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Reasons to File an Early Tax Return

Reasons to File an Early Tax Return

Why Filing Early Makes Sense

Even though many taxpayers file their tax returns on or about April 15 every year, there is no need to put it off until the last minute. Indeed, filing an early tax return can make sense for a variety of reasons, and you can file for 2019 as of now.

 

The Internal Revenue Service (IRS) opens the 2020 filing season for individual tax payers on Jan. 27, 2020. The IRS says it issues most refunds within 21 days, although filers claiming the Earned Income Tax Credit or Additional Child Tax Credit may not receive a refund until after February 15.

 

Even if you don’t file early, there are reasons to begin preparation as soon as you can. For starters, it gives you the time you need to collect the evidence you need to claim all of your deductions. You will avoid the headache of the middle-of-the-night stress over figures and receipts. Your accountant will have a more flexible schedule and will probably be able to start working on your accounts immediately. Also, by filing early you will likely short circuit would-be identity thieves.

 

KEY TAKEAWAYS

  • The Tax Cuts and Jobs Act doubled the standard deduction, eliminated the personal exemption, and made many other changes that could change how you do your taxes, starting with the 2018 tax year.
  • Early filing gets you a faster refund.
  • Lack of rushing gives you time to avoid mistakes that could lead to an audit.
  • Tax planning before December gives you time to estimate capital gains, harvest tax losses, make last-minute charitable deductions, and shift some deductible items to the most useful tax year.

 

New Standard Deduction

One of the most important decisions taxpayers have to make is whether to take the new, larger standard deduction, initiated for 2018 by the Tax Cuts and Jobs Act (TCJA), or itemize. Single filers and married taxpayers who file separately can claim a $12,200 standard deduction for 2019 (it goes up to $12,400 for 2020). For married couples filing jointly the standard deduction is $24,400 ($24,800 in 2020). Heads of the household get a deduction of $18,350 ($18,650 in 2020). The sooner you begin working on your tax return, the sooner you will be able to decide.

 

New SALT Tax Deduction Limit

The TCJA also limits your total state and local tax deduction (SALT) to $10,000. This limit may provide further incentive to take the standard deduction if your SALT deduction is typically more than the new limit and you don’t have a whole lot of other deductions. Getting a head start on your taxes will help you avoid an unforced error when it comes to this important part of your tax return.

 

A Faster Refund

Avoid procrastination, give yourself peace of mind, and check this important item off your new year’s to-do list. Once the IRS says it will begin processing returns, why not turn yours in and get this unpleasant task over with?

 

For the 2018 tax year, the IRS issued refunds to 111.6 million filers, at an average of $2,860 per refund.6 If you have money coming to you, there’s no reason to let the government keep it longer than necessary. Filing sooner means a faster refund, because the IRS won’t be as busy early in the tax season as it will be in April.

 

Some people count on their income tax refund to pay major bills. Filing early puts the money in your hands sooner and may help you avoid taking out an expensive short-term loan to cover those expenses, especially if you’re still paying off your holiday bills.

 

Prevent Identity Theft

The sooner you file, the less time there is for an identity thief to file “for” you—and take your refund. This could lead to all sorts of mayhem, especially if the thief claims false deductions, fails to report income, or otherwise taints a return in your name. Fixing a mess like this can take months.

 

Filing early makes you much less vulnerable to identity theft; you file before thieves can step in and file “for” you.

 

No Crowds and No Penalties

If you are someone who mails in your tax return, filing early avoids congestion and a crowded post office. Better to get it done and avoid the hassle.

 

Filing early gives you time to understand fully changes to tax law or deal with changes in your life that alter your filing status. Mistakes from rushing at the last minute can trigger audits that can lead to penalties and interest. Given changes brought on by the TCJA, this point is more important than ever.

 

Access to Preparer and Information

Your certified public accountant (CPA) or other tax preparers will not be as busy in January or February as in April. Early access means your CPA will have additional time to consider your situation more carefully and help you with your return.

 

Buying a home or going back to college require information from recent tax returns. Preparing your taxes early will provide you with the most up-to-date information available.

 

Avoid Amended Returns

Starting early gives you the time to file an accurate return. An inaccurate return will likely become an amended return. Amended returns invite audits. Here are some things to watch out for as you pursue accuracy.

 

Mistakes in Official Documents

Check all incoming statements, including W2s, 1099s, interest statements, and anything used to justify a deduction. Companies, banks, and financial institutions make mistakes. Catch them before you file.

 

Forms That Arrive Late

Early filing may cause you to miss including a 1099 or K-1 that arrives late. Make sure you have all the documentation you need before you click on “send” or drop your return in the mailbox.

 

Tax-Law Updates Not Reflected in Forms

Legislation passed before April 15 may not be incorporated into paper tax forms or tax software that has not been updated. Watch the news. Be on the lookout for changes that might have been missed. If necessary, you can file an amended return.

 

Be Honest

If you do have to amend your return, don’t correct only the things that are to your advantage. Correct anything that is wrong.

 

TCJA Changes

With 2019 being only the second year affected by the changes wrought by the TCJA, it’s important that you take the time to understand them fully. Even the 1040 Form has changed. In fact, if you previously used the 1040EZ or 1040A, those forms were eliminated, starting with 2018.7 You can use your 2018 return as a template for 2019, though there are differences between the two, such as the end of the penalty for not having health care. You can’t use returns for the years before it to guide you, however. And if you’re a senior and qualify, 2019 brings the new senior tax form, 1040-SR.

 

Shifting Tax Burdens

If you take that head start before Dec. 31, you will have time to estimate capital-gains distributions, harvest losses, contribute to a 529 savings plan or make last-minute charitable contributions. You can also take advantage of the opportunity to shift deductible items—such as property taxes, business expenses, or even mortgage payments—to whichever year makes the most sense tax-wise.

 

You can still maximize contributions to a company 401(k) and/or any individual retirement account (IRA) plans you have and make deposits to your health savings accounts until April 15 of the year following your tax return date (April 15, 2020, for your 2019 taxes).

 

Time to Save

If you owe the IRS, filing early gives you time to save up the money. Remember, you don’t have to pay until the filing deadline. Waiting only to find out that you owe more than you expected could put a real crimp in your budget. The U.S. Department of Treasury forecast that 21% of taxpayers would likely owe taxes due to under-withholding following changes brought by TCJA, up from 18% previously.

 

The Bottom Line

Most experts agree that it’s best to at least start your return as early as possible. The decision to file early may depend on the complexity of your return if you are receiving a refund. Follow the advice of your financial or tax advisor to make sure your return is accurate and complete.

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