It's often possible to file your tax return as early as January, once you've received your W2 from your employer and your 1099s from your investments. The IRS will even accept your return as soon as January. But this is one situation where the early bird doesn't always get the worm. Let's dig into whether filing early will leave you satisfied or spitting dirt. (If you don't know how to start doing your own taxes, see 10 Steps To Tax Preparation and Next Season, File Taxes On Your Own.)
How Filing Early Might Help You
Though many people think of filing their tax returns as a dreaded chore to be postponed for as long as possible, there are many reasons why it can make sense to file early.
- Get your refund faster. If you've overpaid your taxes and are expecting a refund, it makes a lot of sense to file early. You'll get your refund sooner not only because you're filing earlier, but also because the IRS probably won't be as busy in January, February or March as it will be in April and beyond.
- Get it over with. Why spend the first three months of the year with nagging thoughts of April 15 in your mind when you have the option to get it over with now? Avoiding procrastination can give you a lot of peace of mind that will make you happier and more effective in other, more important areas of your life.
- Avoid crowds at the post office. According to the IRS, in 2010, 70% of taxpayers filed their returns electronically - that means the other 30% are still mailing theirs, and joining the crowds at the mail office to do so. If you're planning to be one of them, whether out of habit, a desire to avoid the unnecessary expense of electronic filing, or the belief that paper filers are less likely to get audited, consider the extra time you'll have to waste at the post office if you wait until April 15 to mail your return(To learn more about audits, see Surviving The IRS Audit.)
- Avoid the possibility of being late and owing more. You might think you'll have plenty of time to prepare your return on April 14, but you can't predict what life might throw at you. If you have the time now, why not get your taxes taken care of? If it turns out that you owe money and you end up filing late, you'll waste money paying interest and possibly penalties. (To learn more, see How To Owe Nothing On Your Federal Tax Return.)
- Put your best foot forward. You might sit down at the last minute to do your taxes only to discover that something is making your tax situation more complicated than you're used to and that you won't have time to figure it out before you submit your return. What's more, if you're in a hurry, it can be easy to mess up even the simplest return by forgetting to enter your Social Security number or making an error in a calculation. Why risk making a rushed mistake that could lead to a costly audit?
- Avoid high-interest loans. If you're expecting a refund and you have bills to pay, getting your taxes filed quickly can actually help save you money. Instead of resorting to options like adding to your credit card balance, paying bills late or getting a payday loan to tide you over until late April or early May (which is when you'll get your refund if you file on April 15), get your refund early and use it to stay on track with your finances.
In general, filing early is best for people who have simple tax returns or who are expecting a refund. More advanced taxpayers are more likely to see negative results from filing early, such as those discussed next. (To answer the rest of your tax filing questions, see our Personal Income Tax Guide.)
How Filing Early Can Hurt You
While many people simply put off filing their tax returns until April - waiting until the last minute like most of us do with any deadline - it turns out that procrastination isn't the only reason to wait when it comes to your taxes.
- Maximize your interest. If you're going to owe money to the IRS, why give it to them any sooner than you have to? You can still complete your return early and turn it in, but you don't need to pay until April 15. Keep the amount you owe in a safe, interest-bearing account and earn a few extra bucks for yourself.
- Avoid amending your return. Sometimes employers, universities, mortgagees and investment companies make mistakes on the tax forms they file to report your wages, tuition costs, mortgage interest and investment income to the tax authorities. If you file your return based on this incorrect information, you'll have to file again once the mistake is fixed and new forms are mailed out to you and the IRS. Not only does filing twice take some time, you'll likely find that you owe more or less tax based on this new information. If you file early, get a refund, and spend it right away, will you have the money to pay up if your tax liability suddenly changes? (To read more on this subject, see A Tax Primer For Homeowners and Tax Tips For The Individual Investor.)
- Tax forms for the current year may not be available if you file in December and updates sometimes occur during the tax season. Legislation passed at the end of the year might not be reflected in tax forms yet if you file early. If you use tax software, it will usually not allow you to finalize your return until it has all of the forms available for the current year that apply to your situation. If you print forms from the IRS website, you will also want to make sure that the forms you need are for the tax year for which you are filing. However, even though the form is available for filing doesn't mean updates are complete. If congress passes a new law, there could be a new update any time before April 15th. If you file your taxes early, pay attention to reports of tax law changes on the news. Then visit www.irs.gov for instructions on how to correct your tax forms. (For more on this, see Get A Six-Month Tax Extension.)
The Bottom Line
To determine if you should be one of the few who file early, examine the pros and cons of each option and consider how they relate to your filing situation. If getting it over with can put some money back in your pocket sooner, it might be worth it, but for many people, it makes more sense to wait.
To keep reading on this subject, see Give Your Taxes Some Credit.