Morgan Stanley
  • Wealth Management

Are You Prepared for Tax Day?

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 new, July 15 federal tax filing and payment deadline approaches, if you haven’t already filed, consider taking these steps:

Manage your Wealth

Find a Financial Advisor, Branch and Private Wealth Advisor near you

*Invalid zipcode

Get Your Paperwork Organized

Tax time, unfortunately, can involve a mountain of paperwork. Make sure you have all of 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 may include:

  • W-2s, 1099s and other income forms
  • 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 2019 tax year ended December 31, but you still have time before Tax Day 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 2019 tax year is generally April 15, 2020, but now has been extended to July 15, 2020. That means you may still be able to put more funds in these accounts—up to the IRS 2019 maximums of:

  • $6,000, plus a $1,000 in catch-up contributions if you’re 50 or older, for IRAs,
  • $3,500 for single coverage ($7,000 for family coverage) and another $1,000 if you’re 55 or older 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, 2019, you still have time to contribute for the current tax year—up to $19,500, as well as a $6,500 catch-up contribution if you’re age 50 and over.3 So consider saving more now—it can help you reduce your taxable income for 2020 tax filing purposes as you continue to build your nest egg. 

Note, however, that additional contribution 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 taxes.4 These do-it-your-selfers 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, especially now that the tax reforms passed in late 2017 have changed key portions of the tax code. 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;
  • Offer 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. Your Morgan Stanley Financial Advisor can connect you to experienced tax planning and preparation professionals at leading U.S.-based providers across the country to service all your tax needs.  

Plan for Future Tax Seasons

It’s never too late to start incorporating tax-efficient strategies into your longer-term wealth plan. Active tax management may help you save more for goals, such as retirement, and keep more of what you’ve earned. For example:

  • Tax-loss harvesting is a strategy where you offset capital gains via a strategic use of investment losses, some of which can carry over from a prior year, or for future filings.
  • Tax-aware asset location involves distributing higher-yield assets to a tax-deferred or tax-exempt account, which may help minimize your exposure to current taxes 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.

Speak with your Morgan Stanley Financial Advisor about how you can incorporate tax-efficient investment strategies into your wealth 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.

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 one of the 73.2% of tax filers who received a refund in 2019,5 you may be looking forward to another one in 2020. Instead of splurging 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 2019 Bankrate survey found that only 40% of Americans would be able to cover a $1,000 emergency from their savings.6 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) in 2021, 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 to make tax season as painless as possible.