You had a good year, or so says the IRS, and now it’s time to pay up! Finding the money to pay your tax bill may be a bit tricky but here is what you should know besides sticking your head in the sand.
File On Time
Just because you are not able to pay your tax bill doesn’t mean you should wait to file your taxes. By waiting you will be subject to failure-to-file penalties which will cost you 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. Failure-to-file will cost you much more in penalties than failure-to-pay which is only 0.5 percent of the unpaid taxes each month.
If your taxes are just not done, this is where you file an extension. Keep in mind however, if you file an extension you are still responsible for paying your taxes on the original due date so there really is no way getting around paying on time.
Establish A Payment Plan
Whatever you are able to pay on time is going to avoid the failure-to-pay penalty of 0.5% of the unpaid amount, but for the remainder due, the IRS makes it easy to repay them by offering payment plans. Payment plans where the balanced can be paid within 120 days still won’t avoid the failure-to-pay penalty but the IRS will allow you to set up the payment plan for no charge. Balances that take a bit longer to repay may have a set-up fee that can run $100 or more.
Ensure whatever payment plan you agree to will leave you some breathing room in your budget for emergencies or unforeseen events. You can always pay more if you need to and you won’t break the agreement if an emergency does arise.
Don’t Resort To Alternative Payment Methods
You may be tempted to pay off your tax bill with a credit card but enticing as that sounds to get the IRS off your back, the interest rate is likely going to cost you much more than the 0.5% penalty. The same goes for raiding retirement accounts as that will trigger early withdrawal penalties (for those under the age of 59 1/2) and will treated as income, possibly putting you in a worse scenario for next year’s taxes.
Be Better Prepared For Next Year
Look back at the year and figure out why you owed so much in taxes. If you simply just did not withhold enough from your paycheck, now is a great time to adjust your W-4 with your employer so they withhold more from each paycheck making the tax burden much more bearable. If you had a special circumstance such as selling a stock holding for a large gain or taking a distribution from a retirement account, ensure you are setting aside 15-20% of the proceeds in a separate account specifically for the purpose of paying taxes.
If you are self-employed, a freelancer, or have alternative sources of income, you will want to look into making estimated tax payments. This requires discipline of you setting aside proceeds of your income and sending in quarterly payments to the IRS. Whatever your situation, the IRS makes it clear, and somewhat easy, so don’t avoid it. Just be smart about it and disciplined.
Disclaimer: I am a CERTIFIED FINANCIAL PLANNER TM (CFP®), but I am not your CFP® or financial advisor. The information in this article is for general informational and entertainment purposes only and does not constitute financial advice. This article does not create a financial planner-client relationship. The author is not liable for any losses or damages related to actions or failure to act related to the content in this article. If you need specific financial advice, consult with a licensed financial advisor, CFP®, or tax professional who can tailor advice regarding your specific circumstances. Additionally, sometimes I use affiliate links to support my website. This means I may earn a small commission, which is no additional cost to you, for referring and discussing products and services that I personally use, or have used and trust. Thanks for your support!