You’re Paying Too Much in Taxes: 6 Signs That You Could Be Overpaying

Do you like paying more in taxes than you have to? Probably not.

Overpaying on taxes is one of the most common and avoidable mistakes I see as a financial coach. Every year, new clients unknowingly hand over more money to the IRS than necessary — not because they’re rich, reckless or shady, but because they simply don’t know what to look for at tax time.

So let’s break down the biggest ways you may be giving the IRS more than your fair share, and how you can fix it.

1. You’re celebrating when you get a big tax refund

Approximately 64 percent of all tax returns filed in 2024 resulted in refunds, based on IRS data through Dec. 27, 2024. In fact, the average tax refund for the most recent tax season was $3,138.

If you got that amount back, you might be celebrating, but guess what? That was your money, and the government just borrowed it interest-free. Receiving a tax refund, especially a sizable one, is a sign that you overpaid in taxes throughout the year.

When my clients have received large refunds, we’ve worked with their tax advisors to adjust their withholdings and increase their cash flow throughout the year. That extra money in each paycheck has helped to:

• Pay down high-interest credit card debt
• Make extra car loan payments
• Earn passive income in a high-yield savings account
• Contribute to retirement savings
• Save up for their next vacation

2. You’re filing under the wrong status

Your tax filing status affects your standard deduction, tax brackets and eligibility for certain credits. A common tax mistake occurs when single parents qualify as “head of household” but file as “single.”

Let’s say you’re a single mom with one child, and you earn $60,000 a year. If you select single as your filing status, your standard deduction for 2025 is $15,750 (under the Trump administration’s new tax guidelines). But as head of household, your standard deduction is $23,625. The higher deduction amount reduces your tax liability and keeps more of your money in your pocket.

As a bonus, head of household filers receive a lower tax rate. Not accounting for the higher standard deduction, the single mom earning $60,000 would pay nearly $1,400 less in taxes.

3. You’re managing investments without a tax game plan

I see this a lot with newer investors: You get a good return on investments, so you sell them without realizing what kind of taxes you’re on the hook for.

• Short-term capital gains (investments held for one year or less) are taxed like regular income, with tax rates of up to 37%.
• Long-term gains (held over a year) are taxed at 0%, 15% or 20%, depending on your income.

And if you have investments that have lost value, you can sell those to offset gains. It’s called tax-loss harvesting, and it can seriously lower your tax bill if done right.

If you’ve recently been unemployed, switched jobs or taken a pay cut this year, it could be an opportunity to do a Roth conversion — moving money from a Traditional IRA or 401(k) into a Roth IRA to pay the taxes now so you don’t have to pay taxes later.

4. You’re not using tax-friendly accounts first

I’ve had countless clients tell me they started investing in a brokerage account because it was easy through their bank or an app, before contributing the maximum to their tax-friendly accounts first. Building savings in any high-yield vehicle builds financial resiliency, but prioritizing saving in tax-friendly accounts first can also help reduce your tax liability.

Here’s why that’s a big deal:

• Traditional IRA or 401(k) contributions reduce how much you pay in taxes. For example, if you invest $1,000 in a traditional IRA, the income used to calculate your tax liability will be $1,000 less.
• Roth IRA withdrawals are tax-free if they meet certain criteria. For example, if you invest $1,000 in a Roth IRA and that amount grows to $5,000, that entire $5,000 will not be taxed.
• HSA (Health Savings Account) contributions can lower your taxes if you have a high-deductible health insurance plan (HDHP). The “big beautiful bill” adds ACA bronze and catastrophic plans as qualified HDHPs. For example, if you invest $1,000 in an HSA, your taxable income will be lower by $1,000, and the earnings and withdrawals in the HSA will be tax-free if you use it for qualifying health expenses.

5. You’re not claiming enough deductions for your business or side hustle

Small businesses take many forms — and in some cases, your side hustle counts as a business. Side hustlers often forget to track their expenses, which means they could be overpaying on their taxes.

For example, if you use your phone to promote your business on Instagram or answer client calls, part of your phone bill could be deductible. The same goes for things like subscriptions, mileage, office supplies and even a portion of your home, if you conduct business there.

And if you’re a solo entrepreneur and earning income from a side hustle or business, you can open a SEP IRA or Solo 401(k) to save for retirement and reduce your taxable income.

6. You’re not working with a vetted tax nerd

I love a good DIY moment, but taxes are not the time to wing it. I’m a money coach whose parents and brother were all accounting experts, and even I have never once done my taxes without consulting a tax professional.

If your situation is even slightly complex (you run a business, have investments, bought a house or had major life changes, like a birth or death), it’s worth getting help.

But don’t hire just anyone. Find someone who understands your specific situation. Because I run a consulting business, I needed a tax pro who actually understood my business to help me find the right deductions. Not all tax professionals are created equal, and the one that’s best for you may not be right for me.

Questions to ask your tax partner

You don’t have to wait until tax time to clarify your tax strategy. Bring the following questions to your tax advisor during their off-season so you’ll have plenty of time to create a plan if you need to make changes before filing.

• Have I maxed out all the tax-advantaged accounts I’m eligible for? Double-check if you can still contribute to IRAs, HSAs, FSAs or retirement plans through your business.
• Am I using the best filing status for my situation? Ask your tax professional to run scenarios under different statuses to show the difference.
• What deductions or credits am I eligible for that I might be missing? Ask specifically about education credits, the saver’s credit or self-employment deductions if they apply to you. Also, ask whether any of your regularly claimed deductions or tax credits are impacted by the new tax bill, and what that means for your money.
• Should I adjust my withholding so I’m not overpaying during the year? If you got a big refund last year, this one’s especially important.
• Would a Roth conversion or tax loss harvesting make sense for me this year? If you lost money in investments, your income dropped or you expect to be in a higher bracket, this could save you money long term.

Final thoughts: There are no bonus points for paying more than necessary

Paying taxes is a part of adulting. While you shouldn’t try to pay less than your legal obligation, overpaying isn’t going to help you reach your money goals faster.

Learning how to lower your tax bill is one of the smartest money moves you can make, and all the moves mentioned above were available even before the bill passed. You don’t have to become a tax expert, but you do need a healthy wealth plan that includes an efficient tax strategy.

Whether you’re investing for the first time, running a side hustle or trying to build generational wealth, paying the right amount of taxes frees up more of what you earn and supports your path toward financial freedom.