What Are the Benefits If I Pay My Taxes Early?
While most people associate the tax deadline with paying taxes, U.S. taxes are set up so taxpayers pay tax throughout the year. They do this through withholding or estimated taxes. However, if you’ve underpaid taxes and are subject to an underpayment penalty, it can help to pay your taxes early — that is, before the tax deadline.
An underpayment penalty can occur if you haven’t paid enough taxes throughout the year. How do you know what’s enough? According to the IRS, most taxpayers can generally avoid an underpayment penalty if they either:
- Owe less than $1,000 in tax after subtracting their withholding and refundable credits
- Paid taxes through withholding or estimated payments that are at least 90% of the tax for the current year or 100% of the tax amount for the prior year – whichever is smaller.
So, how is it to your advantage to pay your taxes early? Any penalty due is based on the amount of your underpayment, assuming a payment date of July 15, 2020. If you pay the balance due plus penalty earlier than July 15, you reduce your penalty.
Paying Taxes Early When You Have No Underpayment Penalty
If you’re not subject to an underpayment penalty – meaning the two situations above apply to your situation — you can also pay your taxes early. However, there’s no additional benefit to paying your taxes early.
You can file and pay your taxes as soon as the IRS begins accepting tax returns for that year, typically in late January. Be sure you’ve received all of your tax documents, such as your Form W-2, Forms 1099, or other tax forms, before you complete your taxes. A late form could mean that you would need to file an amendment.
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