Paying taxes might not be the most exciting part of retirement, but it’s still a necessary one especially if you’re receiving Social Security benefits. While many retirees assume their tax situation becomes simpler, the truth is that Social Security can make things a bit more complicated.
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That’s why accounting experts agree: filing and paying your taxes early is a smart move when you’re collecting Social Security. Here are six reasons why getting ahead of tax season can save you money, stress and even your benefits.
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Avoid Unwanted IRS Penalties and Interest
“The IRS wants taxes paid as you earn income,” explained Paul Carlson, certified public accountant (CPA) and managing partner at Law Firm Velocity. “What a lot of people forget is that if you have taxable Social Security or other earnings (like dividends or retirement withdrawals), you need to make quarterly estimated tax payments.”
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If you don’t pay on time, the IRS will hit you with penalties and interest, which keep adding up like a high-interest credit card. “If you file late, the penalties are 5% of the tax owed per month. If you pay late but file on time, the penalties are 0.5% per month,” said Kari Brummond, accountant and content strategist for TaxCure.com.
Early payment protects your hard-earned retirement income from being eaten up by extra fees.
Better Budgeting and Peace of Mind
“Imagine getting a big tax bill at the last minute,” Carlson said. “It’s very stressful and could throw off your entire budget.”
When you’re living on a fixed income, that surprise tax bill can seriously derail your financial plans. By paying your taxes early (or better yet, having them withheld throughout the year), you gain clarity and control over your finances.
“Paying early gives you peace of mind and makes it easier to plan ahead,” Carlson added.
Protect Social Security Payments From Garnishment
Yes, the IRS can take a portion of your Social Security if you ignore your tax bill for too long. It’s called the Federal Payment Levy Program and it allows the government to garnish up to 15% of your monthly Social Security check to collect back taxes.
Once garnishment starts, it doesn’t stop until your full tax debt. This includes interest and penalties until it’s paid off. That’s money you could be using for housing, groceries or medical care.
Carlson said it’s always better to be proactive with your finances and tax planning process.
Enough Time To Fix Complications
Filing taxes while on Social Security can come with unexpected hiccups, which is why it’s smart to get a head start.
“I think it is wise to do your taxes perhaps a bit earlier when receiving Social Security,” said Adam Hamilton, CEO of REI Hub. “Social Security can make things a bit more complicated when doing your taxes, so at the very least it gives you a bit more wiggle room if you run into an issue you need help with.”
For example, some retirees are surprised to learn that, according to Merrill, up to 85% of their Social Security benefits may be taxable especially if they also have income from part-time work, a pension or retirement account withdrawals. If you accidentally under-report your income or overlook a 1099-R form from a retirement account, your return could be flagged by the IRS, resulting in delays, penalties or the need to file an amended return.
Starting early gives you time to catch and resolve these issues without the last-minute stress or risk of missing the filing deadline.
Withholding Options
You don’t have to wait until April to deal with your taxes. Brummond recommended an underused but powerful strategy: withholding taxes directly from your Social Security payments.
“To do that, file Form W-4V, Voluntary Withholding Request,” she explained. “The SSA will then withhold taxes from each payment. When you file your return, those withholdings can help offset other taxes you owe from side gigs, investment income or retirement accounts.”
This method helps you stay current with your taxes year-round and could even lead to a refund.
Faster Refunds (If You’re Owed One)
If you’re one of the lucky retirees expecting a refund, filing early gets that money back into your hands faster.
“Even if you’re due a refund, don’t let that make you lazy,” Carlson said. “You can get your refund sooner and use it for whatever you need — whether that’s medical costs, savings or a spring getaway.”
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This article originally appeared on GOBankingRates.com: 6 Reasons To Pay Your Taxes While on Social Security as Early as Possible