The 2022 filing season is already underway for many taxpayers even though the Internal Revenue Service won't start processing their returns until Jan. 24.
But these early bird filers are on to something. Here are eight reasons you might want to consider completing your Form 1040 soon.
1. To get the rest of your Child Tax Credit.
Around 36 million families last year got an early tax benefit. The IRS delivered half of their 2021 tax year Child Tax Credit (CTC) in advance as monthly payments from last July through December. The maximum advance amounts were $1,800 for each child younger than age 6 and $1,500 for youngsters ages 6 to 17.
The advance CTC payments were distributed in order to get the tax break money into the hands of folks facing COVID-caused economic problems as soon as possible, rather than making them wait until filing season to claim the full amount on their returns. The IRS used information from taxpayers 2020 or 2019 tax returns, or from updates provided through the agency's online Child Tax Credit portal, to determine the amounts to deliver.
If you did get advance CTC payments last year, you'll get Letter 6419 from the IRS, showing the amount of advance CTC the agency sent. Use this info to determine how much of the remaining $1,800 or $,1500 per child you're eligible for when you file your 2021 tax return.
You can read more about claiming your remaining credit in my post You got your last 2021 Advance Child Tax Credit payment. Now what?
And if you didn't get the credit early, you won't get a letter. But you still can file for the CTC, if you're eligible, on your return.
2. To get COVID-19 relief payments.
Millions of people got a third COVID-19 economic impact payment (EIP) in 2021. Most of them got the full available amount of $1,400 per person after the payment became law last March.
But most is not all. Some people got less than the full amount. Others didn't get any. Filing is how you get any payment amount you were shorted last year. Here's why that might have happened and how to get the rest of your EIP.
Like the advance CTC amounts, the EIPs technically were advance payments of a 2021 tax break, the Recovery Rebate Credit (RRC). Also like the advance child credit, the IRS was authorized to get money to folks as soon as possible to help offset COVID-related financial difficulties. So, one more time, the IRS used tax data it had in its system to determine the EIP amounts.
That was a good idea, but that 2020 or 2019 filing data didn't necessarily reflect everyone's correct 2021 income situation. So now you might be eligible for more EIP if you didn't get the full amount or any of it last year.
If you got any EIP last year, you should get Letter 6475 from the IRS. This official notice lets you know the amount the IRS sent you. Use that to determine if, using your 2021 filing date, you are due more. If you didn't get any EIP in 2021, you won't get Letter 6475. You can, however, still claim on your tax return any EIP for which you qualify based on your 2021 tax situation.
The Form 1040 instructions, which are cited on the highlighted line 30 above, contain a worksheet (page 59 of that PDF). I suggest, however, that you let your tax software or tax preparer figure this out for you.
The main thing is to get all the coronavirus pandemic economic relief amounts for which you qualify. Remember, it's a tax credit, which means if you do owe Uncle Sam anything, the credit will cover that bill dollar-for-dollar. Even better, the RRC is a refundable tax credit. If your credit amount is more than your tax bill, you get the excess credit as a refund.
3. To get your refund sooner.
Getting a tax refund as soon as possible is the main reason that so many folks file their taxes as early as they can every year. The continuing coronavirus pandemic financial difficulties make receipt of those refunds even more critical.
I could go on (and on and on) about how it's better to adjust your withholding and get that tax money in each paycheck throughout the year, instead of letting the Bank of Uncle Sam hold onto it for months without paying you any interest.
But I get it. Some folks just aren't good at money management. Heck, some of them are my relatives! They need the untouchable forced savings account. And with today's minuscule interest rates, owners of basic bank savings accounts aren't getting much of a return. So, I'm not going to preach, at least not any more in this post.
If you are due a federal tax refund, your best move in addition to filing as soon as you can is to do so electronically and have the refund directly deposited into a bank or other financial institution account. The IRS says this combination should mean your refund will show up in that account within 21 days of processing.
True, COVID-19 complications have thrown the IRS behind in processing returns and issuing refunds. But tax filers' hope springs eternal when a refund is involved.
Also note that the IRS still is required by law to take closer looks at certain CTC and Earned Income Tax Credit (EITC) claims. Refunds associated with these tax credits are held until mid-February.
But it doesn't hurt to go ahead and get into the queue for return processing by electronically filing your return as soon as you can. The tax software manufacturers, including the eight participating in this year's Free File program, will hold early prepared returns and then transmit them to the IRS when it opens its electronic doors on Jan. 24.
4. To beat tax ID thieves to the punch.
The IRS and its Security Summit partners have made good progress in recent years in reducing tax identity theft and refund fraud. The agency is even allowing all taxpayers to apply for an Identity Protection Personal Identification Number, or IP PIN, this year to further thwart would-be ID thieves.
Among those steps is increased filing filters to help catch any suspicious-looking 1040s. The downside of this added security is that it naturally slows things down. So you want to get your return in soon so it can be OK'ed and moved through the processing line.
By doing so, if tax identity thieves try to file under your name and Social Security number, the crooks will discover that you beat them to the tax punch!
If, however, a criminal falsely files a return as you, when you do get around to sending in your legitimate tax return, the IRS will kick it back to you since its records will show that "you" have already filed and been sent "your" refund. Clearing up the fake tax filing mess can take time, time that you're without your legal refund.
Instead, prevent that by filing before the crooks do.
5. To figure out how to pay what you owe.
Most folks who put off filing do so because they know they owe taxes. But filing early actually can help in this situation.
The sooner you fill out your Form 1040, the sooner you'll know exactly how much you owe the U.S. Treasury.
The tax bill could be because you didn't adjust paycheck withholding to take into account new tax laws or family circumstance changes. They also could be because you didn't realize that your gig jobs and unemployment benefits that helped you (almost) make ends meet when the pandemic forced your regular workplace to close. And, yes, all your 2021 unemployment is taxable. Congress did not continue the exemption of some of the money they granted back the first COVID year of 2020.
Whatever the reason for an unexpected tax bill, when you're armed with specific tax dollars due knowledge, you can figure out how to come up with the cash. Do you need to raid an emergency savings account? Or borrow from a family member? Or put it on a credit card (don't forget to take those fees into account!)? Or set up an installment payment with the IRS?
Remember, too, that if you file early, you don't have to send that tax due amount then. You can submit your return before the April 18 deadline, but wait until then to send in the money you owe.
I know, some of you are asking why not just get an extension? Because even if you do file Form 4868 and get six more months to finish your return, you still have to pay by Tax Day in April. So if your return is ready, get that paperwork (electronic or old-school pages) out of the way, and then pay what you owe on 4/18.
6. To find a tax professional.
OK, what with the pandemic and working from home or not working and the kiddos remote schooling and basically life's chaos, you've decided you just can't with taxes this year. You need professional tax help.
Finding the perfect educated, experienced tax professional to take care of your return is easier when you do your searching earlier in the tax season. As the filing deadline nears, it's generally tougher to get on a good tax pro's schedule.
In fact, as filing crunch time nears, if you can hire the tax pro you want, he or she probably will have to file an extension for you because they are working on the returns of other clients who came to them earlier.
There's also the basic economics of hiring a tax pro earlier in the season. Most tax preparers will charge more to work on returns as the filing deadline nears.
If you're worried about the cost, consider that with all the recent law changes (in addition to COVID-19 issues, there are new cryptocurrency considerations), any fee you pay a tax preparer likely will be returned to you in the tax savings your tax pro can find.
7. To get to work on your state taxes.
I live in Texas, one of the handful of states that doesn't impose any type of income tax. But most Americans have to also file state tax returns in additional to their federal 1040s.
In most of these tax-collecting states (and the District of Columbia), your federal return is the foundation for filing your state and local taxes.
The sooner you finish your federal return, the sooner you can tackle your state and local tax counterparts and get any refund you might be due from those tax jurisdictions.
8. To clear the tax deck and start focusing on your 2022 taxes.
I know, you just want to be done with your current tax return and take a break. If only.
Taxes always force us into a balancing act. At this time of year, we're working on last year's taxes, while also trying to make moves this year to cut the amount we'll owe when we file our 2022 return next year.
The sooner you can be done with the 2021 tax year, the sooner you can focus this year's necessary tax actions, some of which show up every month in the (shameless plug alert!) ol' blog's right column as part of the monthly Tax Moves list or as the more frequent Tax Tips.
Your 2021 tax year return results also will make it clear whether you ended up in a good or bad tax situation, and will offer guidance on tax steps you need to take for the remaining 2022 tax year.
So what are you waiting for, aside from IRS' Jan. 24 official opening of tax-filing season? Get to work on that 2021 return now!
You also might find these items of interest:
- 4 tax moves to make in January 2022
- Tax statements you need to file your 2021 return
- Tax return checklist & questions to help you file your taxes