By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement PlansPrint This Post
As we enter yet another tax season, it may evoke the age-old question for many, “Should I file my taxes early, or wait until the deadline?” As with many quandaries, there is no simple answer to this question, as it depends on each person’s unique tax circumstances, and perhaps also individual personality traits. Are you the type of person who likes to get things done ahead of time, or do you prefer to push off difficult task as long as possible? Tax season can be a frustrating experience under normal circumstances, but this year’s tax season looks to be particularly “bumpy” given the ongoing COVID-19 pandemic, continued challenges with the IRS in processing stimulus payments, and an exhausted IRS workforce still trying to catch up with last year’s delayed tax season.
When contemplating this question of when to file, there are several key factors to consider. For instance, filing early is a great idea for individuals who have received all their tax forms and anticipate a refund. Taxpayers expecting a refund should remember that the refund actually represents an excess payment made to the IRS over the past year, so getting the money returned to you as soon as possible makes financial sense. Additionally, filing early typically results in faster processing times for the refund. In fact, electronic filing with direct deposit into a bank account continues to grow in popularity and it is the fastest way to get your refund.
Filing early could also be advantageous if:
- You owe money to the IRS, as it may give you additional time to fully understand your tax liability and arrange for payment. Payments do not have to be made until April 15, even if you file your tax return early.
- You are anticipating a big life changing event (such as purchasing a home or attending college) by helping to obtain key information required for college financial aid or home purchase approvals in a timely manner.
- You are concerned about identity theft. Filing early can lessen the time and opportunity for an identify thief to fraudulently file for you – and potentially steal your refund!
Conversely, you may want to wait to file your tax return if:
- You don’t have all your tax information (i.e. 1099s, schedule K-1s, etc.). For example, if you own mutual funds in a taxable investment account, it is not uncommon for 1099s to arrive in mid to late February. An incomplete or inaccurate tax return could result in needing to file an amended tax return. Amended returns have also been known to invite IRS audits.
- You need additional time to use tax advantaged strategies, such as making tax deductible IRA contributions for the previous calendar year (if you’re eligible).
The last 12 months have proven to be eventful in many ways, including the enactment of the CARES Act which has created some potentially new tax events for individuals (i.e. those receiving unemployment benefits for the first time, those electing coronavirus-related distributions from retirement accounts, etc.). Be sure to consult with your tax advisor in determining all the issues that could impact your decision to file your taxes early or wait.