- Francesca Sacco
How to pay an unexpected tax bill
***This article is intended to be informative; for specific tax advice for your situation, consult a licensed tax professional.
For some, tax season can be especially overwhelming, especially if they’ve been surprised by a tax bill. Some 11.23 million Americans owe a total of more than $131 billion in back taxes, penalties and interest to the United States Internal Revenue Service (IRS). This number is likely to grow.
If you’re among those who owe for the 2020 tax season, it’s time to start thinking of way to strategically pay what you owe.
What to do if you owe
Before you panic, know that there are some options you may not know about. Mistakes do happen. So be sure to review your return with your tax professional to make sure you’ve included every exemption and credit for which you qualify, and to ensure the correct information was provided.
If the information is correct, and you do owe money, consider using your emergency fund, liquidating investments or borrowing from family or friends. If all else fails, consider taking out a low-interest rate loan to pay your tax bill.
Avoid using money that is set aside for retirement. If you owe a lot of money, a home equity loan or home equity line of credit may be cost-effective way to pay. These types of loans can provide a quick cash influx and the flexibility to help you meet your tax obligation.
If you don’t want to take out a loan or are unable to do so, consider setting up a payment plan with the IRS. There are a couple of different payment plans available depending on your scenario. Payment options include full payment, short-term payment or long-term payment. Short-term payment plans are available without a set-up fee, and must be paid in 120 days or less. Long-term payments, or an installment agreement, can be paid monthly through automatic withdrawals. There is a $31 set-up fee. If you’re setting up a long-term payment without automatic withdrawals, there is $149 set-up fee. Additional fees apply if you’re paying by card.
You must qualify to set up these payments. You can qualify for long-term payments if you owe $50,000 or less in combined tax, penalties and interest. You can qualify for short-term payments if you owe $100,000 or less in combined tax, penalties and interest. To learn more, visit https://www.irs.gov/payments/online-payment-agreement-application.
Note that the IRS can charge anywhere from 0.50-5.00% in interest on unpaid taxes, so you’ll want to pay off your bill as quickly as possible.
Here’s what to avoid
It may be tempting to pay your tax bill with a high-interest credit card, but this type of debt can impact your credit score and can quickly rack up fees. It may also be tempting to take the money from your retirement accounts, but it’s unwise to undermine your long-term plan by withdrawing funds early. Plus, you’ll be faced with penalties and additional taxes on the amount you take out, which means you’ll have less money to pull from than originally thought.
Make sure it doesn’t happen again
Once you get your tax bill paid off, you’re going to want to make sure it doesn’t happen again. Be sure to work with your tax professional – or get a tax professional – to ensure the correct amount of money is being withheld. From there, you’ll want to update your W-4 form with your employer to reduce the possibility of an unexpected tax bill next year.