- Filing your taxes early could protect you from identity theft.
- Getting started ahead of time gives you plenty of time to look for opportunities to reduce your taxable income.
- If you end up owing money, starting early can mitigate some of the sticker shock since you'll have time to plan how to make the payment.
Tax season is upon us with tax forms arriving in inboxes and mailboxes. Tackling your 2017 tax return may be a dreaded chore (because of complexity or the prospect of owing additional tax) or a welcome event (because you 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.
Here are 7 reasons to get a start on your 2017 tax return now.
1. Protect yourself from identity theft
Filing your tax return as soon as possible is one of the best ways to guard against becoming a victim of tax-related identity theft. For the scheme to be successful, a criminal files a fraudulent return and collects a refund in your name before you do. If you file your legitimate return before a crook tries to file one for you, the fraudulent return is rejected.
That doesn't mean you should submit an incomplete return, cautions Gil Charney, director at The Tax Institute at H&R Block. "Your goal should be to file as early as possible without compromising the completeness or integrity of your tax return, which could cause other problems," he notes.
If you haven’t received the necessary tax documents from an employer, financial institution, charity, or some other source, be proactive and ask for them. On the other hand, if you owe a payment with your return and you need time to raise the money, Charney points out that you can file your return early and instruct the Internal Revenue Service to deduct the amount from your bank account or debit card, or charge your credit card, on a specified date—right up until the filing deadline. (The deadline is April 17, 2018, for your 2017 taxes because of a District of Columbia holiday.)
Read Viewpoints on Fidelity.com: Answers to top 6 tax form questions
2. Lower your taxable income
You have several options for potentially reducing your 2017 taxable income with a contribution to a tax-advantaged account up until the tax deadline. The sooner you make a contribution, however, the sooner you'll be able to invest your contribution and give that money the chance to grow tax deferred.
One opportunity available to many taxpayers is a contribution to a traditional IRA. A contribution to a traditional IRA can reduce taxable income and, in turn, 2017 taxes for those eligible for the tax deduction.* The tax-deductible contribution limit for the 2017 tax year is $5,500. For those who are age 50 and over, the limit is $6,500.
It isn't necessary to have a job to have a traditional IRA. A nonworking spouse, as long as their spouse has taxable income, can contribute to a Roth or traditional IRA. The amount of a married couple’s combined contributions can’t be more than the taxable compensation reported on their joint return. Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to a traditional IRA. Note that after 2018, that will no longer be the case as alimony payments will no longer be considered taxable income to the recipient as a result of the Tax Cuts and Jobs Act of 2017.
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 your 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 2017, the contribution limit is 25% of compensation (20% of net self-employment income reduced by half of self-employment tax for the self-employed) or $54,000, whichever is lower. The deadline for 2017 contributions is the tax deadline—April 17, 2018. If you file an extension, you'll have until October 15, 2018 to make the contribution for 2017.
Consider speaking with a tax expert to investigate the impact of SEP IRA contributions on the tax deductibility of contributions to a traditional IRA in the context of your personal situation.
3. Review your 2016 tax return
Looking back at your 2016 tax return can give you a great head start on what you'll need in order to prepare your return for 2017. You can see which financial institutions should be sending you tax documents, which charities you might have contributed to, and which deductions you might again be eligible to claim.
Here's another benefit to taking time to review your 2016 return: If you spot an error, you can file an amended return and possibly get back some money you thought was long gone.
4. Take into account significant life events
Got married? Had a child? Divorced? Retired? Bought a new home? All of these and many others can have a significant impact on your tax return. Consider the effects they might have on your tax liability and how you file your return. If you are unsure of the effects, consult a tax professional. Newly married couples, for example, are typically better off filing a joint tax return, but there are circumstances, such as one spouse owing back taxes or having large medical bills, when filing separately may make sense.
5. Make a checklist
After reviewing last year's return and any significant life events from 2017, make a checklist of items you need to prepare before filing your return. By starting early, you'll give yourself time to compile all the information you need and to explore potential tax-saving deductions and strategies.
6. 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.
H&R Block's Charney notes that last-minute surprises may become more common 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 required to pay estimated taxes throughout the 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.
7. Catch errors in tax documents
Tax preparation software is great at filling out forms and calculating your tax liability, but it doesn't always spot reporting errors in tax documents sent to you. Unless you catch them yourself, they could significantly impact your tax bill.
For example, suppose you received money from a lawsuit settlement or a sweepstakes prize in 2017 and it was reported on a Form 1099-MISC. The amount should appear in Box 3, "Other income," but if the issuer mistakenly placed it in Box 7, "Nonemployee compensation," it would be considered self-employment income and subject to an additional 15.3% self-employment tax. Another example is Box 7 on Form 1099-R, which may contain a letter or number code as well as a check box for IRA, SEP, or SIMPLE distributions. The entries can make a difference in how you report the distribution and if it's taxed.
If you can't determine on your own what the proper entries should be on the forms you receive, you should consult a tax professional.
Start as soon as you can
By starting your tax return now and giving yourself time to resolve questions and issues that might arise, you may find the process less anxiety producing and may discover some opportunities to help lower your tax bill.
Next steps to consider
Take advantage of potential tax-deferred or tax-free growth.
Track year-to-date activity and get tax forms and tools.
Find strategies to help reduce taxes on income, investments, savings, and more.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
For a Traditional IRA, full deductibility of a contribution for 2017 is available to active participants whose 2017 Modified Adjusted Gross Income (MAGI) is $99,000 or less (joint) and $62,000 or less (single); partial deductibility for MAGI up to $119,000 (joint) and $72,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $186,000 for 2017; partial deductibility for MAGI up to $196,000. For 2018 full deductibility of a contribution is available to active participants whose 2018 Modified Adjusted Gross Income (MAGI) is $101,000 or less (joint) and $63,000 or less (single); partial deductibility for MAGI up to $121,000 (joint) and $73,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $189,000 for 2018 partial deductibility for MAGI up to $199,000.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917