While the most common advice is to file your taxes as early as possible, is that always the wisest choice? Depending on your situation, it might actually be more beneficial to wait in order to file the most accurate return. Here's what you need to know to decide when to file taxes.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
Each year, millions of Americans file their tax returns to report their taxable income to the federal government and reconcile their tax bill. In 2019, nearly 72% of filed returns resulted in a tax refund of almost $2,900. Because this money belongs to you and does not accrue interest, filing sooner rather than later to put this money in your pocket makes good financial sense.
For most, the best choice is to file taxes early — or at least as soon as you can. This way:
- The IRS may process your return and agree on your tax liability sooner.
- You will know sooner if you owe and have more time to save money.
- You can assess whether you need to file an amended return if you have discovered an error or omission.
Let's walk through some of the considerations you should make when trying to decide when to file taxes.
Revised 1099 Forms
Whether you earn a paycheck, have gains or losses from investments, or have some other form of income that affects your taxes, there is usually a tax form meant to help you report this information to the IRS.
The law requires your employer to mail your W-2 Form by January 31. The W-2 form shows your earnings, the amount of taxes withheld from your paycheck for the prior year, and other important items for filing your federal and state taxes.
The same delivery rule often applies to the many versions of the 1099 Form. Companies you do business with must send your 1099 Form by January 31. In addition to sending your copy to you, they must also file their 1099s with the IRS.
While you technically don't need your 1099s to prepare your return, it's a good idea to review them to make sure what you put on your tax return matches what is on file with the IRS.
- If the information on your 1099 form appears wrong to you, consider contacting the company to have them file a revised version with the IRS. Otherwise, the IRS might think you owe a different amount than what you report on your return.
- If the company catches its own reporting mistake, you may receive a Corrected 1099 Form. Once you receive the necessary forms and include this information on your return, you can move forward with filing.
- If you have already filed using the original 1099 that included the mistake, you may need to file an amended return to reflect the new and accurate information.
Tardy Schedule K-1s
The Schedule K-1 is another tax form issued annually to report taxable activity resulting from ownership interests held in several types of "pass-through" business entities.
While not filed with an individual owner's tax return, business partners and S Corporation owners are normally supposed to receive these informational forms by March 15. Without these forms, owners cannot accurately determine how much income to report on their individual returns for the year.
- Unfortunately, given the much later reception deadline, Schedule K-1 tends to arrive later in the tax season and is usually one of the last tax documents a taxpayer receives.
- If you're supposed to receive a K-1, you may not be able to accurately file your tax return until you receive the form.
One remedy might come from taking initiative. If you own the business and are able to prepare your own K-1 when you prepare your business taxes, then you can prepare it ahead of time and report the K-1 information on your personal taxes.
Retirement plan contribution limits
Each year, the IRS allows you to contribute money toward a tax-advantaged plan such as an individual retirement account (IRA) or a health savings account (HSA) if you meet certain requirements. Filing early can let you know if you qualify to make a contribution and how much you can contribute. When you file your tax return early, you usually still have time to save money and contribute toward your previous year's limits.
Should you wait to file your taxes?
For simple tax situations, filing early may get you a refund sooner. This money belongs to you and doesn't usually earn interest while in the hands of the IRS.
Filing early also:
- Eliminates the need to file an extension.
- Gives you time to save money for any tax bill you may have. Just because you file early doesn't mean you need to pay at the same time. Generally, you have until the filing deadline to pay your taxes owed.
Because most taxpayers only need W-2s and 1099s to prepare their returns, all of which must be mailed by the end of January, you usually don't need to wait to file your tax return. If you find out you received a revised 1099 Form after filing and the change was major, you may need to file an amended return.
If you have an ownership stake in a partnership or other pass-through entity, you may need to wait until at least mid-March to file.