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As April 15th approaches, it’s essential to recognize the importance of filing an income tax return, even if you fall below the income threshold set annually by the IRS. While you may not be legally obligated to file due to income limitations, doing so can yield numerous benefits. There are six reasons why filing an income tax return, even when not required, is a wise financial decision. From maximizing tax credits to safeguarding against identity theft, why taking the initiative to file your taxes can positively impact your financial health and future opportunities.
1. Don’t Let Your Tax Credits Expire
Even if your income falls below the standard deduction threshold, filing a tax return can make you eligible for valuable refundable tax credits like the Earned Income Tax Credit (EITC) or the Child Tax Credit. These credits can provide a significant financial boost and open doors to various tax-saving opportunities. Whether you choose to invest in your retirement or contribute to your child’s education, filing your taxes ensures you make the most of these credits before they expire. For instance, you can take advantage of tax-deferred growth by investing in an Individual Retirement Account (IRA) or secure your child’s future education expenses by contributing to a 529 saving plan.
Understanding IRAs:
- Traditional IRA: Contributions to a Traditional IRA are typically tax-deductible, reducing your taxable income for the year. The earnings in a Traditional IRA grow tax-deferred until withdrawal, usually during retirement. However, withdrawals are subject to income tax at the time of distribution. By contributing to a Traditional IRA, you not only save for retirement but also potentially lower your tax liability in the current year.
- Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible. However, qualified withdrawals, including earnings, are tax-free during retirement. Additionally, Roth IRAs offer greater flexibility, allowing you to withdraw contributions (but not earnings) penalty-free at any time. By contributing to a Roth IRA, you invest in your future while enjoying tax-free growth and flexibility in accessing your funds.
Understanding 529 Saving Plans:
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses and K-12 education expenses. These plans, sponsored by states, state agencies, or educational institutions, offer various investment options and tax benefits. Contributions to a 529 plan grow tax-deferred, meaning you won’t pay taxes on the earnings as long as the funds are used for qualified education expenses, including tuition, fees, books, supplies, and room and board. Additionally, many states offer tax incentives, such as deductions or credits, for contributions to their 529 plans. By filing a tax return and utilizing a 529 plan, you can effectively save for your child’s education while enjoying tax advantages.
2. Protect Yourself from Identity Theft
In today’s digital age, identity theft is a prevalent threat, with potentially severe consequences. By filing a tax return annually, you create a self-check mechanism against tax-related identity theft. Electronically filed returns prompt immediate rejection if someone has already submitted a return, alerting you to potential fraudulent activity. Additionally, registering for an IRS online account allows you to monitor your tax status and swiftly address any suspicious filings or discrepancies.
3. Streamline Third-Party Financial Requests
Filing a tax return provides essential documentation often required by third parties, such as lenders, landlords, or grant providers. Having up-to-date tax records readily available can expedite processes like securing loans, renting properties, or applying for grants, saving you time and hassle. In today’s limited market, the fastest person usually gets the deal.
4. Trigger the Assessment Statute of Limitations
Filing your tax return initiates the Assessment Statute Expiration Date (ASED), setting a timeframe for the IRS to assess taxes owed. The ASED typically spans three years from the filing date. However, this statute may extend to six years if your gross income is underreported by 25% or more. Moreover, if you file a fraudulent return, there is no statute of limitations, allowing the IRS to pursue assessment indefinitely. Furthermore, since the IRS has 3 years to Audit a filed return, if you did not file but someone else filed using your identity it can be up to 3 years before you discover that. You will have to spend money to prove your identity was stolen. By fulfilling your filing obligation, you commence and end the statute of limitations, at the appropriate time, and shield yourself from potential undiscovered theft.
5. Ensure Refund Statute Expiration Date (RSED) Compliance
Filing your tax return is vital to comply with the Refund Statute Expiration Date (RSED). The RSED is a three (3) year timeframe from the date you filed your original tax return or two (2) years from the date you paid the tax, whichever is later to claim tax refunds or credits owed to you. Failure to file within this window may result in the forfeiture of your refund entitlements. By submitting your tax return in a timely manner, you adhere to the RSED, ensuring the preservation of your refund rights and avoiding financial losses. Therefore, if you earned income and did not file a return, you still have time to file those last three year returns, to claim credits you’re eligible for.
6. Access State and Local Jurisdiction Benefits
Filing an income tax return may unlock eligibility for various state and local incentives or relief programs, particularly in the aftermath of natural disasters or economic hardships. Missing out on these benefits due to non-filing could mean forgoing valuable assistance or financial relief when you need it most.
In conclusion, filing an income tax return, even when not mandated, offers numerous advantages and safeguards for your financial well-being. It serves as a proactive measure to claim tax credits, protect against identity theft, and access various financial opportunities. Don’t let free money go to waste – take charge of your financial future by filing your taxes today! If you need assistance or suspect identity theft, don’t hesitate to reach out for expert guidance. Your proactive approach to tax filing can pave the way for financial security and peace of mind.
