Clients may see a tax refund or credit appear in their financial plan when more federal or state income tax has been withheld during the year than is ultimately owed after all deductions and tax credits have been applied.
How Voyant calculates taxes
Each year, Voyant performs two stages of tax calculation:
- Tax withheld at source – Taxes are estimated and withheld from income as it is received, such as employment income, pension income, Social Security (where applicable), or certain retirement account withdrawals.
- Year-end tax calculation – At the end of the year, Voyant performs a full tax assessment using the client's total income, deductions, exemptions (where applicable), and eligible tax credits.
If the final tax liability is lower than the amount already withheld throughout the year, the difference is modelled as a tax refund in the following year, similar to the refund a client may receive after filing their federal and state income tax returns.
Example
Consider a client who is employed and contributes to a traditional 401(k) and also makes deductible contributions to a Traditional IRA.
Income taxes may be withheld from the client's pay throughout the year based on payroll withholding elections. When Voyant performs the year-end tax calculation, it applies all eligible deductions and recalculates the client's total tax liability.
If the client paid more tax during the year than was ultimately owed, Voyant models the resulting refund in the following year.
Other situations that can generate a tax refund
A tax refund may occur whenever deductions or tax credits reduce the client's final tax liability after taxes have already been withheld. Common examples include:
- Deductible Traditional IRA contributions
- Self-employed retirement plan contributions
- Deductible expenses
- Mortgage interest deductions (when itemizing)
- Charitable contribution deductions (when applicable)
- Education-related tax credits
- Other eligible federal or state tax deductions and credits That have been manually entered.
Why does the refund appear in the following year?
Voyant models tax adjustments as part of the annual tax filing process. Although payroll withholding can sometimes be adjusted during the year by updating a client's Form W-4 or state withholding elections, the software generally assumes that any overpayment or underpayment of tax is reconciled when the annual tax return is filed.
As a result, any overpayment identified during the year-end calculation is shown as a tax refund in the following year.
Key takeaway
A tax refund in Voyant does not necessarily indicate an error. It simply means that the taxes withheld throughout the year exceeded the client's final tax liability after all applicable deductions and tax credits were considered during the annual tax calculation.
If the plan shows a tax refund, review the client's income sources, tax withholding, deductions, and tax credits to understand what reduced their overall tax liability.