Understanding Your Tax Return

Start with your income

Your return shows several versions of income, but two numbers matter most:

Total Income reflects everything you earned during the year—wages, investment income, business income, and more.

Taxable Income is what you’re actually being taxed on after deductions. This is the number that determines your tax liability and is often more important for planning purposes.

A large gap between these two numbers can indicate effective use of deductions or tax strategies. A smaller gap may highlight opportunities to be more intentional moving forward.

Understand what you paid in taxes (and the refund misconception)

Your return shows your total tax liability for the year (Form 1040, Line 24). This is the number that reflects what you actually owed in taxes.

From there, it compares that number to what you already paid in (withholdings, estimated payments), which determines whether you receive a refund or owe a balance.

A common misconception is that a large refund is a “win.” In reality, it simply means you paid more than necessary throughout the year—essentially giving the IRS an interest-free loan.

On the flip side, owing a small amount at tax time isn’t necessarily a bad thing either. The goal is typically to land somewhere close, without significantly over- or under-paying.

Look at your retirement contributions

Your tax return can also help confirm whether you’re taking full advantage of tax-advantaged savings opportunities.

Here’s where to look:

• W-2, Box 12: This shows contributions to employer retirement plans like a 401(k) (often coded as “D” for traditional or “AA” for Roth)
• Schedule 1, Part II: This includes deductible IRA contributions, if applicable
• Form 5498 (received later): Confirms IRA contributions, though this typically arrives after tax filing

Reviewing these can help answer:

• Are you contributing as much as you intended?
• Are you utilizing pre-tax vs. Roth in a way that aligns with your plan?
• Is there room to increase contributions moving forward?

Look for a few simple opportunities

Your tax return can also highlight a few areas that are easy to overlook—but can make a meaningful difference over time.

A few things to double-check:

• Did you take advantage of accounts designed to lower taxes?
  Contributions to things like retirement accounts or HSAs can reduce your taxable income. If those numbers are lower than expected—or missing altogether—it may be worth revisiting your contribution strategy for this year.
• Is most of your income coming from one source?
  For many people, income is heavily concentrated in salary, which is taxed at ordinary rates. Over time, it can be helpful to build in other types of income (like investments) for more flexibility—but this is something that evolves gradually.
• Were there any one-time spikes in income?
  Bonuses, stock sales, or business income can push you into a higher tax bracket for a given year. If that happened, it may open the door for planning opportunities in future years (like spreading income out or offsetting it strategically).

We often see this with clients who had a big bonus year and didn’t realize how much it impacted their taxes until filing.

You don’t need to solve all of this on your own—but recognizing these patterns is the first step toward making more intentional decisions going forward.

Use it as a planning tool—not just a record

Your tax return is one of the best tools for forward-looking planning.

It can help answer questions like:

• Should retirement contributions be adjusted?
• Does it make sense to consider Roth contributions or conversions?
• Are there opportunities for charitable strategies, like donor-advised funds?
• Is your current withholding or estimated tax strategy appropriate?

Small adjustments based on this year’s return can make a meaningful difference over time.

The bigger picture

A tax return doesn’t tell the whole story, but it does provide important clues. When viewed in the context of your broader financial plan, it becomes much more than a once-a-year task.

Taking a few minutes to understand what it’s telling you can lead to more informed decisions—and fewer surprises—down the road.

If you’d like help reviewing your return and identifying any planning opportunities, we’re always happy to take a look with you.