For millions of Americans, there is no getting around the need to file an annual tax return. And if you need to file a tax return, you might as well get it done early.
“The IRS encourages people to file early so you get your refund earlier,” says Joanna Powell, a CPA and managing director in the Boston office of financial firm CBIZ MHM.
Of course, that’s not the only reason to file early. It can also mean more time to double-check your work, plan for payments and avoid tax fraud. What’s more, if you owe taxes, you can always file now and pay later.
That said, early filing isn’t right for everyone. The IRS recently advised those who received a stimulus or rebate payment from their state to wait until the government works out if and how that money may be taxable.
Keeping reading to learn why you should consider filing early, what documentation you’ll need and how early filing prevents tax identity theft.
[READ: Tax Prep Checklist: Collect These Forms Before Filing Your Taxes.]
Benefits of Filing Taxes Early
There are several reasons to complete tax returns early rather than waiting until Tax Day:
— More accurate returns potentially resulting in larger refunds.
— Less competition for appointments with tax preparers.
— More time to plan for tax payments.
— Less chance of tax fraud.
The opportunity to quickly receive a refund is enough for many people to file early, but it isn’t the only reason to get started on your return now.
People who file early may be in line for a larger refund. That may be because those filing near the tax deadline are often rushing to complete their paperwork and could miss valuable deductions or credits.
Starting early means more time to gather information for potential tax breaks. Plus, for divorced parents, an early filing could head off potential problems when it comes to claiming children on a return.
“If you have an agreement with your ex-spouse on who can claim the kids, sometimes they don’t adhere to the agreement and claim them anyways,” says Moira Corcoran, a CPA and tax expert on the website JustAnswer. If that happens, the IRS will reject the next return that is filed with the same dependents. “First one to file and claim them gets the deductions,” according to Corcoran.
Completing tax forms early also provides an opportunity to plan for how to pay the bill if you end up owing money. “If you have a balance due with your return, you have until the filing deadline to make the payment,” Corcoran says. The filing deadline this year is April 18.
Appointments with tax professionals may be hard to come by during the final weeks before the tax-filing deadline. Making an early appointment could mean you are able to meet at a convenient time, and your return won’t have to compete for your tax preparer’s attention.
However, one of the biggest reasons to file as soon as possible is to avoid tax fraud. “The chance of identity theft through a fake tax return is mitigated,” Powell says.
Fraudsters use stolen Social Security numbers to create phony returns and file them early in the tax season. If they aren’t flagged for review by the IRS, the return is processed and a refund issued. Then, when the legitimate taxpayer tries to file his or her return, the system rejects it. The result can be a protracted process in which an affidavit must be completed, supporting documentation provided and a paper return filed.
“You want to file your taxes before someone else tries to file them for you and claim your refund,” says Leah Diehl, a CPA and assistant professor of accounting at the University of Montana College of Business.
When Is the Earliest I Can File My Tax Return?
The IRS began accepting tax returns on Jan. 23 this year, but some people might not be able to file right now if they haven’t yet received all their tax forms.
For instance, 1099 forms from investment accounts may not go out until mid-February. Meanwhile, those who own pass-through entities such as a partnership or S-corporation may not get tax forms for their business income until March.
However, employees should have their wage information by now. Employers were required to mail all W-2 forms, which record worker wages, tax withholding and other data that is crucial for tax filings, by Jan. 31. The same deadline applies for non-investment 1099 forms, which are sent to independent contractors or used for nonwage sources of income, such as interest or disbursements from retirement accounts.
[SEE: Every Tax Deadline You Need to Know.]
What Do I Need to File My Taxes Early?
Depending on the complexity of your income and tax situation, you may need the following documents, among others, before you can file your return:
— W-2 forms from wage-earning jobs.
— 1099 forms from independent contractor or gig work.
— 1099 forms from retirement, brokerage or dividend income.
— Mortgage and property tax statements for itemizing deductions.
— Charitable donation receipts and copies of medical bills for itemizing deductions.
— Business expense receipts for Schedule C business deductions.
— K-1 form for partnership income.
To ensure you have all the necessary documents for filing, consider where you have earned money in the past year and in which accounts you have invested. The answers will help determine which tax forms may be coming your way.
“Taxpayers have to make sure they have all of their information ready to go,” Diehl says. “Sometimes, forms like the W-2 are corrected and revised by employers, which can cause errors if you file too early.”
If you file before receiving all the necessary documentation, you can always amend your return when new information arrives. However, this can be a time-consuming process and may result in additional tax-filing fees from software providers.
Who Should Not File Early This Year
While there are many benefits to filing your tax return early, this year there is also one big reason to wait. If you received a stimulus or rebate payment from your state in 2022, the taxability of that money seems to be in question.
The IRS recently issued a statement saying it was working with state tax officials to provide clarity on how these payments should be handled on tax returns. More than a dozen states issued some type of payment to their residents last year, and the IRS notes “the rules surrounding them are complex.”
More guidance should be coming from the government shortly. In the meantime, the IRS suggests affected taxpayers hold their returns or consult with a tax professional before filing. If you’ve already filed your 2022 return, there’s no need to amend it just yet, the agency adds.
How to Avoid Tax Fraud
Although the IRS has taken steps to curtail tax-related identity theft, the practice is still prevalent. Fortunately, those who can’t file early may have other options to deter fraud.
The IRS offers a transcript service that lets taxpayers review activity on their record. This method doesn’t prevent identity theft, but it helps taxpayers proactively address problems rather than finding out about fraud when filing their return.
Using an identity protection PIN offers another layer of security against fraud. In the past, the federal government only issued PINs to those who were victims of tax identity theft and those who lived in specific states. Now, anyone can opt into the program. Be aware that once you request a PIN, you must use one to file every year.
If you’d prefer not to use a PIN, filing as early as possible remains one of the best ways to avoid being a victim of tax identity theft.
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4 Benefits of Filing Taxes Early originally appeared on usnews.com
Update 02/09/23: This story was previously published at an earlier date and has been updated with new information.