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Whether due to avoidable penalties or because they failed to claim a tax deduction for which they were entitled, many taxpayers this year will make a check out to the Internal Revenue Service for more than they actually owe.
“Modern tax-planning software is making it easier for the average person to file their taxes accurately, so they’re not missing as many tax breaks as before, but there are still a few areas where we see mistakes,” said Skip Johnson, a partner with Great Waters Financial in Minneapolis, Minnesota, in an email interview.
Take note that overpaying your tax bill is not the same as withholding too much from your monthly paychecks, which results in a refund when you file your tax return. If you forget to claim a deduction or get hit with a fee for not following the rules, it’s (generally) a loss to you.
With that in mind, let’s explore some of the most critical missteps, why they matter, and what you can do — starting today — to avoid overpaying the IRS:
- Filing penalties
- RMDs, Social Security
- Tax-deferred accounts
- Interest rate strategy
- Tax breaks on the table
- Reinvested dividends
- Charitable donations
Late filing, payment penalties can cause you to pay too much tax
Filing your tax return accurately and on time isn’t just bureaucratic busywork — it’s your frontline defense against unnecessary penalties that can erode your wealth.
The penalty for failure to file by the deadline, which is among the most costly penalties, is 5 percent of the unpaid taxes for each month or part of a month that your tax return is late, increasing up to 25 percent of unpaid taxes.2
The late payment penalty, by contrast, is more forgiving. The IRS is often willing to work out an installment plan if you can’t come up with the cash by the mid-April deadline. You will normally face a failure-to-pay penalty of one half of 1 percent of your unpaid tax bill for each month or part of a month after the due date. If you request an extension of time to file your tax return before the deadline and paid at least 90 percent of the taxes you owe for the year, you may not face a failure-to-pay penalty. But you must pay the remaining balance by the extended due date, plus interest.
Another common tax-filing penalty that is easy to avoid is an estimated tax underpayment penalty. Such penalties reported by filers earning between $200,000 and $500,000 were about $1.3 billion for 2024, or triple the amount in 2021, according to an analysis of IRS data by the Wall Street Journal. The number of affected tax filers grew about 30 percent to 3 million over the same period.3
To avoid the penaltyyou must generally pay either 90 percent of your total tax liability for the current year, or 100 percent (110 percent for some higher-income taxpayers) of the amount you owed in the prior tax year through income tax withholding or by making estimated quarterly payments.4
The IRS applies a penalty rate (or percentage) to calculate the size of your penalty, based primarily on how much you owe. But any extra payment is money down the drain. Independent contractors and those who are paid sporadically, in particular, should monitor their tax liability and payments throughout the year.
Don’t Let Retirement Account Rules Trip You Up
If you are approaching, or already enjoying, your retirement, you face a specialized set of potential tax traps.
The IRS mandates that retirees begin Required Minimum Distributions (RMDs) from tax-deferred IRAs and certain other accounts in the year they turn 73 (rising to 75 in coming years). Missing an RMD may expose you to an onerous excise tax of up to 25 percent of the amount not withdrawn (reduced to 10 percent if corrected in a timely manner).
To sidestep this, closely track RMD rules, especially as age thresholds change with new legislation like the SECURE 2.0 Act.
Additionally, as you transition from work to retirement, don’t forget that IRA and 401(k) withdrawals are taxed as ordinary income and, if taken before age 59½, generally come with a 10 percent early-distribution tax for early withdrawals unless you qualify for an exception.
Social Security adds another layer of complexity: as your retirement income rises, the taxable portion of your benefits can range from 0 percent up to 85 percent, depending on your combined income.
For tax year 2025, the tax returns due on April 15, 2026, married couples filing jointly with a combined total income between $32,000 to $44,000 may see up to 50 percent of their Social Security benefits taxed. Above $44,000, up to 85 percent may be taxable. Those limits remain the same for tax year 2026. Proactive income management and working with a trusted advisor are crucial to minimizing taxes in retirement.4,5
Maximize Tax-Deferred Accounts
One of your most powerful tools for shrinking your tax bill is maximizing contributions to tax-deferred accounts like 401(k)s and traditional IRAs. For tax year 2025 you can contribute up to $23,500 to your 401(k), with an additional $7,500 in catch-up contributions available if you are 50 or older. In 2026, that limit is $24,500, with a catch-up contribution of $8,000. Those age 60 to 63 may make a higher catch-up contribution of $11,250 for tax years 2025 and 2026, in place of the catch-up contribution threshold if their plan allows.
Eligible taxpayers may contribute up to $7,000 to a traditional IRA in tax year 2025, plus an additional $1,000 in catch-up contributions if they are 50 or older. For tax year 2026, those limits are $7,500 and $8,600 respectively if you are age 50 or older.
Pre-tax contributions to your retirement account directly reduce your taxable income — an actionable step that can save you thousands annually and build your future security.
RMDs and Social Security snafus
Retirees must begin taking required minimum distributions (RMDs) from their tax-deferred IRA in the year they turn age 73 (the new age limit under the SECURE 2.0 Act), although this requirement can be postponed until April of the following year. Failure to take RMDs, either because they forgot or because they miscalculated how much they owe, can result in an excise tax of up to 25 percent of the amount not withdrawn.
The original 2019 SECURE Act raised the age at which RMDs must begin to 72 from age 70 ½. The new SECURE 2.0 provisions raised that age limit again to 73 beginning on January 1, 2023, and to 75 in 2033. Those approaching RMD age should take special care to ensure that they are on track to pay what they owe. A financial professional or tax preparer can help.
New retirees who transition from collecting a regular paycheck to converting their savings into a regular income stream must also be mindful of the taxes they will owe, said Johnson.
Money withdrawn from tax-deferred retirement accounts like 401(k)s and traditional IRAs, of course, are subject to ordinary income tax (plus a 10 percent early withdrawal penalty if you are under age 59 ½, unless you meet one of the exceptions).
“People who are newly retired and have always had money withheld for taxes by their employer sometimes forget about taxes when they start taking money out of their IRAs,” he said, noting that can result in a nasty surprise, or in some cases, a penalty if they can’t pay what they owe. “We suggest making estimated payments in retirement.”
Another important point: The amount of your combined taxable income in retirement affects how much of your Social Security benefit is subject to taxation, which can be anywhere from 0 to 50 percent, or even 85 percent in certain cases.
For tax years 2025 and 2026, married couples filing jointly must pay taxes on up to 85 percent of their Social Security benefit if they file a federal tax return and have a combined income of more than $44,000, according to the Social Security administration..6
“The higher you push your gross income, the more of your Social Security [check] is subject to income tax,” said Johnson. “If you’re not planning for that and paying attention to those limits, you may be surprised to find that you owe a lot more taxes than you expected.”
Retirees can potentially reduce the amount of Social Security tax they pay by managing their withdrawals from a combination of nontaxable accounts (like Roth IRAs) and tax-deferred accounts (401(k)s and traditional IRAs), said Johnson, who suggests working with a tax preparer or financial professional to maximize the size of your Social Security benefit.
Underfunding tax-deferred accounts
Tax-deferred accounts are one of the most effective ways to minimize your taxable income, while building financial security.
Your 401(k) and traditional IRA are funded with pretax dollars, which reduces the amount of tax you will owe in the year you contribute.
The 401(k) contribution limit is $23,500 for tax year 2025 and $24,500 for tax year 2026. If you are age 50 or older you may make additional catch-up contributions of up to $7,500 in 2025 and up to $8,000 in 2026. As noted, a new provision will enable those age 60 to 63 to make higher catch-up contributions of up to $11,250 per year in tax years 2025 and 2026 if their plan allows.
For individuals age 50 and older whose prior‑year wages exceed $145,000 (indexed; $150,000 for 2026), however, all catch‑up contributions including super catch‑ups must be made as after-tax Roth contributions once effective. If a Roth option is not available, catch‑up contributions for those higher income taxpayers are not permitted.
As for IRAs, the contribution limit in tax year 2025 is $7,000, with an additional catch-up contribution allowance of $1,000 if you are age 50 or older. Those limits climb to $7,500 and $1,100 respectively in 2026.
The amount you may deduct for contributions to a traditional IRA, however, is subject to income phaseout limits and whether you are covered by a workplace retirement plan.7
- For single taxpayers covered by a workplace retirement plan, the phase-out range is between $79,000 and $89,000 for tax year 2025 ($81,000 and $91,000 for 2026). They cannot contribute to an IRA at all if their MAGI exceeds those limits.
- For married taxpayers filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is between $126,000 and $146,000 for tax year 2025 ($129,000 and $149,000 for 2026). They cannot contribute to an IRA at all if their MAGI exceeds those limits.
- If you are not covered by a workplace retirement plan but your spouse has coverage, the phase-out range is between $236,000 and $246,000 in 2025($242,000 and$252,000 for 2026).
Similarly, contributions to a health savings account, or HSA, for those who are enrolled in a high-deductible health plan can reduce your taxable income.
HSAs are funded with pretax payroll deductions and the earnings become tax free if used to pay for qualified medical expenses. Unlike a flexible spending account, or FSA, contributions to which must be used or forfeited at the end of each year, contributions to an HSA accumulate. They can be used to cover current health care bills or saved for future use, including during retirement when medical bills are typically higher.
Many HSA plans allow plan participants to invest a portion of their account balance in brokerage accounts to seek higher returns. (Be aware that any investment in securities such as stocks, bonds, or mutual funds involves risk.)
Individuals may contribute up to $4,300 to an HSA in 2025, increasing to $4,400 in 2026. Families may contribute up to $8,550 in 2025 ($8,750 in 2026). An additional $1,000 catch-up contribution is available to those age 55 and older. The more you contribute to tax-deferred accounts each year, the more tax dollars you save.
Interest rate oversight
With interest rates still higher than a decade ago Johnson said his firm is seeing an uptick in individuals who are giving up more than they should because they are not taking advantage of tax-friendly savings strategies.
“People are getting decent interest rates again on Certificates of Deposit and other banking instruments, but that interest is taxed as ordinary income,” he said, noting ordinary income tax rates are higher for many Americans than the capital gains tax rate, which caps out at 20 percent.
As a result, taxpayers who have parked some of their savings in a CD and don’t immediately need the gains may be paying a higher tax than necessary, said Johnson.
“You could potentially get a similar interest rate in a similarly conservative product, but pay less tax, by repositioning that money into an annuity (which is tax-deferred), a Roth IRA (which is funded with after-tax dollars, but offers tax-free growth), or even municipal bonds, which actually end up federally and possibly state income tax free,” he said. Of course, each option comes with its own features, costs, risks, and tax considerations, so it’s important to weigh them against your individual goals and circumstances.
To determine the best saving and investment strategy for you, however, it may be best to consult a financial professional.
Forgotten tax credits, deductions
Tax credits and deductions can potentially reduce your tax liability significantly, but only if you claim them.
Many individuals fail to claim all the tax breaks to which they are entitled, especially new ones that they do not yet understand or existing credits that they fear may raise a red flag for an audit, said Mark Luscombe, principal tax analyst for Wolters Kluwer in Riverwoods, Illinois, in an email interview.
For example, most parents are well aware of the Child Tax Credit, but they are still unclear on the newer $500 credit for “other dependents” who do not qualify for the Child Tax Credit.
Luscombe said many homeowners forget to include points paid at closing in their mortgage interest deduction, while other taxpayers fail to consider some of the less obvious medical expenses, which may be deductible, including equipment for disabled persons, substance abuse programs, certain weight-loss programs, smoking cessation programs, and transportation to and from medical appointments.
A tax credit is more valuable than a deduction because it provides a dollar-for-dollar reduction of your income tax liability, while a deduction reduces the amount of your income that is subject to taxation. But both can lower your tax bill.
Some of the most valuable credits and deductions that taxpayers who qualify should claim include the Earned Income Tax Credit, which is worth up to $8,231 in tax year 2026 for families with three or more children, and the Child and Dependent Care Tax Credit, which is worth from 20 percent to 35 percent of your qualifying expenses for child or day care, up to an annual limit.
“Many people fail to keep track of day care expenses, including summer day camp expenses, or fail to obtain taxpayer identification numbers from day care providers, so that they can claim the Child and Dependent Care Credit,” said Luscombe.
The Saver’s Credit, for low- and moderate-income workers, also provides a credit of 10 percent to 50 percent (depending on your income) of your new retirement plan or IRA contributions up to $2,000 ($4,000 for married taxpayers filing jointly.)
The IRS offers an Interactive Tax Assistant tool to help you identify the tax credits and deductions for which you may be eligible. (Learn more: 5 commonly missed tax deductions and credits)
If you forget to claim a deduction this year, or have done so in the recent past, never fear. The IRS and many states allow you to file an amended tax return to claim those credits retroactively for up to three years.8
Reinvested dividends
When you sell a mutual fund, you pay taxes on the capital gain, which is calculated by subtracting the amount of money you paid for those shares (your “cost basis”) from the sales price.
If your mutual fund pays dividends, however, and you automatically reinvested those dividends to buy more shares, you slowly increased your cost basis with each new purchase. Why? Because you already paid taxes on that dividend when it was distributed.
Many taxpayers forget to factor in reinvested dividends when they sell those shares, which results in an artificially higher tax bill. Look closely at your securities transactions to ensure you are not paying more than you should.
Charitable donations
Wealthy taxpayers who are philanthropically inclined make a potentially costly mistake when they make a cash donation to a favorite qualified charity.
By donating appreciated stocks or securities instead, they can claim a tax deduction equal to the full market value (subject to limits and provided they itemize), as long as the asset was owned for at least a year. In addition, if you donate stocks or other investments, you may not pay any capital gains tax.
Donors can also gift their permanent life insurance policy to a charity, if it is no longer needed, which may yield an income tax deduction, depending on IRS rules and individual circumstances. The donor can instead name the charity as a beneficiary under the policy, so that he or she has continued access to the policy’s cash value. (Learn more: Using life insurance for charity)
As always, it’s wise to plan your charitable giving with help from a qualified tax or financial professional, who can help you make the most of your generosity.
No one wants to pay the federal government more than they owe. By avoiding penalties, saving smart, and leaving no tax deduction or credit stone unturned, you can potentially put more jingle in your pocket this tax-filing season. How you choose to use those savings is up to you.
Frequently Asked Questions:
Q: What does it mean to overpay taxes, and how common is it?
A: Overpaying your taxes means you're giving the government more money than you legally owe. This happens far more often than you might think. The IRS issues billions of dollars in refunds each year, representing money that taxpayers essentially loaned to the government interest-free. While getting a refund might feel like a windfall, it actually means you've been living on less money than you could have throughout the year. Even more concerning, many taxpayers leave money on the table by failing to claim deductions and credits they're entitled to, resulting in permanent overpayment that never gets refunded.
Q: Why should I care about overpaying if I eventually get a refund?
A: Think of it this way: when you overpay your taxes throughout the year, you're giving the government an interest-free loan. That money could have been working for you instead — paying down high-interest debt, building your emergency fund, or growing in an investment account. Moreover, a large refund often indicates you're having too much withheld from each paycheck, which means you're living on less money than necessary every month.
Q: What's the difference between a tax deduction and a tax credit?
A: Tax credits are significantly more valuable than deductions. A tax deduction reduces your taxable income — the amount of income subject to taxes. If you're in the 22 percent tax bracket and claim a $1,000 deduction, you save $220 in taxes ($1,000 × 22 percent). A tax credit, however, reduces your actual tax bill dollar-for-dollar. A $1,000 tax credit saves you a full $1,000 in taxes, regardless of your tax bracket.
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This article was originally published in March 2020. It has been updated.
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1 Internal Revenue Service, “Collections, Activities, Penalties, and Appeals,” Aug. 19, 2024.
2 Internal Revenue Service, “Failure to File Penalty,” Oct. 8, 2024.
3 Internal Revenue Service, “Topic no. 306, Penalty for underpayment of estimated tax,” Dec. 4, 2025.
4 Wall Street Journal, “Estimated Taxes Are a Pain. Here’s How to Avoid Costly Penalties.” Feb. 20. 2006.
5 Internal Revenue Service, “Social Security Income,” Sept. 5, 2025.
6 Social Security Administration, “Must I pay taxes on Social Security benefits?,” June 30, 2025.
7 Internal Revenue Service, “401(k) contribution limit increases to $24,500 for 2026; IRA limit increases to$7,500,” Nov. 13, 2025.
8 Internal Revenue Service, “File an amended return,” Nov. 26, 2026.
