The IRS finally started accepting 2020 federal income tax returns on Friday, February 12. This was several weeks later than usual due to the need to program and test the IRS’s computer systems to reflect COVID-19-relief legislation that was passed in December.
This year, you have until April 15 to file your 2020 federal (and state, if required) income tax return. You can receive an automatic six-month filing extension (until October 15) if you request it by April 15.
Even though you have until April 15 (or October 15 if you file for an extension) to file your tax return, it could be beneficial to file it sooner rather than later. Here are five reasons why:
1. Faster receipt of a tax refund — Assuming you qualify for a tax refund, the sooner you file, the sooner you’ll get your money. If you file your return electronically and choose direct deposit, you could get your refund in as little as eight days. According to the IRS, nine out of 10 taxpayers who e-file and choose direct deposit will receive their refunds within three weeks.
Note that if you claim the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC), your refund will be automatically delayed. Legislation passed by Congress requires the IRS to delay these refunds in an effort to reduce fraud that may occur on returns that claim these credits.
2. Less potential exposure to fraud — Tax refund fraud remains a big problem. This occurs when identity thieves steal Social Security numbers and file false tax returns in other people’s names in order to collect fraudulent refunds. When the real taxpayer attempts to file a legitimate return, it’s rejected because the IRS already has a return on file.
One of the best ways to avoid being victimized by this type of fraud is to file your tax return as soon as possible. Once your return has been filed, you should be safe from this type of scam since identity thieves are looking for people who haven’t filed yet.
3. More tax-saving opportunities — Getting your tax return prepared early could give you time to take advantage of last-minute tax-saving opportunities. For example, many people aren’t aware that they have until April 15 to make tax-deductible contributions to their IRAs for the previous tax year. Contributing additional funds to your IRA before you file and designating them as 2020 contributions could lower your tax bill.
Filing early could also give you more time to make adjustments to your tax withholding. While getting a big chunk of change in the form of a tax refund might be fun, the truth is it isn’t always smart financial management. A tax refund is simply the government giving you back money that you overpaid in taxes — without interest. Based on the size of your refund and your anticipated income this year, you can reduce your withholding at work, which will result in an immediate increase in your take-home pay.
4. Potential to claim a stimulus payment from last year — If you didn’t get a stimulus check last year, or only received a partial stimulus payment, there’s a chance that you could claim the money when filing your 2020 federal income tax return. This includes if you had a child last year and the IRS used your 2019 tax return (before your child was born) to calculate your stimulus payment. If you meet the income limits, you could receive up to $1,100 in dependent stimulus payments via a recovery rebate credit.
The same holds true for a taxpayer who was claimed as a dependent on someone else’s tax return last year but won’t be this year. For example, if a college student’s parents claimed her as a dependent on their 2019 tax return but she has now graduated and is working full-time and living on her own, she may be able to claim stimulus payments via a recovery rebate credit if she meets the income limits.
5. Greater peace of mind — Last but not least, filing your tax return as soon as possible will allow you to check a big item off of your financial “to-do list.” Just think about how nice it would be to not have to think about your taxes when the calendar turns to April this year!
Be sure to speak with your tax advisor for guidance in your specific situation.