Advantages of Filing Taxes Early Go Beyond a Quicker Refund
At the beginning of every year America is divided into two camps: team “Get My Taxes Done Early” and team “Wait Until April 15th.” Which camp you fall into often depends on whether you think you are getting a big fat refund or whether you believe a tax bill is coming.
No matter your tax situation, though, there are significant advantages to doing your taxes early. Advantages of early filing include easier money management if you owe additional taxes, opportunities for greater deductions, and reducing the risk of identity theft and fraud.
Fewer Problems if You Owe Money
Those that owe money every year to the IRS, or who believe they do, often put off filing their taxes. Unfortunately, this strategy won’t change the amount of money you owe; the best it can do is kick the can down the road. At worst, however, filing your taxes in April can actually cost you more.
More Time to Get the Money Together
If you owe money to the IRS, filing your taxes on April 15th means you have one day to come up with the money. Instead, if you file your taxes in January or February, you’ll have months to get the money together. The extra time will allow more time to adjust your budget and save the money or to find a low cost loan if you are in a dire situation.
Avoid Interest, Fees, or Penalties
If the last paragraph made you think “I’ll just file an extension,” you’ll end up with an even bigger tax bill. Remember, if you owe money, filing an extension doesn’t extend the period for payment. An extension can only extend the filing deadline.
If you owe money and don’t pay it by April 15th, the IRS will consider your tax payment to be late. In addition to the taxes you owe, you may now also owe interest and penalties.If you do owe money on your taxes, talk with a professional tax adviser about how to work with the IRS to minimize or eliminate any penalties while you collect the money you owe.
Bigger Tax Deductions
By filing early, you may gain the opportunity to take additional tax deductions you might have missed out on by filing closer to April 15th. It’s not that new tax deductions become available to you, but the extra time will allow you more opportunities to find and take advantage of the tax deductions you qualify for.
Surprise Tax Deductions
The tax code is an incredibly complex and long document. In fact, an IRS report to congress once admitted that the IRS actually doesn’t know how many pages long the tax code is. Even financially sophisticated people are unaware of many obscure tax deductions. As a result, your tax adviser may surprise you with additional tax deductions for which you qualify.
As an example, if you purchase a home, you probably know the mortgage interest is tax deductible. Your adviser may surprise you, however, with the fact that points, pre-paid property taxes, and some closing costs can also be tax deductible. Without the closing statements, however, you may not know how much of a deduction you can claim.
Similarly, if you moved for a new job, all of your moving expenses may be tax deductible as well. The tax code is littered with obscure deductions, which a professional tax adviser can help you find. Your adviser, however, will need to get their hands on paperwork and receipts to know how much to deduct.
If you get your taxes prepared in April, you may not have time to get the necessary documents together to claim the new deductions. Your adviser can always file an extension while you find the documents, but the extension will delay any refund you may now be getting.
Tax Planning Opportunities
Another advantage to filing taxes early is it might open you up to new tax planning opportunities. For example, tax deductible contributions to qualified retirement accounts can be made as late as April 15th and still be counted on last year’s tax return. By preparing your tax return early, you have time to make the contributions and then change your return before filing it with the IRS.
Your tax adviser can assist you in identifying contributions which qualify for this tax treatment, as well as advise you on whether it is better to take the deduction for last year, or save it for when you do the current year’s taxes. In addition to tax-deductible contributions, there are many other ways to maximize tax deductions by shifting the year in which they are claimed.
Blocking Criminal Activity
Unfortunately, tax time is also a time of heightened criminal activity. The IRS is even warning that criminals are targeting tax preparers by pretending to be potential clients or pretending to be the IRS. Filing your tax return early can put a stop to a lot of the criminal activity, or at least make it more difficult for the criminals to succeed.
False Tax Refunds
The most common strategy identity thieves use is to file false tax returns and claim the refund the IRS owes you. Even if you aren’t owed a refund, criminals could bolster their fake return with fake deductions and forged W-2s, claiming a big refund. You, of course, are left to deal with the mess left behind by a filed return filled with lies. USA Today reported it takes an average of 278 days for a victim to straighten out the mess.
In 2013, the General Accountability Office (GAO) estimated the IRS paid out nearly $6 billion in false returns. But if you file your return before the thieves do, the IRS will already have a return on file for the same Social Security Number (SSN). This should be a big enough red flag that the IRS rejects or at least questions the second return.
Threatening Phone Calls
Another scam on the rise is when criminals pose as IRS agents attempting to collect money or information from victims. In the past, you could just hang up on the person because the IRS didn't collect over the phone. Unfortunately, you now can’t just hang up on a supposed IRS agent who is collecting over the phone. Since the IRS now hires private collection companies to harass tax payers owing back taxes, the person on the other end of the phone may now be a real tax collector.
If you’ve already filed your return and received a check or confirmation back from the IRS, however, you’ll be much less likely to get taken advantage of. Knowing the IRS has already received your return will make it very easy to dismiss someone claiming you haven’t filed your return.
Regardless of when you file, you should never give out information to an IRS collector over the phone. Instead, make an appointment at your local IRS office to discuss the problem. Always initially meet with the ‘IRS agent’ in an official IRS building and not at your home, place of business, or other location.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org