Income tax filing season is upon us and let’s admit it – there’s a certain amount of stress with the whole process. It may be related to the time and effort it will take to gather the necessary documents. Or fear that you may owe the IRS money. And if you’re preparing your return yourself, you may have some anxiety over the potential to make a mistake that could invite an IRS audit.
Those may or may not be legitimate concerns, but there are numerous financial benefits of paying your taxes early. Since the process of filing returns can be stressful in itself, the best strategy is to get the job done as quickly as possible, put it in the rearview mirror, and move forward with your life.
Even if you do expect to owe money, it’s almost certainly better to file early and get it over with. And who knows? You might even find you owe less than you thought. But if you let it ride until close to April 15th, you’ll be causing yourself a lot of unnecessary stress.
That’s why when it comes to income taxes, it’s almost always better to file and pay early.
How early can you file your 2020 income tax return?
There’s probably no one in America who is unaware that April 15th is “tax day”. But that doesn’t mean you need to wait until April 15th to file.
Though the specific date on which the IRS will begin accepting tax returns for processing has not yet been announced, it’s typically sometime in the closing days of January. At least, in theory, you can file your return as early as the announced date, as long as all your relevant text documentation has been received enabling you to prepare an accurate return. If you plan to file electronically, you won’t be able to file until the announced date, since that will also be when the IRS will begin accepting e-filed returns.
But unless your tax situation is fairly simple, and you receive all your needed documents early, you probably won’t make it in time for the earliest filing date. That’s because employers and other institutions are not required to provide important tax documents until after the IRS begins accepting returns for processing.
For example, employers have until January 31, 2021, to provide W-2s. That’s true for 1099s for employee compensation as well. However, other 1099s, such as those that report interest, dividends, capital gains, and other investment transactions, don’t need to be sent out until February 28.
And as we all know, just because W-2s and 1099s are due out by a certain date doesn’t mean everyone complies. You may not get your W-2 until February 7th, or your investment-related 1099 until March 5th. It happens in the real world.
So, while the IRS may begin accepting tax returns as early as late January, your own ability to file will depend on how quickly your employer(s) and any financial institutions you save or invest with get your tax documents to you.
The financial benefits of paying your taxes early
I’m using the term “paying your taxes” because that’s almost certainly the main reason people delay filing their taxes until April 15. But there are plenty of other reasons you might be waiting until the last minute, including procrastination.
But whether you expect to pay, or you’re anticipating a refund, there are plenty of reasons to file – and, if necessary, pay – your taxes early.
Get your money early if you’re due a refund
According to the IRS, the average federal income tax refund is $2,899. That figure is for the 2018 tax year since the 2019 results are doubtlessly still being collected due to the disruptions caused by the coronavirus in 2020. But the amount of the refund doesn’t change much from year to year, so we’re still talking roughly $2,900.
That’s a nice chunk of money, and one too big to leave on deposit with the IRS, where it earns no interest. For that reason, you should want to get your tax refund as soon as possible. And in most cases, if you expect a refund on your federal income tax, you’ll probably be looking for one on your state income tax as well. That means more than $2,900 may be hanging in the balance.
The sooner you get your refund from the IRS and into your bank, the sooner you’ll be earning interest on the money – or putting the cash to some good use elsewhere.
In addition to the potential to earn interest (or investment income if you plan to invest your refund), you can keep more of your refund by filing online through a free tax-preparation service.
Credit Karma Tax is an excellent example. If you’ve already signed up with Credit Karma to take advantage of their free credit monitoring service, you’ll also be eligible to use their free tax-preparation service. Though it’s not recommended for more complicated tax situations, it can be an excellent choice if your return is somewhere between simple to moderately complex. It’ll give you an opportunity to get your refund as soon as possible, but without incurring any cost for doing so.
Give yourself more time to pay if you owe
It’s perfectly understandable to choose to wait until the last moment to file your income tax if you owe money. But if you already know you owe, hesitation will only generate additional unneeded stress.
What’s more, there’s no need to panic if you owe the IRS money, even if you can’t afford to pay it. In fact, the IRS provides several options for paying overdue taxes. Once you get one of these payment methods in place, the stress will ease, and you’ll be able to freely concentrate on the business of getting your 2020 tax liability paid.
The IRS will help you pay your tax balance
The IRS provides no fewer than three options to pay your taxes if you’re unable to pay them with your return:
- When you file your taxes, you can contact the IRS and request additional time to pay your full tax balance. The IRS will give you up to 120 days to pay your balance. You’ll need to contact the IRS to set this up, which is another compelling reason to file your return early.
- If you won’t be able to pay the full balance within 120 days, you can also set up an installment payment agreement. The IRS will give you up to 72 months – a full six years – to pay your balance in full. However, interest and penalties will be assessed on the portion of the tax that has not been paid by April 15th.
- If you’re unable to pay the full balance even with additional time or an installment agreement, you can also propose an offer in compromise. You’ll need to make an application with the IRS, but you may qualify to pay a reduced tax balance if you can demonstrate a hardship. This may be approved if you’ve experienced a prolonged time of unemployment, the death of a loved one, a divorce, or a major medical event.
The critical element when you owe the IRS money is to file your tax return on time. Early is even better, since it will make it easier for you to set up a workable payment plan. That’ll be easier to do early in the tax filing season when the IRS is more likely to answer their phones or to respond to online applications for payment plans.
Reduce the likelihood of income tax refund fraud
Income tax refund fraud is one of the fastest-growing and least understood forms of identity theft. That’s in large part because it happens without the taxpayer even being aware of what’s going on – at least until an ominous letter arrives from the IRS.
If you’re expecting a refund, that letter will inform you that a large refund has already been paid under your name and Social Security number.
You don’t need to worry that the IRS is going to come after you for the fraudulent overpayment. They’re well aware of income tax refund fraud and have an entire protocol set up to deal with it. But it will take weeks or months to sort out, and that will mean your true refund will be delayed until the problem is cleared up.
To avoid the hassle and the delay – as well as the possibility of the fraud itself – you’ll minimize the likelihood of it happening by filing as early in the tax season as possible.
Income tax refund fraud usually takes place shortly after the IRS begins accepting returns for processing. If the fraudster has your name, address, and Social Security number, he or she can file a bogus tax return claiming a large refund.
The early filing by the fraudster is the key to the whole theft. The fraudster will be able to both file a fraudulent return and collect the refund before you file your legitimate return.
You can head the fraud off by filing as early as possible. Use tax-preparation software, likeTaxAct, to file as soon as your important tax documents arrive. TaxAct has multiple plans, ranging from free filing to less than $12 for a basic return, to about $60 for a more complicated return, such as if you’re self-employed.
Avoid the last-minute tax crush – and the possibility of needing to extend
There’s something of a myth – which is one dreaded by tax preparers everywhere – of a taxpayer walking into a CPA firm or tax-preparation company on April 14th and expecting to have the return filed by the next day. That’s something like doing your Christmas shopping on Christmas Eve. And trust me, it probably won’t work with tax-filing either.
I spent many years working in CPA firms, and I can tell you categorically that’s not how tax-preparation works.
Walk into a CPA firm on April 14th, and the most that will happen is your return will be extended.
In fact, many CPAs have a cutoff date that’s set much earlier. In some firms, it may be April 10th, but in others, it may be April 5th, April 7th, or even April 1st.
The reason is CPA firms and tax-preparation offices are swamped with last-minute tax returns as the 15th approaches. The higher the volume of last-minute returns, the earlier the cutoff date will be. You can forget about April 15th– your return will automatically be extended if you come in after the cutoff date established by the firm.
Like avoiding as many traffic jams as you possibly can, you should do your best to not take part in the last-minute tax-preparation crunch. And, if for whatever reason, it looks like you’ll be a late filer, your best choice will be to opt for tax-preparation software to get the job done yourself.
Warning: an extension to file your return is not an extension to pay your taxes
At a minimum, it will be important to have your return completed even if you need to file an extension. A completed or mostly completed tax return will let you know what your tax liability is.
That’s important because filing an extension only grants you the right to file your return by October 15th. But it does not give you an extension to pay your tax liability.
Being better prepared to file a complicated return
Next to apprehension over owing on your taxes, the biggest source of stress and filing delays is likely from the need to file a complicated return. That may be the case if you’re self-employed, have a large number of investment trades, own investment real estate, or participate in multiple partnerships.
The document collection process for any of those return types is admittedly challenging. But that’s all the more reason to keep accurate records as well as knowing where to access important documents, many of which can easily be retrieved from online sources.
Delaying the preparation of a complicated tax return until April 15th, or even anticipating an extension, won’t make the problem go away. It’ll simply postpone it to a later date, which means you’ll spend more time stressing and worrying.
This can be especially problematic if you’re using the services of a paid tax preparer. The closer you get to April 15th, the more backed up paid tax preparers are, including CPAs.
Tax software can help you file the most complicated returns yourself
Don’t let that stop you from filing. There are advanced tax software programs that can help you prepare your tax returns yourself. And you can do it with a quality level similar to a return prepared by a CPA.
TurboTax is an excellent choice to self-prepare the most complicated tax returns. You can quickly and easily file even the most complicated returns for no more than $120 on the federal, plus $50 for your state return. That’s just a fraction of what you’d pay a CPA to prepare your return. And using the easy, step-by-step data entry process TurboTax employs will make the tax-preparation process easier than you might imagine.
They offer a 100% accuracy guarantee, the ability to prepare up to five returns with a single package, an audit support guarantee, an interface with QuickBooks, and – for an additional fee – live audit representation.
For the sake of your own sanity, file and pay your income taxes as early in the tax filing season as you can. Given all the tax preparation software that’s available – that’s both easy to use and low cost – there’s no reason to wait.
File as early as you can, get the task behind you, then go on with your life. Even if you expect to owe, a delay doesn’t eliminate the need to make payments. It only defers it to a later date and leaves you spending more time worrying.
Between tax software and e-filing, there’s no reason at all to put yourself through that.