Under current pay-as-you-go federal income tax rules, you’re generally required to pay taxes as you earn the related income. Failing to pay the correct amount can result in a penalty when you file your tax return. That’s a good reason to estimate your 2015 tax liability now, while you can still make corrections. Here’s what you need to know.
- The rules. Estimated tax underpayment penalties generally do not apply when the balance due on your 2015 return is $1,000 or less. If you end up owing more than $1,000, you can avoid a penalty by paying “safe-harbor” amounts. For example, your tax payments during the year need to equal 90% of your 2015 tax or 100% of the tax on your 2014 return (110% if you file jointly and your income was over $150,000).
- Your options. You can pay what you owe by having additional federal income tax withheld from your wages, social security, pensions, and other income. You could also choose to increase your final estimated tax payment or make it early. An important difference between the two is that federal withholding is treated as if you made payments evenly throughout the year. Increasing your withholding, even in December, can help you prevent an underpayment penalty.
Checking your tax liability is a simple way to avoid surprises when you file your return. There’s another benefit too: If you discover you’ve paid in more than you’re going to owe, you can give yourself an early refund by reducing your payments during the last few weeks of the year.
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