We're only a few weeks into 2016, but there are a number of reasons why it's a good idea to turn your attention to your income taxes right away.
It’s still only January, of course, and many of you won’t even begin to think about doing your taxes until early April. While the tax bill for 2015 isn’t technically due until April 15, you should consider filing your taxes sooner if, like most Americans, you’re in line for a tax refund.
According to 2015 IRS data, nearly 80% of Americans received a tax refund for the tax year 2014. On average, those people received about $2,500 each. Those in higher tax brackets are less likely to receive a refund. Only 34% of those who earned more than $200,000 per year received a refund for tax year 2014, a number that typically remains steady. There are a number of reasons for this, not least of which is that those in higher brackets owe more taxes (obviously!), but it’s also true that many high-earners monitor their tax liability very closely, so as not to give the state or federal government any interest-free loans over the course of the year.
Even though you have a few months yet before you have to start thinking about filing, let’s go over a few reasons you should start thinking about it early.
Take the Fear of the Unknown out of the Equation
If you’re like many physicians, your income is relatively stable from year to year, and thus your tax liability and how much you already set aside in federal and state taxes is unlikely to have a substantial swing. But there are many other factors that determine tax liability. Life changes such as having a child or getting a divorce will certainly change what you owe from one year to the next. Changes in state and local taxes may also change rates. Significant changes in personal income may not have been reflected in your tax withholdings, as many people don’t make changes to what is withheld until after they’ve felt the burn of an April tax bill. These and dozens of other factors may mean a significant change in whether and how much you owe or are owed.
Looking into your tax liability now doesn’t mean you have to file now. Working with a tax professional, or even doing your taxes yourself, allows you to do the legwork now and hold off on filing until April 15. Knowing early about any tax liability can help you put away a little at a time now to cover the deficit. Conversely, finding out now about a large refund may help you avoid the same fate the following year by making adjustments in your withholding.
Do Your Homework
If you are going to work with a tax professional, shopping around now will give you ample time to consider the history, trustworthiness, and overall merit of whatever professional or firm you’ve selected to prepare your taxes. This is a very important step. Despite constant reminders from the Internal Revenue Service, many filers still don’t know that they—and not the tax preparation firm—are responsible for any errors made on their income tax returns. Check out the IRS’ page on signs that your tax preparer may be more interested in a refund (of which they may share a percentage) than in filing an honest return. Penalties for fraud—a more nefarious crime than a simple mistake—can include prison time and hefty fines. But even a simple mistake can be pejorative, so make sure your tax firm or representative is reputable and that you check the work before you sign on the bottom line.
There are many more reasons to think about doing your taxes early, so we’ll return to this topic a few more times over the next several months. For now, take a look under the hood and see how things are running. You may thank yourself later.
*Note: This article is for informational purposes only and should not be considered tax or legal advice.