By
updated 2/3/2010 9:23:52 AM ET 2010-02-03T14:23:52

It's often possible to file your tax return as early as February, once you've received your W2 from your employer and your 1099s from your investments.

Major Market Indices

The IRS will even accept your return as soon as January.

But this is one situation where the early bird doesn't always get the worm.

Ways filing early may help you
Though many people think of filing their tax returns as a dreaded chore to be postponed for as long as possible, there are many reasons why it can make sense to file early.

Get your refund faster:
If you've overpaid your taxes and are expecting a refund, it makes a lot of sense to file early. You'll get your refund sooner not only because you're filing earlier, but also because the IRS probably won't be as busy in January, February or March as it will be in April and beyond.

Get it over with:
Why spend the first three months of the year with nagging thoughts of April 15 in your mind when you have the option to get it over with now? Avoiding procrastination can give you a lot of peace of mind that will make you happier and more effective in other, more important areas of your life.

Avoid crowds at the post office:
According to the IRS, in 2008, 57.8 percent of taxpayers filed their returns electronically - that means the other 42.2 percent are still mailing theirs, and joining the crowds at the mail office to do so.

If you're planning to be one of them, whether out of habit, a desire to avoid the unnecessary expense of electronic filing, or the belief that paper filers are less likely to get audited, consider the extra time you'll have to waste at the post office if you wait until April 15 to mail your return.

Avoid the possibility of being late and owing more:
You might think you'll have plenty of time to prepare your return on April 14, but you can't predict what life might throw at you. If you have the time now, why not get your taxes taken care of? If it turns out that you owe money and you end up filing late, you'll waste money paying interest and possibly penalties.

Put your best foot forward:
You might sit down at the last minute to do your taxes only to discover that something is making your tax situation more complicated than you're used to and that you won't have time to figure it out before you submit your return.

What's more, if you're in a hurry, it can be easy to mess up even the simplest return by forgetting to enter your Social Security number or making an error in a calculation. Why risk making a rushed mistake that could lead to a costly audit?

Avoid high-interest loans:
If you're expecting a refund and you have bills to pay, getting your taxes filed quickly can actually help save you money. Instead of resorting to options like adding to your credit card balance, paying bills late or getting a payday loan to tide you over until late April or early May (which is when you'll get your refund if you file on April 15), get your refund early and use it to stay on track with your finances.

In general, filing early is best for people who have simple tax returns or who are expecting a refund. More advanced taxpayers are more likely to see negative results from filing early.

While many people simply put off filing their tax returns until April - waiting until the last minute like most of us do with any deadline - it turns out that procrastination isn't the only reason to wait when it comes to your taxes.

Maximize your interest:
If you're going to owe money to the IRS, why give it to them any sooner than you have to? You can still complete your return early, but instead of turning it in, keep the amount you owe in a safe, interest-bearing account until April and earn a few extra bucks for yourself.

Avoid amending your return:
Sometimes employers, universities, mortgagees and investment companies make mistakes on the tax forms they file to report your wages, tuition costs, mortgage interest and investment income to the tax authorities.

If you file your return based on this incorrect information, you'll have to file again once the mistake is fixed and new forms are mailed out to you and the IRS.

Not only does filing twice take some time, you'll likely find that you owe more or less tax based on this new information. If you file early, get a refund, and spend it right away, will you have the money to pay up if your tax liability suddenly changes?

Tax forms are sometimes updated during the tax season:
Legislation passed at the end of the year might not be reflected in tax forms yet if you file early. If you use tax software, it will usually not allow you to finalize your return until it has all of the forms available for the current year that apply to your situation.

If you print forms from the IRS Web site, you will also want to make sure that the forms you need are for the tax year for which you are filing.

However, even though the form is available for filing doesn't mean updates are complete. If congress passes a new law, there could be a new update any time before April 15th.

If you file your taxes early, pay attention to reports of tax law changes on the news. Then visit www.irs.gov for instructions on how to correct your tax forms.

Decrease your chances of being audited:
It's often difficult to make conclusive statements about actions that can help you avoid an audit, but some people think it's best to put off your taxes to the extreme - that is, to file an extension using IRS Form 4868 and submit your return in October.

In his book, "Working for Yourself," attorney Stephen Fishman writes, "the IRS generally has three years after April 15 to decide whether to audit your return. Filing early just gives the IRS more time to think about whether you should be audited." Note that filing Form 4868 doesn't extend the amount of time you have to pay any tax owed: it only extends the amount of time you have to submit your paperwork. What's more, if you're expecting a refund, you'll have to wait that much longer to get it.

Weigh your options
To determine if you should be one of the few who file early, examine the pros and cons of each option and consider how they relate to your filing situation.

If getting it over with can put some money back in your pocket sooner, it might be worth it, but for many people, it makes more sense to wait.

© Investopedia ULC

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 3.79%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.69%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.83%
13.79%
Cash Back Cards 17.80%
17.78%
Rewards Cards 17.18%
17.17%
Source: Bankrate.com