What Comes First: State or Federal Taxes?
Understand the relationship between state and federal tax filings, including the sequence, processing, and adjustments involved.
Tax season can be a challenging time for individuals and businesses, with various forms to complete and deadlines to meet. A common question is whether to address state or federal taxes first, a decision that can influence the filing process and timing of refunds or adjustments.
Understanding how state and federal tax obligations interact is key to managing taxes efficiently, avoiding complications, and ensuring compliance with both levels of government.
Filing Sequence for Returns
The order in which tax returns are filed can impact the overall process. While there is no federal requirement dictating whether state or federal returns must be filed first, filing the federal return first is often more practical. Federal returns, governed by the Internal Revenue Code, frequently form the basis for state tax calculations, as many states use the federal adjusted gross income (AGI) to compute their taxes. Filing the federal return first ensures that accurate figures are readily available for state forms.
Filing the federal return first can also be beneficial for those expecting a refund. The IRS generally processes federal refunds faster than state agencies. Federal refunds are often issued within 21 days for e-filed returns with direct deposit, while state processing times vary and may take longer. This can be important for taxpayers managing cash flow.
Refund Processing Order
The IRS typically processes federal refunds more quickly than state agencies due to its centralized and streamlined systems. Federal refunds are often issued within 21 days for electronically filed returns with direct deposit.
State refund processing times, however, vary widely. States like California and New York may have sophisticated systems but often take longer due to additional verification steps aimed at preventing fraud. While these checks can delay refunds, they are critical for maintaining the integrity of the tax system.
Opting for electronic filing and direct deposit can expedite state refunds, but discrepancies between federal and state returns may trigger audits or adjustments, causing further delays. Ensuring consistency between the two can help avoid these issues.
Adjustments If Federal Return Changes
Changes to a federal tax return often require corresponding adjustments to the state return. These changes may result from errors discovered after filing or receiving additional income statements. For example, if the IRS revises rules affecting certain deductions, taxpayers may need to amend their federal return, which could alter state tax liability.
Taxpayers must be proactive in reporting federal changes to their state. Most states require notification within a specific timeframe, often 30 to 90 days, to avoid penalties or interest on additional taxes owed. Failure to comply with these reporting requirements can lead to significant penalties in some states, such as Illinois and Massachusetts.
Simultaneous vs. Separate E-Filing
Deciding whether to e-file federal and state returns simultaneously or separately can affect the accuracy and efficiency of the filing process. Simultaneous e-filing, where both returns are submitted together, reduces administrative effort and minimizes the risk of inconsistencies. This approach is especially useful for those using tax software that auto-populates state forms based on federal data.
Separate e-filing, however, offers more flexibility, allowing taxpayers to manage the timing of each submission independently. This can be advantageous for individuals with multi-state income or complex state-specific credits and deductions, as it provides additional time to ensure accuracy and compliance.