Note to Readers: This post begins an occasional series on personal finance topics that may be useful for a broader audience than The Rational Walk’s typical focus on value investing. Please feel free to pass along a link to this article to clients or associates who may benefit from the material.
The annual tax filing deadline of April 15 is still nearly three months away and few taxpayers have even started to contemplate the dreaded process of filling out tax forms. The Internal Revenue Service provides some guidelines regarding whether one needs to file a Federal income tax return, but even those who may not be required to file can often benefit by doing so. Here are six reasons to promptly file a tax return for 2009:
Recover Excess Withholdings
Many people end up paying excess taxes through payroll withholdings throughout the year. While the prospect of receiving a large check from the government sounds appealing, the excess withholdings actually represent an interest free loan to the government. Taxpayers who anticipate a refund for 2009 should file as soon as possible and may also want to consider adjusting withholding instructions for 2010 by filling out a new W-4 Form (pdf).
Leverage the Earned Income Tax Credit
Many taxpayers do not realize that certain credits in the tax code are “refundable” and can actually result in a negative tax liability. This means that certain taxpayers could receive a refund of all taxes withheld from their paycheck along with additional cash! The Earned Income Tax Credit (EITC) is one example of a refundable tax credit. In general, the EITC is targeted toward lower income taxpayers with qualification depending on whether one files as a single or jointly along with the number of children who are claimed as dependents.
Claim the 2009 Stimulus Payment
Most taxpayers who are employed as W-2 workers have already received the 2009 stimulus payment in the form of reduced payroll taxes withheld during the past year. However, it is possible that a taxpayer may have missed out on the 2009 stimulus, particularly those who are self employed or retired. The IRS has information regarding the procedure for claiming the 2009 stimulus when filing a return for the year.
Take Advantage of IRAs
Many taxpayers can qualify for substantial tax savings by contributing to a deductible IRA. While any taxpayer with earned income may contribute to an IRA, income limits apply which govern whether a taxpayer can deduct the contribution from income. The IRS provides detailed guidance regarding IRA contributions.
Avoid Penalties
The last thing most taxpayers want to do is incur additional penalties on top of their existing tax liability. By filing a return in a timely manner and paying any amount that is due, penalties and interest can be avoided.
Adjust Tax Strategies for 2010
Taxpayers who file their 2009 tax return early in the year may also discover opportunities to reduce income tax liability for 2010. Tax preparation software such as TurboTax or H&R Block’s TaxCut can quickly identify ways in which taxes can be reduced going forward. While it is never pleasant to discover that steps could have been taken to reduce 2009 taxes, the silver lining is that tax strategies can be optimized for 2010.
If All Else Fails, File an Extension
For various reasons, some taxpayers will find it impossible to file prior to April 15. If you are in this situation, it is important to at least file an extension that will extend the deadline to as late as October 15. Filing an extension does not relieve the taxpayer of the obligation to pay all amounts due, but it does eliminate penalties associated with failing to file a return on time.