement accounts and learn about available matching contributions.
The order emphasizes the U.S. government’s commitment to promoting high-quality, low-cost individual retirement accounts. Whether through an employer plan or an individual account, maximizing these contributions is an easy way to lower today’s taxes while building long-term financial security.
Incorrectly estimating your annual income
Underestimating your annual income can trigger an unexpected tax bill, as many deductions, credits, and subsidies rely on this number. Freelancers, business owners, and individuals with multiple income sources are especially vulnerable to inaccurate estimates. One major area where this happens is the Affordable Care Act (ACA) premium tax credit.
If you underestimate your income on the health insurance Marketplace, you receive larger advance credits than you actually qualify for. As noted by LIFE143, the IRS compares your actual earnings against your original estimate when you file. If you made more than you thought you would, you likely received too much financial help and will have to pay back those excess credits on your tax return.
This ACA penalty for underestimating income can significantly increase your tax liability. To protect your budget, update your Marketplace application whenever your income changes during the year.
Poorly timed withdrawals
Poorly timed withdrawals from retirement accounts or investment portfolios can result in a larger tax bill than necessary. According to a 2025 report, one-third of job changers withdrew their retirement savings as a lump sum instead of rolling them into another retirement account. Additionally, if you take the money out before age 59 1⁄2, you will usually face a 10% early withdrawal penalty on top of the regular income taxes owed on that amount.
Even if you’re past that age, taking a large distribution from a Traditional IRA in a single year can significantly increase your taxable income. That additional income may push you into a higher tax bracket and even affect your Medicare premiums or the taxable portion of your Social Security benefits.
Spreading withdrawals over multiple years and factoring them into your overall tax strategy can help lower your tax burden and allow more of your retirement savings to stay invested.
Missing tax-loss harvesting opportunities
Investment losses can serve as a valuable tax-planning tool when used strategically. Tax-loss harvesting allows investors to sell underperforming assets and use the resulting losses to offset capital gains elsewhere in their portfolio.
Forbes points out that if your investment losses outweigh your gains, you can use up to $3,000 of the difference to lower your regular taxable income. Just keep in mind that this strategy relies heavily on market behavior. As Forbes notes, your chances to lock in these losses are tied to market performance and volatility, meaning you will find far more opportunities during market downturns.
Over time, investors with long-term buy-and-hold portfolios may have fewer losses available to harvest as more holdings appreciate. You also need to watch out for the wash-sale rule, which cancels out your tax benefit if you buy the same or a very similar investment within 30 days.
Missing tax deadlines and proper documentation
Missing dates for IRA contributions, quarterly estimated payments, or required minimum distributions (RMDs) triggers harsh penalties alongside the regular tax you owe.
Similarly, failing to track receipts for deductible expenses, charitable donations, or business costs means losing legitimate deductions because you cannot prove them.
As David Rae, CFP, explains, “Tax planning happens year-round and involves proactive strategies to control how much you must pay each year.” He adds that if you only meet with your tax professional during filing season, you’re likely missing out on meaningful tax-planning opportunities.
Scrambling in April is rarely effective. Staying organized, tracking important deadlines, and reviewing your tax situation regularly can help you avoid unnecessary costs and maximize your tax savings.
FAQs
What are the most common financial planning mistakes that increase your tax bill?
Some of the most common mistakes include not maximizing tax-advantaged retirement accounts, incorrectly estimating your annual income, and taking poorly timed retirement withdrawals. Others include overlooking tax-loss harvesting opportunities and missing important tax deadlines or documentation. Many of these issues can be avoided with year-round planning and regular reviews of your financial situation.
Can retirement account withdrawals affect your taxes?
Yes. Withdrawals from Traditional IRAs and other tax-deferred retirement accounts are generally taxable. Taking a large distribution in a single year can significantly increase your taxable income. As a result, you could be pushed into a higher tax bracket, which could affect your Medicare premiums or the taxable portion of your Social Security benefits.
What happens if you miss important tax deadlines?
Missing deadlines for IRA contributions, estimated tax payments, or required minimum distributions (RMDs) can result in penalties and additional taxes. Failing to keep documentation for deductible expenses may also cause you to lose legitimate tax deductions.
Key financial planning and tax statistics
| U.S. adults who said their taxes were too high (2026) | 60% |
| U.S. adults who said their taxes were too high (2019) | 51% |
| Americans who said they pay too much in taxes | 59% |
| Job changers who withdrew retirement savings as a lump sum instead of rolling them over | 1 in 3 (33%) |
| Early withdrawal penalty before age 59½ | 10% |
| Maximum ordinary income offset through tax-loss harvesting | Up to $3,000 per year |
| Rise in adults saying taxes are too high (2019–2026) | 9 percentage points |
Growing your wealth is only part of financial planning. Keeping more of it by minimizing unnecessary taxes is just as important. Small decisions, like contributing to tax-advantaged accounts, estimating income accurately, and meeting tax deadlines, can significantly affect your tax bill.
The good news is that most of these mistakes are preventable with regular planning and timely action. Reviewing your finances throughout the year, rather than waiting until tax season, can help you spot potential issues early. Working with a qualified tax professional or financial advisor can also help you avoid costly surprises when it’s time to file your return.