4 reasons to file your freelance taxes early (and when you should wait until Tax Day)
The IRS is now open for the business of filing 2019 tax returns. If you are a person who likes to get things done and you have all of your tax documentation in hand, don’t fight the urge to file early. Even if you have been a procrastinator in years past when it comes to filing your freelance taxes, here are four solid reasons you should file your taxes as early as possible (and when you should wait until April 15).
When you should file your freelance taxes early:
1. You expect a tax refund this year. Filing as soon as possible will help to expedite the money you are owed—but if you're expecting a big refund, you may want to adjust your withholding (if you are also receiving a W-2) and/or the estimated taxes you are paying. If you’re consistently overpaying your taxes, you’re basically lending money to the IRS interest-free.
2. You are divorced and have dependents you want to claim. Unless you and your ex work it out in advance, you may lose the ability to claim any child tax credits or related deductions. If you don’t file before your former spouse does, it can be difficult to change dependent claims on your federal and state taxes after the fact. Also, be sure to check out the specific rules from the IRS about who can claim a dependent.
3. You are buying a house or applying for other loans. Planning to buy a new house this spring? Getting your taxes done will help you consolidate all of the information you’ll need to get preapproved for a mortgage in time for you to shop and make an offer on the property you want. This also applies to college students applying for financial aid, which is often done in February or March, who will need their tax information or their parents' details.
4. You are planning to use a new tax preparer. If you need assistance filing your freelance taxes, you’ll want to reach out to your new preparer and file as early as possible. If you wait too long to ask for help, you run the risk of not being able to get on a tax professional’s client list due to the volume of returns they are processing as the season progresses.
Filing taxes late in the season may be better for you in these scenarios:
1. You have complex investments. If you have certain types of investments, you may not want to file early. Some types of investments, like limited partnerships, have until mid-March to issue an earnings statement, which may need to be revised after they're issued. If this happens after you have already filed your taxes, you’d have to revise your return with the correct information.
2. You owe taxes. No one wants to pony up money that they owe earlier than necessary—and taxes are certainly no exception. If you expect to owe money to the IRS, it is better to file later in the tax season, although you may want to prepare your return now so you know exactly how much you’ll be paying.
No matter when you file, check to see if you qualify for these extended tax breaks:
The federal budget legislation passed last December extended the following individual tax breaks that had expired or were about to expire, making them available for you to claim on your 2019 and 2020 returns.
Medical expenses: If you aren’t claiming the flat standard deduction, you may be able to use this tax break to write off various types of medical and dental costs. To qualify, your eligible medical expenses must exceed 10% of your annual gross income (AGI) in 2019. This floor drops to 7.5% of your AGI in the current 2020 tax year.
Mortgage insurance premiums: This tax deduction allows filers to itemize mortgage insurance premiums like they would mortgage interest. This means that if you paid mortgage insurance premiums in 2019, you can deduct them, but only if you itemize your deductions and qualify for the mortgage insurance premium deduction.
Exclusion for income from canceled mortgage debt: Here’s another mortgage-related tax break. If you borrow money from a commercial lender that ends up canceling or forgiving your debt, the amount of the canceled debt will not count as income for tax purposes (as it normally would). This relief is actually an extension of the Mortgage Forgiveness Debt Relief Act of 2007.
Higher education tuition and expenses: Not only can you still deduct qualifying higher education expenses (assuming you are eligible for the deduction), you don’t have to itemize your deductions to do so. Education expenses that qualify for this deduction include tuition and required fees, such as charges for books, supplies, or equipment used in a course of study.
As you can see, there are many benefits to filing your tax return as soon as you can. If you are unsure about what’s best for you, check with a tax professional, who can make sure you don’t leave any potential deductions or tax credits on the table.
Jonathan Medows is a New York City–based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union* and a monthly email newsletter covering tax, accounting, and business issues to freelancers on his website, www.cpaforfreelancers.com, which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
*Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.