Getting a Jump-start on Your Taxes in 2020
With the tax season 2020 officially open since January 27 and the deadline being on April 15, now is the best time to start filing your taxes. By February 15, you should have received all or most of the required documents to file taxes for 2019. There are a number of reasons why filing taxes sooner is beneficial for everyone. This article will focus on those benefits and give you some handy tips on how to file taxes as early as possible.
According to statistics, over 70% of those who file taxes early receive an average income tax refund of around $2800. If you’re in this group, filing early will get your money much quicker. Even if you don’t plan or need to spend the return, you can always put it in a savings account. The return won’t be super big, but hey, it’s better than leaving it idle for over two months.
How Taxes Are Calculated
Your taxes are primarily dictated by your total income. Due to the progressive tax system used by the federal government, the more money you make, the more taxes you pay. The exact rates are determined by tax brackets shown below:
For example, if you make $85,525-$171,050 annually, as a single person, you will pay 24% income tax. If you get married, the amounts should be changed accordingly, as shown in the right columns.
Regular job workers receive a tax form called W-2, which contains information on how much your employer has paid on your behalf, and how much has already been deducted. This data is then transferred to your tax return file and is the primary means of determining how much the government owes you. Some accounting software, such as, Quickbooks, store W-2 forms for easy access when it comes time to take care of taxes.
Freelancers and other self-employed citizens file taxes using the tax form 1099. These are mainly issued to you by banks or investment institutions where you have generated interest income.
How to File Taxes
First of all, it’s important to understand that the payroll withholdings that you set up at the beginning of your employment are subject to multiple changes, and aren’t exactly correct. These changes can be dictated by significant life events such as marriage, the birth of a baby, or a divorce. Apart from these, getting a new job, getting a second job, or owing taxes from last year can also apply. As a result, these events may result in you over- or under-paying your taxes.
There are three ways to file your taxes:
- File taxes by yourself by filling out the tax form 1040 in accordance with the instructions provided by the IRS. Once done, mail the form to the IRS, including all the payments you owe.
- File taxes using online accounting software like FreshBooks, QuickBooks, or Zoho Books. These tools will walk you through a series of questions concerning your income and potential deductions. After that, you can automatically fill out the form 1040, print the electronic version, and mail it to the IRS. It’s important to note that any industry-leading accounting software always gets the latest information on annual taxation policy updates. This means that you won’t need to spend any time researching what’s changed and whether any changes apply to your case. Last but not least, the tools are affordable and have a free trial you can use.
- File taxes with the help of an accountant who will help you maximize your refunds and prepare all the documents in your stead. The downside is that this service will cost you a lot of money.
Here are the benefits of filing taxes as soon as possible:
1. Filing Taxes Early Helps Avoid Deadline Stress
Last year, over 34 million taxpayers filed their taxes from April 1 to 15. That’s close to the same number of people who filed taxes during the whole month of March. No wonder that over 50% of taxpayers are stressed during the entire tax season. Give yourself a fake deadline (March 10 sounds good), and just get it over with. You can even celebrate it later with friends or colleagues using the money you got back from the government.
2. Early Tax Filers Enjoy Larger Refunds
According to IRS data, taxpayers who file their taxes by the end of February get on average $400 larger refunds than those who postpone it till April. This is largely due to you having more time to focus on the details and being less stressed about the deadline. Also, claiming all the tax deductions that you’re eligible for takes more time and requires more documents, compared to the standard deduction processes.
3. Filling Taxes Early Gets You More Time to Arrange Payments
Sometimes, like in the case of getting divorced, you’ll be facing an income tax bill instead of a refund. Naturally, you’d love to postpone that as much as possible. However, filing taxes early will earn you enough time to plan and arrange your payments so that you won’t need to pay in full until April 15. Let’s face it. You’re going to pay that money anyway, so why not make it as smooth and painless as possible?
4. File Taxes Early to Avoid Identity Theft
Once identity thieves get access to your Social Security number (SSN), they have everything they need to file tax returns in your stead, and without your knowledge. Every year, the IRS rejects a number of electronically filed returns. Mostly, the reason is that there has already been a return on file for that SSN.
Surely, once the agency receives two returns for the same number, an investigation starts, and you get notified about it. However, in such cases, getting your refund often turns into a long and painful process. Filing taxes early helps avoid all of the above by simply locking down your SSN, even if somebody does try to scam you.
5. Get Better Rates with Your Tax Preparer
If you’re planning to consult a professional, you’ll most likely get better rates and appointment times before March 1. In fact, if you don’t set up an appointment before March 10, you’ll most likely need to file an extension, simply because you won’t make it in time. Finally, it’s natural for tax preparers to charge more money per application the closer you get to the deadline.
There are a number of instances when filing taxes early won’t work. If you have any investments, you’ll need to wait for your bank to send you earning forms. While some of these forms, like 1099-INT, which lists interest earnings in a savings account, can be expected to arrive by the end of January, more complex forms may take longer. For example, limited partnerships that use the form K-1, do not arrive until mid-March. On top of that, such documents are often subject to revisions, meaning that if a taxpayer filed using the initial figures, they would be forced to revise their tax returns.
Whatever you do, remember that it’s crucial to file everything correctly. If it turns out you owe money to the government which you didn’t pay, it could become a real pain. And it’s not even the amount that matters: even $10 is enough to get you into loads of unnecessary paperwork, wasted time and headache that can be avoided. Filing taxes early will grant you enough time to double-check all the calculations and make sure you don’t miss anything important. If you own a small business, setting up an accounting software can help you simplify all taxation processes immensely, and allow you to focus on growth.