The countdown to Tax Day has begun. Here are some steps you can take 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 both for this tax season and in future years.
As the April 18 federal tax filing and payment deadline approaches, it may be helpful to review Morgan Stanley’s 2021 Federal Income Tax Tables, and if you haven’t already filed, consider these tax season tips:
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 avoid mistakes and take advantage of every deduction you’re entitled to. Documents and information you may need to include:
- Forms W-2, Forms 1099 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 help you determine the specific documents you’ll need to complete your taxes.
Max Out Tax-Advantaged Accounts Before Tax Day
The 2021 tax year ended December 31, but you still have time before Tax Day 2022 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 2021 tax year is April 18, 2022. That means you may still be able to put more funds in these accounts—up to the IRS 2021 maximums of:
- $6,000, plus $1,000 in catch-up contributions if you’re 50 or older at any time during the 2021 calendar year, for IRAs
- $3,600 for single coverage ($7,200 for family coverage) and another $1,000 if you’re 55 or older at any time during the 2021 calendar year, for HSAs2
What about your employer-sponsored 401(k) plan? While the window to contribute the IRS maximum to this type of account closed for many employees on December 31, 2021, you still have time to contribute for the current tax year—up to $20,500, as well as a $6,500 catch-up contribution if you’re age 50 and over at any time during the 2022 calendar year.3 So consider saving more now—it can help you reduce your taxable income for 2022 tax filing purposes as you continue to build your nest egg.
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 contributions rules.
Consider Getting Help From a Tax Professional
About a third of American households file their own tax returns.4 These do-it-yourselfers may feel comfortable navigating complex tax forms and have the patience to gather documents and prepare their own returns. They may also have a straightforward tax situation, which can simplify the process.
Others seek professional help. As your financial situation grows more complex, 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.
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:
- Tax-loss harvesting is a strategy where you offset capital gains via a strategic sale of stock or securities to recognize losses, some of which can carry over from a prior year.5
- Tax-aware asset location involves allocating higher-yield assets to a tax-deferred or tax-exempt account, which may help decrease your current 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’s Total Tax 365 approach, 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 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.
But 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 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 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.
Think About How You’ll Spend a Refund
If you’re among the three-quarters of tax filers who typically receive a refund,6 you may be looking forward to another one in 2022. 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 2021 Bankrate survey found that only 39% of Americans would be able to cover a $1,000 emergency from their 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 2023, 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, a little preparation 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.