Are You Prepared for Tax Day? A Checklist
Morgan Stanley Wealth Management01/10/24
Summary: The countdown to Tax Day has begun. Here are some strategies to consider as the deadline approaches.
It should come as no surprise that many Americans take a dim view of paying taxes.1 Still, the saying coined by Ben Franklin more than 200 years ago—“Nothing is certain except death and taxes”—rings true today: Taxes are inevitable. The sooner you get started, the better prepared you’ll be.
As the April 15 federal tax filing and payment deadline approaches, it may be helpful to review our Current Rates and Brackets guide, and if you haven’t already filed, consider these six tax season tips:
1. Get your paperwork organized
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 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 (for contract work) and other tax forms showing income earned
- Previous-year tax returns
- Records of mortgage interest and property taxes paid
- Any childcare expenses or medical costs
- Records of charitable contributions
Work with your tax professional to help you 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.
2. Max Out Tax-Advantaged Accounts Before Tax Day
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’re 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 at the end of last year. 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.
3. Consider Getting Help From a Tax Professional
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 and help reduce the risk of unwanted surprises if your tax situation changes.
4. Plan for Future Tax Seasons
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:
5. If You Owe Money, Consider How You'll Pay
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.
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.
6. Think About How You’ll Spend a Refund
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 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) in 2024, 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.
- Pew Research Center. “Top tax frustrations for Americans: The feeling that some corporations, wealthy people don’t pay fair share.” Accessed November 28, 2023 https://www.pewresearch.org/short-reads/2023/04/07/top-tax-frustrations-for-americans-the-feeling-that-some-corporations-wealthy-people-dont-pay-fair-share/
- IRS, Tax season rapidly approaching: Get ready now to file 2023 federal income tax returns in early 2024, Accessed Dec. 7, 2023, https://www.irs.gov/newsroom/tax-season-rapidly-approaching-get-ready-now-to-file-2023-federal-income-tax-returns-in-early-2024
- IRS, Retirement Topics - IRA Contribution Limits, Accessed Dec. 7, 2023, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
- IRS, Tax Forms and Instructions, Accessed Dec. 7, 2023, https://www.irs.gov/pub/irs-drop/rp-22-24.pdf
- IRS, 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000, Nov. 1, 2023, https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
- A loss on stock or securities is subject to wash sale rules. If you acquire the same or substantially identical stock or securities within 30 days before/after the sale that generated the loss, that loss cannot be used immediately for federal income tax purposes
- Bankrate. “Survey: 81% of Americans didn’t increase their emergency savings this year as majority feels behind.” Accessed November 28, 2023 https://www.bankrate.com/banking/savings/emergency-savings-survey/
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