The IRS gives you until April 15th (or the following business day if April 15th falls on a weekend or holiday) to file your tax return, but ideally, you should file as early as possible. Filing your return early in the tax season gives you a lot of benefits and can potentially even save you money. Wondering why you should file early? Take a look at these reasons:
1. Unclaimed Refunds Are Interest-Free Loans to the Government.
If you’re due a refund, you don’t have to worry about fees for filing late. You can claim your refund for up to three years after the filing deadline. But to safeguard your finances, you should file early so you can get your money as quickly as possible. In 2018, the IRS owed 110.6 million people income tax refunds of $2,825 on average — that means the agency was holding over $307 billion in taxpayer’s money.
Until you claim your refund, you’re essentially giving the IRS an interest-free loan. You can also be losing out on potential savings. If you have that money in hand, you can invest it and earn interest, or you can use it to pay down debts and save money on interest and fees. Don’t let the IRS hold onto your money. Instead, claim your refund and put the funds to work for you.
Keep in mind that although getting a chunk of cash at tax time every year can be convenient, you lose money in the long run. To minimize losses, consider adjusting your withholding status so that you get larger paychecks throughout the year instead of a refund.
2. Filing Early Helps You Avoid Late Filing Fees.
The IRS charges significantly higher penalties for filing late than for paying late. If you file late, the penalty is 5% of your balance every month, but if you file on time and pay late, the fee is just 0.5% of the tax you owe. That’s a huge difference. If you owe $12,000, for example, the late filing fee is $600 per month, but the late payment fee is only $60 per month. In both cases, the IRS adds interest to your balance.
3. You Have More Time to Figure Out How to Pay Your Tax Bill.
If you owe money to the IRS, you don’t have to pay when you file. Even if you file early, your payment is not due until April 15th, and by filing early, you give yourself plenty of time to figure out how you’re going to pay your balance. The IRS has a lot of different options for people who can’t afford to pay their entire balance at once. Depending on your situation, you may be able to set up a payment plan, reduce your balance, claim uncollectible status, or explore other options.
4. When You File Early, Scammers Don’t Have a Chance to File a Fake Return Under Your Name.
Between 2015 and 2017, the number of tax-related identity theft cases dropped by 65%, but this issue remains a threat and has a spot on the agency’s “Dirty Dozen” list of tax scams. Generally, tax-related identity theft involves a scam artist filing a fraudulent return in your name to collect a refund.
If a scam artist files first, it can take months for the IRS to sort out the details. You may be stuck trying to prove that identity theft occurred, amending mistakes to your return, waiting for a refund, or dealing with other issues. By filing early, you ensure that scammers don’t have a chance to file a return in your name before you do.
5. Tax Prep Companies Offer Discounts for Early Filers.
Most tax prep software and many tax prep companies offer discounts to early filers. These companies tend to be a lot busier around the tax filing deadline and to spread out their work for the season, they use discounts to entice people to file early.
6. Early Filing Reduces Last Minute Stress.
Filing at the last second can be extremely stressful. If you don’t have all the required paperwork, you may be rushing around looking for forms or trying to reach out to employers, banks, or clients to send you copies of missing documents. In addition to being stressful, this can lead to errors or missing information on your turn.
Generally, you’re not the only one who’s likely to be stressed around the tax filing deadline. Tax professionals also tend to get stressed at this time of year, and if they’re working on a last-minute return, their attention may be diluted and they may be more prone to making mistakes.
On top of that, if you don’t have everything you need to file or if your tax preparer is too busy with other clients, they may have to request an extension. Filing an extension is always better than filing late — when you request an extension, the IRS doesn’t charge you a late filing fee — but with an extension, you still run the risk of delaying your refund or accruing late payment penalties for not paying your tax bill on time.
7. Filing Early Is Linked to Larger Refunds
Additionally, statistics show that on average early filers receive a $200 larger refund. Arguably, this may be since people who are anticipating a refund tend to file early, but the larger refunds may also be due to the extra time and attention you receive from tax professionals when you file early.
How to File Your Tax Return Early — The Earliest You Can File
The IRS accepts e-filed tax returns at the end of January every year. For example, for the tax year 2018, the first date you can e-file is Monday, January 27, 2019, but you need the right documents. Employers, payers, financial institutions, and other entities generally have the information they need to issue tax documents by the first day of the new year, but by law, they don’t have to give you these documents until January 31st.
To file your tax return, you need information about how much you earned during the year and proof of items that qualify you for deductions or tax credits. Depending on your situation and whether or not you itemize, you need the following documents to complete your tax return:
Common Tax Documents Needed to File
- W-2 if you received wages from an employer.
- 1099-MISC if you received more than $600 from a business for freelance work or self-employment services.
- 1099-DIV if you received dividend income.
- 1099-G if you received certain payments from the government.
- 1099-K if you received over a certain amount of money or more than a certain number of payments from a third-party payment processor such as Paypal or Venmo.
- 1099-R if you received distributions from an IRA, pension, annuity, or retirement plan
- last year’s tax return.
- SSA-1099 if you received Social Security benefits.
- Business accounting records detailing revenue and expenses if you run your own business.
- Receipts for quarterly tax payments if you’re self-employed and made quarterly payments.
- A copy of last year’s state and federal tax returns.
- 1098-E (Student Loan Interest Statement) if you want to claim a credit for student loan interest.
- 1098 (Mortgage Interest Statement) if you own a home and plan to itemize.
- 1095-A (Health Insurance Marketplace Statement) to claim a credit for health insurance premiums.
- Medical receipts if you have significant medical bills and plan to itemize.
In some cases, you can file without these exact documents. For instance, you can use the numbers from your last paystub if you don’t have a W2 from your employer yet.
Filing early gives you a lot of benefits, including reducing personal stress and potentially putting money into your pocket. If you owe money to the IRS, we can help — our tax debt professionals can help you set up payments, reduce your balance, eliminate fees and penalties, and negotiate with the IRS. To get a free assessment, contact us today.