The Disadvantages of Filing Your Taxes Too Early

Many individuals aim to file their tax returns as soon as possible. There are several important considerations before submitting returns. Premature filing can inadvertently create additional work or prevent financial optimization.

Ensuring Complete Documentation

A primary concern with filing taxes too early is incomplete documentation. Taxpayers receive various forms. Employers are generally required to furnish Form W-2 by January 31. Financial institutions issue Form 1099-INT and Form 1099-DIV by the same deadline.

However, certain documents, such as Schedule K-1 forms from partnerships, S corporations, or trusts, often have later deadlines and may not arrive until mid-March. Individuals covered by health insurance through the Affordable Care Act marketplace receive Form 1095-A. Filing without all relevant documents can lead to underreporting income, which the Internal Revenue Service (IRS) can identify through its matching programs. This can also mean missing valuable deductions or credits, necessitating an amended return.

Accuracy in Reporting

Rushing to file a tax return can significantly increase the likelihood of errors. Mistakes can miscategorize deductions or credits. Inaccuracies can trigger scrutiny from tax authorities.

If an error is discovered after submission, the taxpayer must file Form 1040-X, Amended U.S. Individual Income Tax Return, to correct the original filing. This process often involves processing time, potentially taking 16 weeks or more for the IRS to review. Incorrect filings can also lead to delays in receiving a refund or result in penalties, such as an accuracy-related penalty, which can be 20% of the underpayment. Carefully reviewing all information before submission can prevent significant administrative burdens and financial repercussions.

Considering Financial Planning

The tax filing deadline of April 15 offers a window for certain financial planning decisions that can impact the prior year’s tax liability. Individuals can contribute to a Traditional or Roth IRA for the previous tax year up until the April 15 deadline. For 2024, the maximum IRA contribution is $7,000, with an additional catch-up contribution of $1,000 for those age 50 and over. Contributions to a Health Savings Account (HSA) for the prior tax year can also be made until the tax deadline.

For 2024, the HSA contribution limit is $4,150 for self-only coverage and $8,300 for family coverage, plus an additional $1,000 catch-up contribution for those age 55 and over. These contributions are tax-deductible, reducing taxable income. Filing a tax return too early means that any subsequent contributions made between the filing date and April 15 cannot be reflected on the original return, requiring an amended return to claim these deductions or credits. This can lead to missed opportunities for tax savings. It is common for taxpayers to feel a sense of urgency about filing their annual tax returns, often hoping to receive a refund quickly or simply to relieve themselves of the obligation. While this proactive approach might seem beneficial, submitting a tax return too early can inadvertently create complications and lead to missed opportunities for financial optimization. Understanding the potential drawbacks before rushing to file is an important part of responsible tax management.

Ensuring Complete Documentation

One of the primary risks associated with filing taxes prematurely is the potential for incomplete documentation. Various income reporting forms are issued to taxpayers at different times during the early part of the year. For instance, employers are generally required to provide Form W-2, Wage and Tax Statement, by January 31. Similarly, many financial institutions typically issue Forms 1099-INT for interest income and 1099-DIV for dividend income around the same date.

However, some crucial documents, such as Schedule K-1 forms, which report income from partnerships, S corporations, and trusts, often have later deadlines, potentially not arriving until mid-March or even later. Additionally, individuals who obtained health coverage through a Health Insurance Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, typically by January 31. Filing without all necessary forms can lead to underreported income or overlooked deductions and credits. The IRS cross-references information reported by third parties with taxpayer returns, and discrepancies can trigger a CP2000 notice, indicating a mismatch and proposing additional tax. Resolving such issues often requires filing an amended return, a process that can be more complex and time-consuming than the original submission.

Accuracy in Reporting

Rushing the tax filing process, even with all documents seemingly in hand, can significantly increase the likelihood of human error. Mistakes can range from simple data entry errors to incorrect calculations or misapplication of tax rules. These inaccuracies can lead to various problems, including delays in processing refunds, potential penalties, or the need to file an amended tax return.

If an error is discovered after a return has been submitted, taxpayers must file Form 1040-X, Amended U.S. Individual Tax Return, to correct the information. This separate filing can take a considerable amount of time for the IRS to process, often ranging from 8 to 16 weeks or more. Furthermore, errors that result in an underpayment of tax may incur penalties. For example, an accuracy-related penalty can be assessed at 20% of the underpayment if due to negligence or substantial understatement of income tax. Additionally, a failure-to-pay penalty of 0.5% of the unpaid taxes can be applied for each month or part of a month the tax remains unpaid, up to a maximum of 25%. Ensuring accuracy through careful review before the initial submission helps avoid these potential complications and additional costs.

Considering Financial Planning

The tax deadline of April 15 offers a final opportunity for certain financial planning actions that can impact the prior year’s tax return. For example, individuals can make contributions to a Traditional or Roth Individual Retirement Arrangement (IRA) for the previous tax year up until the tax filing deadline. For 2024, the maximum IRA contribution is $7,000, with an additional $1,000 catch-up contribution for those age 50 and older. Similarly, contributions to a Health Savings Account (HSA) for the prior tax year can also be made until the tax deadline.

For 2024, the HSA contribution limits are $4,150 for self-only coverage and $8,300 for family coverage, plus an additional $1,000 catch-up contribution for those age 55 and over. These contributions can reduce taxable income or provide other tax benefits. Filing a tax return early means that any such contributions made between the filing date and the April 15 deadline cannot be reflected on the original return. To account for these post-filing contributions, an amended return would be necessary, potentially negating the perceived benefit of early filing and delaying any additional refund or tax reduction.