In the world of personal finance, knowledge is power, especially when it comes to understanding one’s tax obligations. For investors and savers alike, making sound decisions about where to stash money can result in unexpected tax liabilities come April. As we dive into the 2024 tax season, it’s crucial to unpack how various income-generating assets are taxed and what you should keep in mind to avoid unwelcome surprises.
The 2024 tax season is upon us, with the Internal Revenue Service (IRS) now accepting returns. For most individuals, April 15 is the federal filing deadline, though extensions may grant extra time until October. While the deadline looms, one significant aspect to remember is that any taxes owed to the IRS need to be paid by April 15 to avoid potential penalties. This is especially crucial for those who might have enjoyed increased yields from various savings accounts and investment vehicles in the previous year.
Investors who benefited from the attractive interest rates on high-yield savings accounts, certificates of deposit (CDs), and comparable savings instruments should take note. Even as the Federal Reserve moderated interest rates in late 2023, many banks continued to offer enticing yields through 2024. As Catherine Valega, a certified financial planner at Green Bee Advisory, points out, many individuals might overlook the relatively high interest income earned, leading to a shock upon filing taxes. “People often forget about this esoteric income,” she observes, illustrating a common pitfall where savers neglect to account for earnings that may later incur higher tax rates, with the highest federal marginal tax rate reaching 37%.
As tax season approaches, vigilance is essential when it comes to collecting the necessary documentation. Investors should be on the lookout for Form 1099-INT from financial institutions, which discloses interest earnings if they surpass $10. Dividends from stockholdings may also come into play, requiring close attention to Form 1099-DIV or a consolidated 1099 issued from a brokerage firm. The taxation of qualified dividends at favorable long-term capital gains rates, which can be 0%, 15%, or 20%, depending on the individual’s federal tax bracket, underscores why it’s crucial to keep meticulous records of all investment income.
Tim Steffen, a certified public accountant and director of advanced planning at Baird, advises patience in filing returns: “You must wait until you receive your tax documents in the mail.” Frustrating as it may be, these tax documents don’t typically start arriving until mid-February and can extend into March, depending on the type of investments held. For investors involved in partnerships, the timetable can be even more complex. Since master limited partnerships aren’t subject to federal taxes themselves, limited partners must accrue income distributions which come with their respective Schedule K-1 forms. If investors rush to file their taxes before receiving this essential documentation, they could face costly amendments later.
As you prepare your tax return, it is wise to take a step back and assess where your income-generating assets are held. Specific assets, particularly limited partnership interests within individual retirement accounts (IRAs), can lead to a tax liability characterized as “unrelated business taxable income.” This necessitates that the retirement account file a return, which adds a layer of complexity that many investors may not anticipate.
Additionally, double-checking your brokerage’s report of capital gains is recommended. Steffen notes that, while brokerages generally do a competent job tracking this information, individuals managing their own investments may overlook discrepancies—particularly if they have engaged in reinvesting over time. It’s advisable to maintain a vigilant eye on state tax obligations, as different assets may undergo varying tax treatments under state and federal laws. For instance, interest income from U.S. Treasury securities is exempt from state and local taxation but remains taxable federally. This discrepancy emphasizes the need for a comprehensive understanding of both state and federal tax codes.
Final Thoughts: Preparedness is Key
Tax season is an inevitable aspect of financial life that can induce anxiety, but being proactive and educated can mitigate some of that stress. When preparing to file, taking an organized approach to documentation, understanding your obligations on various income streams, and being aware of the regulations surrounding your investments will empower you to face tax season with confidence. Beyond just the numbers, remaining informed about tax implications can lead to better financial strategies throughout the year. As April 15 approaches, let thoughtful preparation and clarity of understanding mark your journey through tax season.