Tax season is upon us with tax forms arriving in inboxes and mailboxes. Tackling your 2022 tax return may be a dreaded chore or a welcome event, depending on whether you owe money or are due a refund. Either way, getting started early may help make your tax-filing season less stressful and potentially save you some money.
Beginning your tax preparation now may help you avoid surprises, give you more time to gather your documents, reduce your taxable income, and even protect you from identity theft.
This year, it will take the average person 13 hours to fill in the required information on their annual tax return forms.1 One way to get through the process is to focus on the potential payoﬀ—say, several thousand dollars in a refund, for one.
"Filing taxes can be complicated and requires effort," says Etinosa Agbonlahor, director of behavioral research at Fidelity. "The more complicated something seems, the less likely we are to want to do it."
The 2022 ﬁling season oﬃcially began on January 23, 2023, and the ﬁnal deadline is April 18, 2023, unless you file for an extension (which also must be done by the tax-filing deadline). So those are your general parameters on timing. Besides the possibility of getting a refund, these are other reasons to fast track your tax process, particularly for your 2022 return.
Here's why you should get moving.
1. Beat the scammers
Filing your tax return as soon as possible is one of the best ways to guard against tax-related identity theft. In these scenarios, a criminal ﬁles a fraudulent return and collects a refund in your name before you ﬁle your return. If you ﬁle your legitimate return before a crook tries to ﬁle one for you, the fraudulent return is rejected.
If you are worried your account has been compromised, still continue to ﬁle your legitimate tax return and to pay your tax bill if you owe money, although you may have to submit a paper return rather than an electronic one. Attach Form 14039, Identity Theft Aﬃdavit, when ﬁling your return.
To protect yourself, remember that the IRS will not call you or contact you via email, and you should not give your personal information to anyone over the phone. Visit Identity Theft Central for information about tax-related identity theft and data security protection from the IRS.
2. Fix mistakes and make adjustments
If you are delaying ﬁling because you haven't received the necessary tax documents from an employer, ﬁnancial institution, charity, or some other source, be proactive and ask for them. The earlier you get these, the more time you have to sort out any mistakes and make adjustments that could help lower your taxable income before the ﬁnal tax deadline of the year.
Some of the most common mistakes involve basic math errors, forgetting to report income, not claiming credits for which you may be eligible, and not taking proper account of investment losses, which can often be used to offset gains in your portfolio.
1099 forms will sum up your short- and long-term net gains and losses. If you have net gains, you'll owe tax on them. But if you have net losses, you can use them to offset up to $3,000 of ordinary income ($1,500 if you're married and filing separately) and carry forward any excess losses to future years.
Read more about common tax mistakes in Viewpoints: 8 tax pitfalls to avoid.
3. Take stock for 2023 and beyond
The beginning of the year is a great time to take stock of your ﬁnancial situation, which is good to do at least once a year.
Knowing where you stand well before the tax-ﬁling deadline also gives you time to adjust your current tax withholding and ﬁgure out what you can contribute to accounts like traditional IRAs, Roth IRAs, and health savings accounts (HSAs), based on your modiﬁed adjusted income and your overall ﬁnancial picture.
IRA contributions A contribution to a traditional IRA may reduce taxable income and, in turn, lower 2022 taxes for those eligible for the tax deduction.2 The tax-deductible contribution limit for the 2022 tax year is $6,000.
For those who are age 50 and over, the limit is $7,000. Remember, you can make contributions to your IRA for the 2022 tax year up to the filing deadline of April 18.
Note: It isn't necessary to have a job to have a traditional IRA. A nonworking spouse, as long as their spouse has earned income, can contribute to a traditional or Roth IRA. The amount of a married couple's combined contributions can't exceed the amount of earned compensation reported on their joint return.
HSA contributions Contributing to a health savings accounts (HSA) can also reduce taxable income. In 2022, an individual with self-only coverage can contribute $3,650 and those with family coverage can contribute $7,300. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. You also can make contributions for the 2022 tax year until the April 18 tax-filing deadline.
Inflation adjustments for IRAs and HSAs Contributions limits for both IRAs and HSAs have received an inflation adjustment for tax year 2023.The IRA contribution limit for tax year 2023 is $6,500, and $7,500 for people 50 and older. For HSAs, an individual with self-only coverage can contribute $3,850 and for those with family coverage, the contribution limit increased to $7,750.
SEP IRAs Self-employed individuals and freelancers can open a Simpliﬁed Employee Pension plan—more commonly known as a SEP IRA—even if they also have a full-time job as an employee. Those who earn money freelancing or running a small business on the side could take advantage of the potential tax beneﬁts from their side gig. With a SEP IRA, contributions may be tax-deductible, just like with a traditional IRA, but the SEP IRA has a much higher contribution limit. The contribution amount varies based on income. For tax year 2022, the contribution limit is the lesser of 25% of eligible compensation, or $61,000. For 2023, the ceiling rises to $66,000. (Self-employed people may face lower limits.3)
Consider speaking with a tax advisor to determine the impact of SEP IRA contributions on the tax deductibility of contributions to a traditional IRA in the context of your personal situation.
4. Avoid "sticker shock"
The last thing you want is to get to the bottom line and see an unexpected large balance owed to the IRS. If you wait until the last minute to prepare your taxes, you may not have time to raise the cash for the payment. Filing for an extension won't help. You still have to pay what you owe by the filing deadline or face a penalty and interest.
This may be particularly important as larger numbers of Americans earn self-employment income from things such as driving for a ride-sharing service, renting out a room in their home, or performing consulting services. People engaged in these types of income-producing activities are typically required to pay estimated taxes each quarter (i.e., 4 times a year). If you're new to self-employment and failed to make quarterly payments, you'll probably need time to plan for any additional taxes due.
By starting your tax return now and giving yourself time to resolve questions and issues that might arise, you may also find the process less anxiety-producing and may discover some opportunities to help lower your tax bill.
5. Get it done
People usually considering doing taxes one of the most onerous ﬁnancial tasks of the year, and getting it done could make all the other items on your ﬁnancial to- do list seem easier.
The ironic thing about taxes is that people see it as a purely negative experience, but roughly two-thirds of filers got money back, and the average refund in 2022 was $3,039, according to the IRS.
"We may associate taxes with losing or giving up money, but if we can change the narrative we tell ourselves when it's time to file our taxes, from a negative to a positive, then we may be more motivated to file earlier," Agbonlahor says.
One of the keys to beating tax procrastination is to try to be realistic about how long it will take. Is it really going to be just a few hours? Perhaps you could time yourself.
If it's taking longer than you want, you can look for ways to make the paperwork easier for yourself throughout the year, so you don't waste time looking for lost documents. Some people take photos of important receipts and store them in a folder on a phone, some set aside a folder for tax documents, some use the old-fashioned shoe box.
You might also avoid discomfort in the present by thinking about how much worse it will feel down the line when you are pressed for time and ﬁnd out something annoying, like you need to do a system upgrade before your tax prep software will work, or your accountant has no more appointments left.
To keep yourself on track, consider focusing on the potential beneﬁt, not the cost. The cost is just a few hours of your time, the beneﬁt could be some money.