I know what you’re probably thinking. It’s February. Tax Day is two months away. Why worry about taxes now? As it happens, there are a number of compelling arguments for working on your taxes as early as possible not only for this year, but next year as well.
The longer you wait to plan for and file your taxes, the more money it could cost you and the longer it could take to get any refunds owed. Because of staffing shortages and the lingering effects of pandemic-era tax delays, the IRS has a significant backlog of refund processing. Some people are still waiting for their tax refunds from last year!
However, those who filed their taxes early — especially if they e-filed — generally had their returns processed and deposited in their bank accounts long before those who waited until the last minute. There’s a clear advantage to putting yourself near the front of the line when you file your taxes. Even if you don’t get a refund, and instead find yourself owing taxes, discovering that early gives you time to determine how you’re going to pay the IRS.
Start Preparing Now
Mid-February is a good time to start preparing to file taxes. That’s when W2s and other tax-related documents start appearing in your mailbox. As documents trickle in, file them in a centralized location that’s easy to access. Once you have all the documents you need, start preparing your taxes right away.
Tax season is not a favorite time of year for most people, but there are advantages to tackling it sooner than later that go beyond just getting your refund faster, including lowering your tax burden. Even though most tax-related financial moves need to be made before the end of the tax year — for example, any charitable giving you want counted for your taxes needs to have been donated before the first of January — there are still options for changing your tax outlook. One example is contributing to certain retirement accounts.
If you have variable income or are close to jumping into a higher tax bracket, it’s sometimes advantageous to wait to contribute to self-employed retirement accounts such as IRAs or solo 401(k)s until you know for certain how your yearly income turns out. If you find you have overhead in your tax bracket for more retirement saving, contributions to IRAs for 2022 are allowed up until the tax filing deadline of April 18. Solo 401(k) contributions for people who own their own business are also permitted through April 18.
If this sounds like a strategy you might want to take advantage of, it’s good to start working on your taxes early so you aren’t scrambling to contribute before the deadline.
Prevent Identity Theft
There are advantages beyond tax strategy as well. Identity theft is a growing problem with tax returns. Enterprising criminals will steal your personal information and file a tax return in your name in order to claim your refund for themselves.
You often don’t discover this has happened until you file your own taxes, which then get rejected because the IRS thinks you already filed! Once you discover the theft, you’ll have to take extra steps to fix the problem.
First, you need to file Form 14039, which tells the IRS you are a victim of identity theft and that someone has filed a fraudulent tax return in your name. You’ll need to send that form along with a copy of your government-issued ID and Social Security card to the IRS, then wait for the IRS to investigate.
However, if you file your taxes early, the identity thief has less time to file the fake tax return before yours arrives. Once your taxes are filed, the IRS will reject the thief’s false return rather than your own.
Don’t just think about this year’s taxes
Tax season is an ideal time to start working on next year’s taxes as well. The earlier you start planning your tax strategy, the more effective you can make it. By planning ahead, you are better able to minimize your tax liability and take advantage of options that might not otherwise be available at a later date.
Because you’re already immersed in thinking about your finances, tax time is also a great opportunity to take stock of the rest of your finances. A financial review is something you should do at least once per year.
Go over your household budget to make sure it’s still working well. The past year has brought intense inflation. As the price of goods and services rise, budgets that worked well before may not be as healthy now.
While budgeting, examine your bank statements for auto-bill services. It’s common for people to subscribe to a streaming service to watch just one show, then forget to cancel. Before they know it, hundreds of dollars per year are being spent on subscriptions they aren’t using.
Stop wasting money by taking some time to cancel the ones that aren’t important to you. Doing this will also help you catch billing errors, like when a company you’ve cancelled services with continues to bill you every month.
Procrastinating on taxes almost seems like a national pastime, but if you tackle them early, you’ll not only put yourself near the front of the line for refunds, but also give yourself time to prepare the most advantageous tax return possible. At Asset Preservation Wealth & Tax, we specialize in preparing taxes that minimize our clients’ tax liability. We don’t procrastinate on filing taxes, and neither should you!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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