Don't have the cash to pay your taxes? You have options
Here are four ways to pay your taxes when you don't have the funds.
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Taxes are due mid-April no matter what. Depending on your income situation, you may prepay your taxes via payroll deduction with your employer or by sending a check each quarter as an estimate to what you'll owe—and, if you overpay in those situations, you'll be owed a refund in the spring. But if you don't set your deductions high enough, or if you earn income another way, you could end up with a tax liability come April. Not having enough money to make your tax payment is a tough spot to be in, but you do have choices to ensure you don't default.
Try not to fret. Consider one of these four ways to pay your taxes when it’s time to file and you don’t have the cash for a full payment.
Set up a payment plan with the IRS
Just like you might pay off a loan, you may opt to enter into an agreement with the IRS to make monthly payments toward your federal tax debt. You may apply online for an IRS payment plan, where you’ll be given the options of either a short-term payment plan of 180 days or less or a long-term payment plan paid monthly up to 72 months, or 6 years.
With short-term plans, you must owe less than $100,000 in penalties, interest, and taxes. There is no setup fee for a short-term payment plan but you will pay accrued interest and penalties until your tax balance is paid in full.
To qualify for a long-term plan, you must owe $50,000 or less in combined penalties, interest and taxes, and you must have filed all your tax returns. With a long-term payment plan, also known as an installment plan, you’ll pay a $31 setup fee, which can be waived for low-income taxpayers. You’ll also pay accrued interest and penalties until your tax bill is paid in full.
Direct debit payments from your checking account are required if your tax balance is greater than $25,000. If you qualify for and choose to pay a long-term payment plan without using a direct debit, you’ll pay a $130 setup fee. Low-income taxpayers may be reimbursed for part of this fee.
If you prefer not to enter into an online payment agreement, you also can make an installment agreement request using IRS Form 9465, which will require you to pay a higher setup fee of $225 for requesting such a plan by phone, mail, or in person. The main IRS phone number is 800-829-1040.
Request leniency from the IRS
A lesser known option is to approach the IRS for an “Offer in Compromise.” This agreement, for which you must apply and be approved, is when the IRS reduces your tax bill due to financial hardship. To approve you for an Offer in Compromise, the IRS considers your financial circumstance including your ability to pay, your income, and your expenses. Once you accept, you must make the agreed-upon payments for your debt as well as continue to pay estimated or payroll taxes and file your taxes annually, or the offer will be rescinded and you may face greater penalties or even jail time.
File for an extension
Filing for an extension will give you up to six more months to file your taxes and pay them, but you will incur a late fee of about 4% of the total you owe, compounded daily, for each day between April 18 and October 17. It could still be in your favor to do this, though, if you think you can save up the total money you owe (plus the interest) in those six months and are able to pay off your taxes in full on or before October 17. However, before you go this route, you may wish to estimate now what you think you’ll owe on your 2021 income to determine if saving up is even viable. If you believe your bill is higher than what you can save in the six-month time period, you’re likely better off going with a payment plan.
Pay taxes with a credit card
You use your credit card for gas and for groceries. Why not your taxes? Paying by credit card is a convenient way to satisfy the IRS, but it’s not free: You will pay a “swipe fee” for using your card and interest charges to the credit card issuer if you don’t pay off the full amount on the card by the credit card’s due date. To minimize interest, choose a card from your wallet with the lowest interest rate (also known as “APR”)—if you’re not sure, you can look it up in your online account. Need a low rate card? Check out the best credit cards, according to our review.
What payment option is best for your wallet?
Installment plans are a good place to start, according to Lynnette Khalfani-Cox, chief executive officer and co-founder of AskTheMoneyCoach.com, a free financial advice site. “The installment payment option that the IRS offers is the single best form of payment relief,” Khalfani-Cox says.
Once you get an installment plan in place, you can focus on paying down your tax obligation. “There’s no penalty if you pay it off sooner,” Khalfani-Cox says. And unlike credit cards, an installment plan with the IRS will not weigh down your credit score.
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