There are lots of reasons to file your taxes early. For one, tax return theft is skyrocketing, and filing early prevents it. Refunds arrive faster, and even when a refund isn’t due, early filers can still wait to pay until mid April. But the biggest reason to file early is the peace of mind. Spending days and nights with taxes always tugging at the back of your mind is no way to go through the first few months of the year. Not only does late filing cause a lot of stress for the procrastinating taxpayer, but a late, frantic filing can fray the nerves of loved ones too.
Here’s a breakdown of the reasons to file early, along with one reason to wait.
File Taxes Early Reason #1: Faster Refund
Money now is better than money later. Savers can take that refund payout and put it in investments, where it can start accruing interest. But even non-savers can almost always put a refund from filing taxes early to good use. They might use it to pay down credit cards and other debt, thereby avoiding interest charges. Or as Warren Buffett puts it, “Cash never makes us happy, but it’s better to have money burning a hole in your pocket than resting comfortably in someone else’s.”
File Taxes Early Reason #2: File Now, Pay Later
One argument against filing early goes, “If you’re getting a refund, sure, file now, but if you owe money, wait as long as possible. And since you don’t know until you do your taxes, you might as well wait” The problem with that line of thinking is, doing and filing taxes does not equal paying them. In fact, the IRS doesn’t require taxpayers to pay their tax bills until the filing deadline of April 15th. This holds true even if a person filed their taxes back in January. So someone could do their taxes at the end of January, file, and then have months before they had to pay.
File Taxes Early Reason #3: Less Chance of Making a Mistake
Waiting to file until the last minute is a big source of tax mistakes, and tax mistakes can cost real money.
Here’s the scenario: Imagine someone named Jason waits until April 14th to file his taxes. He rushes it every year, but this year he forgot he’d made an appointment with the carpenter to install a new door out to the porch, so he’s even more pressed for time than usual. He uses tax software, which eliminates most tax preparation mistakes before they’re made, so that’s a point in his favor. According to the IRS, a whopping 21% of paper returns contain mistakes, while only .05% of returns prepared with tax prep software have errors. However, Jason’s software can’t catch every mistake. Because he’s rushed, he forgets a 1099. He catches it days later, but now he has to file an amended return, along with penalties and interest. More work, less money. Poor Jason.
The extreme end of this is when a mistake alerts the IRS that something seems suspicious, triggering an audit. Filing taxes early can make life a lot less problematic.
File Taxes Early Reason #4: Avoid Tax Refund Theft
The IRS is seeing a significant increase in identity theft where someone steals another’s identity, files a fraudulent return and illegally collects that person’s refund. Tax refund related identity theft jumped 66% from 2012 to 2013 alone and continues to skyrocket. Regina* says, “I did my taxes, then I got a letter from the IRS that said they already had my return on file. When I contacted them, it turned out someone had got my social security number, filed a fake return, and got the money.” The theft resulted in a large amount of paperwork and hassle for Regina. Filing early can preempt this kind of fraud and trouble.
File Taxes Early Reason #5: Knowledge is Power
College students applying for financial aid are required to show their completed form 1040 as proof of their level of need. Homebuyers must often also show their tax return as proof of income. These and other special situations are reasons to file early. If situation crops up that calls for you to show your tax return, it helps if your return has already been filed. It’s one less job the taxpayer will have to do before they get on with the task at hand.
File Taxes Early Reason #6: Domestic Tranquility
The biggest reason to file early is peace of mind, not just for taxpayers, but for those around them.
Kathy’s husband Todd* runs a landscaping business. “Every year,” she says, “he’d wait until the last minute to do his taxes. He’d spread out on his desk with shopping bags of receipts and stacks of forms, and you could almost hear his blood pressure rising. He’d run into something he couldn’t figure out and search online and spend hours on hold with the IRS and get more and more frustrated. Then he’d usually leave something out and have to go back later and file an amended return. The entire month of April just became a time I dreaded.”
Tax software helped relieve the lion’s portion of that stress by streamlining Todd’s tax prep process and removing a lot of guesswork and research. But even so, in the absence of a crystal ball, it’s impossible to know what crisis or opportunity might rear its head at tax time.
Need a reason to file taxes early? How about the unexpected? A broken water heater at tax time can throw you for a loop. Image source: HomeDepot.com
Maybe the water heater breaks on April 14th, or the baby gets sick or some friends announce they’re going on a fun weekend getaway in the mountains and they want you to come along. If the taxes are done, it opens up more options. And even knowing the job is out of the way for the year can take one more worry off your mind, and make it that much easier to fall asleep at night.
“We had a talk about it two Julys ago when things were calm,” says Kathy, “and he saw my side of it. He does the taxes in January now. Things are a lot less stressful. He doesn’t have to file amended returns any more and the returns are bigger than they had been.
Caution
Moliere said, “Unreasonable haste is the direct road to error.” The key word is, “unreasonable.” It’s important to make sure all W-2s have arrived, as well as 1099s and other forms. Also, some investment accounts release tax forms, then release corrected versions of those same forms closer to the filing deadline. Filing taxes before all the necessary information is on hand can mean an amended return, plus fines and interest.
The Bottom Line
Filing taxes early is generally good policy. Taxpayers can use the money from an early refund to their benefit. If they owe, they can still pay at the last minute, even if they don’t file that way. And on the whole, filing early takes a load of stress off in a world that’s got no shortage of it.
Sources
- IRS Criminal Investigation Combats Identity Theft Refund Fraud – IRS.gov
- E-File Overview – IRS.gov
*Names changed for sources’ privacy