Are You Prepared for Tax Day?

Tax time, unfortunately, can involve a mountain of paperwork. Make sure you have all your important documents ready before you begin filing, so you can avoid mistakes and take advantage of every deduction available to you.

The IRS will start accepting returns in early 2024.² The documents you may need to file your taxes can include:

• Forms W-2, Forms 1099-NEC (for contract work) and other tax forms showing income earned
• Records of charitable contributions
• Previous-year tax returns
• Records of mortgage interest and property taxes paid
• Any childcare expenses or medical costs

Work with your tax professional to determine the specific documents you’ll need to complete your taxes. It’s important to note that if you’ve changed your address or name in the past year, you’ll want to let the IRS and the Social Security Administration know.

The 2023 tax year ended December 31, but you still have time before Tax Day 2024 to max out some of your accounts and reduce your taxable income. For example, the deadline to contribute to an individual retirement account (IRA) or a health savings account (HSA) for the 2023 tax year is generally April 15, 2024. That means you may still be able to put more funds in these accounts—up to the IRS 2023 maximums of:

• IRA: $6,500, plus $1,000 in catch-up contributions if you were 50 or older at any time during the 2023 calendar year. ³
• HSA: $3,850 for single coverage ($7,750 for family coverage) under a high deductible health plan, and another $1,000 if you were 55 or older at any time during the 2023 calendar year.⁴

What about your employer-sponsored 401(k) plan? The window to contribute the IRS maximum to this type of account for the 2023 tax year closed for many employees on December 31, 2023. However, for the 2024 tax year you can contribute up to $23,000, as well as a $7,500 catch-up contribution if you’re age 50 and over at any time during the 2024 calendar year.⁵ So, if you are continuing to build your nest egg, consider saving more now. It can help you reduce your taxable income for 2024 tax filing purposes. 

Note, however, that additional contribution and eligibility limitations may apply, meaning the maximum amount you may be able to contribute to an IRA, HSA or 401(k) plan may be less than the IRS maximums stated above. You should speak to a qualified tax advisor for more information on the applicable contribution rules.  

If your financial situation has grown more complex or you simply prefer some assistance, consider working with a qualified professional at tax time. A tax professional can help you:

• Gather the right tax and financial data from your investment accounts
• Take advantage of any deductions or credits you’re entitled to
• Prepare your income tax returns
• Provide advice tailored to your unique financial situation

A tax professional can also provide you with income tax projections, including quarterly estimated payments, reducing the risk of unwanted surprises if your tax situation changes. Further, if you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you to experienced tax professionals at leading U.S.-based providers across the country to help ensure your tax strategy is optimized.  

It’s never too late to start incorporating tax-efficient strategies into your longer-term financial plan. Year-round active tax management may help you save more for goals and keep more of what you’ve earned. For example:

• Tax-loss harvesting is a strategy where you offset federal income taxes on net capital gains via a strategic sale of stock or securities to recognize losses, some of which can carry over from a prior year.⁶ Excess capital losses may also be used to offset up to $3,000 per year ($1,500 if married filing separately) of ordinary income.
• Tax-aware asset location involves allocating higher-yield assets to a tax-deferred or tax-exempt account, which may help decrease your current federal taxable income and may help increase your after-tax returns.
• Tax-favorable investment options, such as municipal bonds, are generally exempt from federal (and, in some cases, state and local) taxes. Also consider tax-efficient exchange-traded funds or separately managed accounts.

With Morgan Stanley Total Tax 365, your Financial Advisor has access to a range of tax-smart techniques to help you manage your tax liability and grow your long-term wealth, 365 days a year. Speak with your Morgan Stanley Financial Advisor about how you can incorporate tax-efficient investment strategies into your financial plan today to help you prepare for tomorrow. 

If, instead of a refund, you end up owing the IRS money, you’ll want to have a plan. If you have the cash and don’t want to risk draining your savings or emergency funds, writing a check may be the easiest option.

If you have a steep tax bill, you may want to look for additional sources of liquidity. One approach is selling individual securities or funds in your portfolio to help raise the cash you need. Be aware of the downsides, including potential income taxes on capital gains, loss of future growth potential and asset-allocation imbalances in your portfolio. Your Morgan Stanley Financial Advisor can help you mitigate these downsides and potentially reduce the taxes you may owe, using our Intelligent Withdrawals tool.

Using a credit card, taking out a loan or paying the IRS in installments are among the other options—each with its own pros and cons. Be sure to think ahead about which payment method may work best for you. 

If you received a refund last year, you may be looking forward to another one in 2024. Instead of spending it all outright, you may want to consider how to use it to support your long-term financial well-being, for example by:

• Reducing your debt burden: If you’re paying high interest charges on a credit card balance or a consumer loan, it can be difficult to save for longer-term financial goals. Consider using your tax refund to help service your balances with the highest interest charges while paying the minimum on lower-rate debt.
•  Preparing for the unexpected: A 2023 Bankrate survey found that 60% of Americans felt behind when it came to their emergency savings.⁷ Consider using your refund to start, or shore up, an emergency fund, with the aim of having at least three to six months of living expenses set aside for a rainy day.
  
• Adding to your nest egg: When it comes to saving for retirement, every little bit helps. Consider putting some or all of your tax refund in your IRA (traditional or Roth), if you haven’t already reached the IRS contribution limits for those accounts for the year. You may also want to consider having less income tax withheld from your paychecks this year. While you may not receive as big a refund (or any refund at all) as a result, you’ll be freeing up income to contribute more to your 401(k) throughout the year—and boosting your nest egg in the process. Your tax preparer can help you determine how much to have withheld.
  

When it comes to taxes, preparing in advance can help you save time and money. Get a jump start on moves you can make today and throughout the year to make tax season as painless as possible.