During tax season I'm in contact with 10 to 20 clients a day, six days a week. The same questions have been coming up for years. To save you and your tax preparer some time and maybe quash a few misconceptions, here are answers to five of the questions I hear most often.

1. Isn't a bigger refund better?
The simple answer is "no." The important line on your tax return is the "Tax Liability" line, not the "Refund or Balance Due" line. A smaller tax liability is always better. Taxpayers should plan to minimize their tax, not maximize their refund.

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Example: Jonathan and James each have federal tax calculated to be $12,000 on their tax returns. Jonathan receives a $500 refund and James receives a $2,000 refund. Who made out better? Jonathan, with his $500 refund. They both paid the same in federal taxes, but Jonathan had $12,500 withheld and James had $14,000 taken out of his pay. Jonathan had use of his money throughout the year, and did not provide the government with an interest-free loan. James gave the government an interest-free loan of his money, while he paid for a motorcycle repair on his credit card at 17% interest. (For some tips on how to best spend a tax refund, read Don't Waste Your Tax Refund.)

True, many people use their tax refund as a form of forced savings. But in this day of direct deposit, it is quite easy to set aside that extra $25 a week (or whatever your refund cushion is divided by pay periods) and have it available for that motorcycle repair, vacation or other needs. Why let the government have free use of it? Another concern might be your state's financial condition. In 2009 and again this year some states are delaying processing refunds due to their own fiscal problems.

2. Why am I taxed on my state refund?
This is as much a complaint as a question, since many people believe they are being taxed on this money twice. Not so. There is a good explanation for what appears to be a tax on your refund: Your state tax refund is added back in to your income and you are taxed on it, only if you itemized in a prior year and deducted that overpayment. If you deducted either state and local tax withholding or estimated tax payments on your return by itemizing on Schedule A in the previous year, you in effect deducted an amount as paid which was later returned to you as a refund. Now, you must "un-deduct" it by including the refund in income the year you receive it. That's the simple part.

Now for the complicated part. It can get more confusing if you only received a partial benefit by deducting those taxes in the prior year. This can happen for one of two reasons. 1). Let's say your state tax refund was $1,000, but your itemized deductions were only $500 greater than the standard deduction. In that case the state tax deduction only reduced your taxable income in the previous year by $500 and only $500 of the refund belongs in income this year. 2.) If you paid the alternative minimum tax the previous year, you might not have gotten the full (or even any) benefit of the previous year's state income tax deduction. In that case, the part of the refund you must take into your income is also less than $1,000.

That's one reasons it pays, if you're using a new tax pro, to bring along the previous year's return and if possible, three years of back returns. Tax software such as Intuit's (Nasdaq:INTU) TurboTax will also calculate the portion of your refund that is taxable - if you have transferred information from the previous year's return into your 2009 return.

3. Why am I paying tax on Social Security? Isn't this my own money, taxed twice?
It's not all your own money. It's true that you paid income tax on the portion of your salary taken for Social Security. But your employer matched what you paid into Social Security, and you didn't pay taxes on the employer's share. In addition, current retirees are getting a real return on the money they paid in - a return they've never been taxed on. (Given the budget deficit, what future retirees will get is another issue I'll leave to the policy wonks.) So although you understandably don't like the fact that up to 85% of your Social Security benefits can be taxed, maybe you can feel a little better knowing that you are not paying taxes on all of it twice.

4. Should I pay off my mortgage, when it means losing my mortgage deduction?
There is little wisdom in having a mortgage solely for the purpose of a tax write off. For every dollar of interest you pay, you get back 25 cents (more or less depending upon your tax bracket) in a refund. You lost 75 cents. And that's assuming you itemize. If you have a small mortgage, you may do as well or almost as well claiming the standard deduction, and thus get little or no benefit form your mortgage break.

But there are other considerations when deciding on whether to maintain a mortgage or to make extra principal payments to pay it off early. Will you be "cash poor" by making extra payments, and not have funds available for other needs and emergencies? Will your employment situation be changing in some way which will make obtaining credit more difficult in the future? If so, it might be beneficial to keep the mortgage or obtain an equity line of credit now (while avoiding the temptation to tap that line without forethought.) If you must have a loan, home mortgages generally are the lowest cost option because of lower interest rates and tax deductibility. (For more on accelerated payments, see Be Mortgage-Free Faster.)

Moreover, even if you have plenty of emergency funds and job security, you must consider the interest rate on your mortgage. If it's very low, you may be able to do better (on an after-tax basis) by investing the money you'd otherwise use for early repayment of principal.

5. Should I tap my retirement account to pay off my credit cards?
Many people became very nervous during the recent market crash, and some emptied their retirement accounts, using the cash to pay off debts. They were scared of stocks and scared of debt, too. Even if you decide you need a more conservative asset allocation (with more bonds or cash equivalents and fewer stocks), you can do it within your individual retirement account or 401(k), without incurring the tax on retirement account withdrawals, plus a possible 10% early withdrawal penalty.

Plus, you must consider more than the tax on the withdrawal itself. The income you recognize when you withdraw cash from a traditional pretax retirement account can push you into a higher tax bracket, forcing more of your Social Security to be taxed or causing you to lose various tax benefits because of "phase out" rules. (Many deductions and credits are only allowed within strict income limits.)

Paying high interest rates on your credit card debt while getting a low rate of return on your 401(k) investments seems counterintuitive, but by withdrawing money prematurely from your retirement account, you lose the chance to let your investments recover and end up having a big chunk of what you take out go to Uncle Sam. So before you decide to cash out a retirement account, ask your tax pro to calculate how much you'll owe. Plus, investigate other alternatives, including a loan from your 401(k) and withdrawals of your original contribution to a Roth IRA.

I am not a financial planner and don't pretend to be one. But the annual tax return ritual is a good time to look at your tax situation and consider how it fits into your total financial picture - and how financial moves you make could affect your tax bill next year.

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