While employers are required to issue W-2 forms to their employees by the end of January, "tax day" doesn't arrive until mid-April, which provides a nice three-month window to work on--or simply put off--filing your taxes.
There are numerous things you can do throughout the year to make completing your return simpler and perhaps less costly, such as organizing and tracking tax-related receipts, maxing out contributions to your IRA and 401k, and making as many tax-deductible donations as you can afford. However, for a number of reasons, it's also important to file your return as early as you can.
1. Save money. When it comes to managing your finances, there is nothing worse than having a large bill arrive unexpectedly in the mail. Therefore, if you think you may owe a significant amount this year, you’ll be better able to set aside the needed funds to pay the bill by filing early. In turn, this will help you avoid penalties and interest from making a late payment or not being able to pay in full on time. After all, just because you file early doesn't mean you have to pay early.
On the other hand, even if you know you will receive a refund check, early filing will allow you to receive your refund faster and use it to pay down or pay off costly bills and high interest loans, which can save you money on interest and fees.
2. Reduce stress. Gathering the necessary records, spreadsheets, and forms to properly file your taxes can take longer than you think, especially if you’re poorly organized. By starting the process now and filing sooner rather than later, you're less likely to make crucial mistakes, such as forgetting to include commonly overlooked tax deductions, because you won't be rushed. Leaving yourself extra time to review your tax filing for errors is especially important if you file your own taxes.
3. Good help is easier to find. Finding a qualified tax professional well in advance of the filing deadline is fairly simple. But once the heart of tax return season hits and the deadline rapidly approaches, accountants and other tax professionals will have far less time to take on new clients. And even if you have an established relationship with an accountant, they'll have more time to devote to your return if you schedule with them early in the year.
4. Receive your refund faster. Obviously, if you file your return in February, you will receive your check earlier than you would if you file in April. However, the net wait times are also much shorter.
I religiously file my return in mid- to late February each year, and I generally receive my refund check within two weeks. One year, however, my filing was delayed by a missing document, and I could not file until early April. I waited almost a month for my money that year because the IRS was inundated with returns by last-minute filers. The longer you wait to file, the longer it takes to get your tax refund check.
5. Give yourself a grace period. Filing early gives you a built-in grace period that can be a huge help in certain situations. For example, if you file early and later identify an error, you still have time to amend your return before the deadline. Realizing that you made a mistake on your return after the deadline passes can result in penalties and interest on the unpaid amount.
[See How to Avoid an IRS Audit.]
Final thoughts: If you know you'll owe money to the government this year, it is a wise decision to file early. However, it may be advisable to hold off sending in the check until closer to the deadline. This will give you a period of time to set aside the necessary funds, and especially if your money is making money via interest, you won't want to pull it off-duty too soon.
If you typically receive a large refund, consider adjusting the withholding allowances on your W-4 so you’re not overpaying your taxes throughout the year. This will increase your take-home pay as well.
When do you file your tax return? Do you find it beneficial to file early?
David Bakke writes about money management, including taxes and budgeting tips, on the Money Crashers personal finance blog.