By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
Now that the holiday season is firmly in our rearview mirror, attention turns to another much-anticipated time of the year: tax season! This season carries with it a number of important judgments for taxpayers, including an understanding of important tax deductions and tax credits, along with the critical determination of the optimal time to file taxes. In other words, should you file taxes early or wait until the deadline? Like many key choices, there are pros and cons to both options and the best choice will depend on each taxpayer’s individual situation.
One advantage often mentioned for filing early applies to those taxpayers who have received all of their tax forms early in the year and anticipate a refund. Taxpayers expecting a refund should think of that refund as excess payments made to the IRS over the past year that are now simply being returned. Receiving that refund as soon as possible just makes financial sense. Additionally, filing early can result in faster processing times for the 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 18 (the tax filing deadline for most taxpayers), even if you file your tax return early.
- You are anticipating a big life changing event (such as purchasing a home or attending college). Filing early would help 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 in your name – and potentially steal your refund!
- You’ll eliminate any tax deadline stress. Filing early provides for a better opportunity to secure needed quality tax services and allows more time to ensure that your return is accurate, reducing the possibility of errors that might result in an unwanted amendment to the filing.
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 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 tax year (if eligible) or establishing an employer retirement plan (i.e., SEP IRA) if the taxpayer is filing as a business owner.
With fewer pandemic restrictions and more staff in place, the IRS has indicated that they are working diligently to deliver a successful 2022 tax season. To avoid processing delays, the IRS is urging taxpayers to carefully review their taxes for accuracy before filing and consider electronic filing with direct deposit if possible. Individual taxpayers will need to carefully consider their unique circumstances in determining the optimal time for filing and be sure to consult with your tax advisor before making any final decision.
Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.