Start Now to Make Your 2024 Tax Return Easier to Do

Last year is a closed book for most transactions that will be reported on your 2023 tax return. However, there are some things you could do now that would simplify your tax return for 2024 and later years and also reduce the fees you pay a professional preparer. Here are some actions to consider.

Consider not investing in publicly traded partnerships (“PTP”) unless you invest amounts meaningful to your total financial assets. The K-1s these entities provide are ten or more pages with at least a dozen numbers that need to be recorded on the return and which might cause extra forms to be used. If the PTP has income in states other than yours, you might also have to file returns in those states. Further, some PTPs send K-1s late, making it necessary to file an extension for your individual return.

Further, if PTP shares are owned in a retirement account, including an IRA, Roth IRA, or 401k, some of the income could become taxable in those tax-sheltered accounts. This means that the retirement account would need to file a tax return and pay tax on some of its income. If you already own such shares, sell them now, and then 2024 would be the final year that you would have to report these investments.

Everything written above for PTPs applies to Hedge Funds, except these K-1s could be as many as thirty pages with about twenty numbers that need to be transcribed onto your return. Also, if you are not sharp, you might miss the note buried on page 14 or thereabouts that the amounts on page one of the K-1 are likely not correct, and you need to check with your tax preparer (who will probably have no knowledge about that particular hedge fund).

Foreign stocks provide complicated 1099s with foreign tax withheld. If you are in a mutual fund with foreign stocks, the reporting gets even more complicated since there could be withholdings from multiple countries that would need to be reported separately. Additionally, foreign stocks cause extra forms to be included in your return. Some brokerage accounts reporting foreign dividends do not provide the full information on the 1099s but refer the investor to an attachment sheet, instruction material included with the 1099, or a website.

If you believe you are wealthy enough to invest in PTPs, hedge funds, and foreign stocks, and the investment is meaningful to your entire portfolio and that they are appropriate for you, then don’t skip these because of the increase in the complexity of your return and your preparation fees.

If you are in an Investment Club, you also should have the club get out of all of the above so your K-1s will not be delayed, and you won’t have to deal with the above for relatively small amounts.

Tax-free bond funds provide 1099s, but you probably would need to look at the attachment sheets that give the percentages of taxable income allocated to each state the interest was from. Either buy individual bonds or buy a fund with bonds from a single state. Many tax-free bonds now have interest subject to the Alternative Minimum Tax (AMT). Watch for this if you are subject to the AMT, and consider staying away from these funds.

If you have shares in your own name rather than with a broker, consider transferring them to a brokerage account. This way, the dividends will be deposited in that account, and you will receive one 1099 reporting all your dividends. When you transfer the shares, provide your cost basis to the broker. Many brokerage firms could arrange the transfer to your account for you.

It is a good practice to keep in touch during the year with your tax advisor to discuss anything new or unusual that will occur during the year or has occurred. You are better off calling before it occurs, but in any event, alert the preparer as soon as you can. Unusual transactions are best worked on when they occur and during “tax season,” when most preparers’ resources are stretched to the limit.

These types of transactions include marital separation agreement payments, the sale of a residence, vacation home, rental property, a business, partnership interest, or valuable artwork or a hobby collection, tax-free exchanges, the sale of certain employer stock or exercising options, or sales of stock and property that was inherited or received as a gift. It also includes inherited partnership interests, stocks, or other investment property, and more than a dozen other types of transactions. If you are contemplating making a charitable donation of property valued over $5,000, you must speak to your tax adviser before making that contribution since you would need to obtain an IRS-acceptable appraisal within a specific time frame. You should also consult with your advisor if you make or want to make gifts during the year.

If your income is substantially greater than last year, or if you won the lottery or have large gambling gains, meet with your accountant before the year ends to see if there is anything that can be done to save taxes. Once the ball comes down for the New Year, it will be too late.

The above are some suggestions of what you can do that will make preparing this year’s and later year’s returns easier, less costly if you use a professional, and can make you more aware and proactive in reducing your taxes as much as possible.

P.S. I am taking a break from the stock market blogs for a couple of weeks but will get back to them.