Here's a common scenario each January: consumers receive credit card bills for all of their holiday purchases. They realize that, once again, they spent too much during the holidays. While they're wondering how long it will take them to pay these bills, the note from their tax preparer gets them thinking about their tax return for the prior year, and wondering about their refund. Many individuals overpay their taxes during the year so they are assured of a refund. To pay off their credit card bills, they want to get their tax refund as quickly as possible. However, they have to wait to file their Form 1040 until they receive the necessary statements—including wage statements (W-2s), interest and dividend statements (1099s), and their mortgage interest statement (1098)— which don't have to be sent until the end of January. Even if they get all their papers and file in early February, taxpayer refunds won't usually arrive until late February or early March.

What taxpayers don't realize is that by withholding a large sum—too large of a sum—from their paychecks over the past year, they gave the federal government an interest-free loan. On the other hand, if not enough tax is withheld, the taxpayer may be subject to a tax penalty based on the amount underpaid.

With these and other tax situations, it is wise to consult with a financial planner. In addition to helping set goals, plan investments, and prepare for retirement, a financial planner will help consumers minimize their taxes. The tax planning would decrease their withholding to give them more money during the year to invest or to spend on their holiday expenses, but not so much as to trigger a penalty.

Consumers often pay more than their share of income taxes. As Congress continually modifies the tax system, it is hard to keep up with every change. Even though many taxpayers now use software, they still have to answer certain questions correctly or they may miss out on a particular tax break. Consulting with a financial planner or tax professional may enable consumers to take advantage of methods to minimize their tax burden, allowing them to keep more of their hard-earned money.

For most people, income taxes represent one of their largest annual expenses. By lowering clients' tax liability, a financial planner could help them have more money to spend during the year to help meet their financial goals. The tax planning process will help clients by using all the deductions and tax credits available to them, using tax-exempt investments, and/or deferring income to the future. Each of these techniques may be available to help clients reach their financial goals.

Note: Some tax forms are included in the study materials. They should be used simply as visual aids; students will not be tested on specific tax forms.

The material in this module focuses on understanding how the federal income tax is calculated. During this process, we must determine not only what income is taxable, but also the type of income that individuals have. We must also determine what deductions and credits are available. The records needed to support an income tax return are also discussed. Lastly, we will look at the various tax planning strategies available to clients to reduce their tax liability.

About the Author

Michael Angell, CFP®, EA is an associate professor at the College for Financial Planning. He obtained his bachelor's degree in mathematics at Creighton University. His 20+ years of work experience includes banking, insurance, investments, retirement, and estate planning. In addition to his responsibilities at the College, Michael also serves as a private client services advisor with an independent investment firm and is also a federally licensed tax practitioner with a nationally recognized company. You can contact him at

Complexity Level: Overview