Filing taxes can be a stressful and time-consuming task for many of us. However, with tax season upon us, it's essential to start thinking about the benefits of filing taxes early. Not only can it help you save time and avoid last-minute scrambling, but it can also have financial benefits.
In this article, we'll explore the advantages of filing taxes early and how it can help you save both time and money. Whether you're a seasoned tax filer or new to the process, read on to discover the benefits of filing your taxes early.
TLDR:
Early tax filing leads to quicker refunds, if any.
Filing taxes early can reduce the risk of identity theft.
Starting the process early provides time to explore options for minimizing taxable income.
Early tax filing can help plan and prepare for tax liabilities, minimizing the initial impact of a large tax bill.
1. Avoid tax scams and identity theft
One of the best ways to safeguard against tax-related identity theft is to file your tax return as early as possible. In these cases, a criminal may file a fraudulent tax return and collect a refund in your name before you file your legitimate return. By filing your legitimate return before the criminal can do so, the fraudulent return will be rejected.
If you suspect that your account has been compromised, it is still important to file your legitimate tax return and pay your tax bill if you owe money. However, you may need to submit a paper return instead of an electronic one, and include Form 14039, the Identity Theft Affidavit, with your return.
To protect yourself, remember that the IRS will not call you or contact you via email, and you should not give your personal information to anyone over the phone. Visit Identity Theft CentralOpens in a new window for information about tax-related identity theft and data security protection from the IRS.
2. Fix mistakes and make adjustments
If you don't have all the tax documents you need, don't delay filing your taxes. Instead, ask the people or organizations that are supposed to provide them to you as soon as possible. The sooner you have them, the more time you have to check for mistakes and make any changes that could reduce how much tax you owe.
When you file your tax returns, make sure to avoid common mistakes like making math errors, forgetting to include all your income, not claiming credits you're eligible for, or not accounting for investment losses that could reduce the amount of tax you owe. Taking a little time to review your tax return can save you money in the long run.
One helpful document is the 1099 form, which summarizes your gains and losses from investments. If you have gains, you'll owe taxes on them, but if you have losses, you can use them to reduce your taxable income by up to $3,000 (or $1,500 if you're married and filing separately) and carry over any extra losses to future tax years. This is an excellent way to lower your tax bill, so be sure to take advantage of it if you have investment losses.
Also, avoid tax filing mistakes with our quick post: Don't let simple mistakes cost you money and delay your tax return!
3. Take stock for 2023 and beyond
The beginning of the year is a great time to take stock of your financial situation, which is good to do at least once a year.
Knowing where you stand well before the tax-filing deadline also gives you time to adjust your current tax withholding and figure out what you can contribute to accounts like traditional IRAs, Roth IRAs, and health savings accounts (HSAs), based on your modified adjusted income and your overall financial picture.
IRA contributions A contribution to a traditional IRA may reduce taxable income and, in turn, lower 2022 taxes for those eligible for the tax deduction.2 The tax-deductible contribution limit for the 2022 tax year is $6,000.
For those who are age 50 and over, the limit is $7,000. Remember, you can make contributions to your IRA for the 2022 tax year up to the filing deadline of April 18.
Note: It isn't necessary to have a job to have a traditional IRA. A nonworking spouse, as long as their spouse has earned income, can contribute to a traditional or Roth IRA. The amount of a married couple's combined contributions can't exceed the amount of earned compensation reported on their joint return.
HSA contributions Contributing to a health savings accounts (HSA) can also reduce taxable income. In 2022, an individual with self-only coverage can contribute $3,650 and those with family coverage can contribute $7,300. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. You also can make contributions for the 2022 tax year until the April 18 tax-filing deadline.
Inflation adjustments for IRAs and HSAs Contributions limits for both IRAs and HSAs have received an inflation adjustment for tax year 2023.The IRA contribution limit for tax year 2023 is $6,500, and $7,500 for people 50 and older. For HSAs, an individual with self-only coverage can contribute $3,850 and for those with family coverage, the contribution limit increased to $7,750.
SEP IRAs Self-employed individuals and freelancers can open a Simplified Employee Pension plan—more commonly known as a SEP IRA—even if they also have a full-time job as an employee. Those who earn money freelancing or running a small business on the side could take advantage of the potential tax benefits from their side gig. With a SEP IRA, contributions may be tax-deductible, just like with a traditional IRA, but the SEP IRA has a much higher contribution limit. The contribution amount varies based on income. For tax year 2022, the contribution limit is the lesser of 25% of eligible compensation, or $61,000. For 2023, the ceiling rises to $66,000. (Self-employed people may face lower limits.3)
Consider speaking with a tax advisor to determine the impact of SEP IRA contributions on the tax deductibility of contributions to a traditional IRA in the context of your personal situation.
4. Avoid "sticker shock"
The last thing you want is to get to the bottom line and see an unexpected large balance owed to the IRS. If you wait until the last minute to prepare your taxes, you may not have time to raise the cash for the payment. Filing for an extension won't help. You still have to pay what you owe by the filing deadline or face a penalty and interest.
This may be particularly important as larger numbers of Americans earn self-employment income from things such as driving for a ride-sharing service, renting out a room in their home, or performing consulting services. People engaged in these types of income-producing activities are typically required to pay estimated taxes each quarter (i.e., 4 times a year). If you're new to self-employment and failed to make quarterly payments, you'll probably need time to plan for any additional taxes due.
By starting your tax return now and giving yourself time to resolve questions and issues that might arise, you may also find the process less anxiety-producing and may discover some opportunities to help lower your tax bill.
5. Get it done
People usually considering doing taxes one of the most onerous financial tasks of the year, and getting it done could make all the other items on your financial to- do list seem easier.
The ironic thing about taxes is that people see it as a purely negative experience, but roughly two-thirds of filers got money back, and the average refund in 2022 was $3,039Opens in a new window, according to the IRS.
"We may associate taxes with losing or giving up money, but if we can change the narrative we tell ourselves when it's time to file our taxes, from a negative to a positive, then we may be more motivated to file earlier," Agbonlahor says.
One of the keys to beating tax procrastination is to try to be realistic about how long it will take. Is it really going to be just a few hours? Perhaps you could time yourself.
If it's taking longer than you want, you can look for ways to make the paperwork easier for yourself throughout the year, so you don't waste time looking for lost documents. Some people take photos of important receipts and store them in a folder on a phone, some set aside a folder for tax documents, some use the old-fashioned shoe box.
You might also avoid discomfort in the present by thinking about how much worse it will feel down the line when you are pressed for time and find out something annoying, like you need to do a system upgrade before your tax prep software will work, or your accountant has no more appointments left.
To keep yourself on track, consider focusing on the potential benefit, not the cost. The cost is just a few hours of your time, the benefit could be some money.
In conclusion, filing your taxes early can save you time, stress, and potentially money. By taking the initiative to file early, you can avoid last-minute rush and potential mistakes, while also gaining peace of mind and potentially receiving your tax refund earlier.
At RP Financial Services, we understand the importance of filing your taxes accurately and on time. Our team of experienced Enrolled Agents is here to help you navigate the complex tax code and maximize your deductions and credits.
Contact us today at (720) 712-7724 or schedule your FREE consultation using the link: https://calendly.com/rpfs/consult-with-ea to discuss your tax needs and see how we can assist you in achieving your financial goals.
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