If you think waiting until the very last day to file taxes is fine, think again! From forcing yourself to unncessarily live with less money throughout the year to having to dole out a large lump-sum in case of a tax liability, there are several reasons why you should file your taxes early.
Reason #1: The IRS pays you no interest on your current refund
According to the latest data from the IRS, in 2016, 109,959,000 out of 150,700,000 returns processed received a refund. With the IRS shelling over $305 billion in tax refunds in 2016, the average refund was $2,777, up 1.8% from the previous year. With 73% of processed tax returns getting a refund, it seems that many Americans are using their tax refund as forced savings plans. The problem is that this particular “savings account” pays no interest! Unless the IRS owes you money from a refund due to a late filing, correction to a previous filing, or delay in payment (after 45 days from receiving a return), the IRS pays you no interest on monies owed to you. On the other hand, you can get at the very least 0.06% interest rate on a savings account anywhere in the nation (or on another, less financially-wise hand, you could at least spend it on something you’d enjoy!). If you do your homework, you will find out that are plenty of great alternatives for saving money. You can get an average 0.17% in money market accounts at credit unions, up to 1.05% APY on online high yield online savings accounts, and up to 3.51% APY in checking accounts from participating local banks and credit unions of the Kasasa network. So, if you know that you’re guaranteed a refund this year, there’s no reason to delay your filing. Get your money now!
Reason #2: Increase your chances of a faster refund
The IRS promises to get your refund in under 21 calendar days. However, you should know that they technically have up to 45 days before they start owing you any interest in your refunds. Every year the IRS has a hard time convincing lawmakers to approve its budget requests. Unfortunately, cuts to the IRS budget since 2010 have resulted in reduced customer service, outdated technology, and the lowest level of audits in a decade. Despite the number of returns processed in 2016 was over 150 million, the number of IRS employees has dropped by 13,000 since 2010. So it makes a lot of sense to submit your return as early as possible when IRS employees receive a much more manageable number of returns. When do you think your return has a better chance of being processed as quickly as possible? On early February, when U.S. taxpayers have turned in 38,737,000 returns? Or on April 15, when U.S. taxpayers have turned over three times that number of returns (124,616,000)? The early taxpayer gets the tax refund faster!
Reason #3: You may have already withheld enough and can increase your take-home pay
Another reason to get ready to file your taxes early is that you may have already withheld more than what you owed to Uncle Sam. For example, if you already met or overpaid your estimated tax liability with the paycheck from the end of November, why would you want to withhold even more from your remaining paychecks of the year? Use the IRS Withholding Calculator and your latest paystub(s), to figure out whether you will underpaid or overpaid federal taxes by the time you file your return. For a step-by-step tutorial on how to do this, review Human Interest’s guide on How to Adjust Your Tax Withholding for 2017. By finding out before the end of the year that you have already withheld enough federal taxes, you’ll be able to adjust your form W-4 and increase the take-home portion of your remaining paychecks. This kind of happy surprise would allow you to take several positive actions, such as:
Buying presents on cash and preventing an increase in high-interest credit card debt
Boosting your contribution to your retirement account by December 31st (in 2018, the contribution limit to a 401(k) is $18,500 and to an IRA is $5,500 ($24,500 and $6,500, if age 50 and over))
Making a larger payment to your existing debts and cutting down on interest expenses
Starting or increasing your down payment fund for the home of your dreams
Reason #4: Buy yourself more time to come up with payment in case you owe the IRS
Getting your tax “ducks” in a row early also helps in case you owe the IRS. If you find with the IRS Withholding Calculator that you have withheld very little throughout the year, you’ll have some options available to make up for the difference and avoid a major cash crunch in a short period of time. Here are three concrete (and one soft) ways to stretch out the time needed to come up with the money for your tax payment.
You can use the recommendations from the IRS Withholding calculator to adjust your Form W-4 to decrease your number of allowances (line 5) and make additional withholdings (line 6) from each remaining paycheck for the year.
You can use Form 1040-ES to make an additional lump sum payment by January 17, 2017. This is particularly useful when you know that you have an upcoming commission or bonus check in the first few days of the next year.
You can file your return early and still have until Tax Day 2017 (April 19th for residents of Maine and Massachusetts and April 18th for everybody else) to pay your taxes in full and avoid interest charges and penalties. While you can pay by phone, check, credit card, or money order, using the IRS Direct Pay service allows you to pay electronically and securely without any fees. It’s very easy to include and authorize a direct debit of either your checking or savings account on a date that you designate, as long as it’s by Tax Day.
The IRS is much more likely to be lenient with you and your repayment schedule if you call them as much in advance as possible, which is only possible if you know how much you owe well in advance of any deadlines!
As you can see by preparing and filing your taxes early, you would be able to have an easier time meeting a large tax bill. For example, it’s much easier to come up with a $3,000 tax payment over several weeks or months, than in a week or less!
Reason #5: Protect yourself against identity theft
Malicious individuals are actively seeking ways to exploit inefficiencies in the IRS processes to gain access to taxpayer data. Here is a perfect example: In May 26, 2015, the IRS notified affected taxpayers about third parties that gained unauthorized access to information on about 100,000 accounts through the “Get Transcript” online application. But that was just the tip of the iceberg. About three months later, that number grew to an estimated 390,000. Then on February 26, 2016, the IRS said there are as many as 724,000 victims potential victims from this data breach. Identity theft through tax returns is very real. As of March 5, 2016, the IRS reported that it identified 42,148 tax returns with $227 million claimed in fraudulent refunds. While the IRS works hards to catch fake returns, the agency can’t always catch the identity thieves on time. From the previously cited number of reported fraudulent refunds, only 79.6% ($180.6 million) could be prevented from being issued. In summary, prevent an unnecessary headache. The earlier you file your taxes, the less likely you’re to fall victim of identity theft, and you’ll benefit financially and logistically in several ways as well. Check out our additional articles on tax strategies:
End of the Year Tax Planning: Tips for Big Bonuses, Commissions, and More
Image credit: Brandon Redfern
Article ByDamian Davila
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.