Filing your taxes early may not be the first thing on your mind as the new year begins, but it’s a strategy that can save you time, money, and stress. Whether you’re an individual taxpayer or a small business owner, getting ahead of the tax season offers numerous advantages. In this article, we’ll explore the benefits of filing early and provide actionable advice to illustrate how early filing can work in your favor.
Why It Pays Off to Be Ahead of the Game
Faster Refunds
One of the most compelling reasons to file early is the opportunity to receive your tax refund sooner. The IRS processes returns on a first-come, first-served basis, so filing early means your return is likely to be processed before the rush of last-minute filers.
Example: Sarah, a single mother, files her taxes in late January. She qualifies for the Earned Income Tax Credit (EITC) and expects a refund of $3,500. By filing early and opting for direct deposit, Sarah receives her refund in mid-February, allowing her to pay off holiday debt and start saving for her child’s summer camp. If she had waited until April, she might not have received her refund until May.
Advice: File electronically and choose direct deposit to expedite your refund. According to the IRS, e-filing with direct deposit can result in refunds being issued in as little as 21 days.
Avoiding Identity Theft
Tax-related identity theft occurs when someone uses your Social Security number to file a fraudulent return and claim a refund. Filing early reduces the window of opportunity for criminals to file a return in your name.
Example: John procrastinated and didn’t file his taxes until April. Unfortunately, a fraudster had already filed a return using his Social Security number in February. John had to go through a lengthy process with the IRS to resolve the issue, delaying his refund by months. Filing early could have prevented this situation.
Advice: Gather your tax documents as soon as they become available and file as early as possible to minimize the risk of identity theft. If you suspect fraud, contact the IRS immediately and consider applying for an Identity Protection PIN (IP PIN).
More Time to Pay If You Owe Taxes
Filing early doesn’t mean you have to pay your tax bill immediately. If you owe taxes, you can still file your return early and schedule your payment for the April deadline. This gives you more time to plan and budget for the payment.
Example: Lisa, a self-employed graphic designer, files her taxes in February and discovers she owes $2,000. By filing early, she has two months to set aside money and avoid scrambling to pay the bill in April. She also avoids late-filing penalties, which can add up quickly.
Advice: If you owe taxes, file early to determine your liability and use the extra time to budget or set up a payment plan with the IRS.
Reducing Stress and Avoiding Last-Minute Errors
Filing early allows you to avoid the stress of the April rush. When you’re in a hurry, it’s easy to make mistakes, such as entering incorrect information, missing deductions, or forgetting to include required forms. These errors can delay your refund or result in IRS notices.
Example: Mark, a small business owner, waited until the last minute to file his taxes. In his rush, he forgot to include a 1099 form for freelance income, which triggered an IRS notice and required him to file an amended return. Filing early would have given him more time to review his return and avoid the oversight.
Advice: Start gathering your tax documents in January and use tax software or a CPA to ensure accuracy. Double-check all forms and calculations before submitting your return.
Access to Professional Help
Tax professionals are in high demand as the April deadline approaches, and their schedules can fill up quickly. Filing early ensures you have access to expert advice and assistance, which can be especially valuable if your tax situation is complex.
Example: Emily, a real estate investor, has multiple rental properties and needs help navigating depreciation and other deductions. By reaching out to her CPA in January, she secures an appointment and receives personalized advice. If she had waited until March, her CPA might not have had availability.
Advice: Schedule an appointment with your CPA or tax preparer as soon as possible to ensure you receive the attention and expertise you need.
Planning for the Year Ahead
Filing early gives you a clear picture of your financial situation, including your tax liability and potential refund. This information can help you make informed decisions about budgeting, investments, and tax planning for the year ahead.
Example: After filing her taxes in February, Rachel realizes she’s eligible for a larger refund than expected due to education credits. She uses the refund to pay down student loans and adjusts her withholding for the upcoming year to increase her monthly cash flow.
Advice: Use your tax return as a financial planning tool. Review your withholding, estimated tax payments, and retirement contributions to optimize your tax situation for the current year.
Avoiding Penalties
Even if you can’t pay your tax bill in full, filing early helps you avoid the failure-to-file penalty, which is much higher than the failure-to-pay penalty. Filing on time or early also reduces the amount of interest that accrues on unpaid taxes.
Example: Tom owes $5,000 in taxes but can only pay $2,000 by the April deadline. By filing early, he avoids the failure-to-file penalty, which could have added 5% of the unpaid taxes per month. Instead, he sets up a payment plan with the IRS to pay the remaining balance over time.
Advice: File your return even if you can’t pay in full. The IRS offers payment plans and other options to help taxpayers manage their tax debt.
Filing your taxes early is a smart move that offers numerous benefits, from faster refunds and reduced stress to better financial planning and protection against identity theft. By taking the time to prepare and file your return early, you can set yourself up for a smoother tax season and a more secure financial future. Start gathering your tax documents now, and don’t hesitate to reach out to a CPA for expert guidance. Whether you’re expecting a refund or owe taxes, filing early puts you in control and ensures you’re ready for whatever the tax season brings.
