- If you’re worried about a big tax bill this year, you have options to make paying it easier.
- If you don’t have savings that can cover the bill, you can request a payment plan from the IRS.
- This article is part of “Tax Health Check,” a series of expert-backed advice to help you win tax season.
Federal taxes are due on April 15, and most state income taxes are due around that time. This means you’ll want to sit down with an accountant or download tax filing software to work on your own taxes in the coming weeks — like it or not.
If you’re expecting to get a tax refund, you may be more than ready to start your return and expedite the process. If you think you’ll owe money — or you worry you’ll owe more than expected — you may be wondering which steps to take next.
Here are four tips from financial advisors and accountants on how to cover a big tax bill when you’re not exactly ready.
1. Take stock of your savings
The first step to covering an unexpected tax bill is looking for “low-hanging fruit,” Lawrence D. Sprung, a financial advisor at Mitlin Financial, said.
Sprung said that an obvious option for consumers is any savings they already have in a savings account, certificate of deposit, or money-market account.
This could be money set aside for emergencies, or it could be savings accumulated for other goals, like a home remodeling project or a large purchase. In any case, you might consider using this money in the short term and then figuring out how to build your savings back later on.
“This can be used and then replaced from current income,” Sprung said.
2. Look into IRS payment plans
Katharina Reekmans, a tax analyst who writes for TurboTax, said that you may be eligible to set up an installment agreement with the IRS if you feel like you won’t have the cash to pay in time. She pointed to both short-term plans and long-term plans based on your needs.
Short-term plans from the IRS are available for up to 180 days if you owe less than $100,000 in combined tax, penalties, and interest, she said. Meanwhile, long-term plans (with monthly installments) are available if you owe $50,000 or less in combined tax, penalties, and interest. These plans allow you to pay taxes owed over the course of six years.
Matt Fitzsimmons, a wealth manager at the Watchman Group, said the IRS offers another solution, called an offer in compromise.
“If the consumer is able to prove financial hardship, they may be able to settle for less than the full amount,” he said. But this option requires detailed financial disclosures and is not guaranteed.
3. Consider other financing
Ben Watson, a certified public accountant and CFO at DollarSprout, said several borrowing options could help you recover from an unexpected tax bill, at least in the short term. He recommended weighing your choices carefully and then considering options like a personal loan or home equity line of credit if the overall interest payments are less than what the IRS can offer you through its payment plans.
Watson added that he wouldn’t recommend paying taxes with a credit card in most cases, even though the IRS lets consumers pay their federal taxes with one in exchange for a fee. But there are some exceptions, particularly for consumers who are willing to sign up for a new credit card.
“If you are able to pay it off fully before interest begins accruing with a 0% intro offer, you could save a lot in interest and penalties from the IRS,” Watson said.
A 0% APR credit card can make sense for unpaid tax bills since they come with zero interest for a limited time and earn rewards for spending.
William M. Angelo, a CPA at Angelo & Associates, said borrowing against your 401(k) is another option if nothing else makes sense. He added that borrowing from your 401(k) allows you to pay interest back to yourself, which could reduce the overall cost compared with other loan options. But borrowing against a 401(k) carries significant risk, and failure to adhere to the repayment schedule can result in a deemed distribution, which incurs both taxes and penalties if you’re under the age of 59½.
Also, consumers who take out a 401(k) loan and switch jobs for any reason may be required to repay the full amount owed all at once. This can become a huge, sudden financial problem.
“Using a 401(k) loan should be approached with caution and a clear repayment plan,” Angelo said.
4. File for a tax extension
Sprung said that consumers who are scrambling to pay and need some time can file for an extension on their federal tax return. This may not be the best option for consumers who need a long-term fix, but it can at least buy them some time.
“This will give them an additional six months to plan for and budget for their tax bill,” he said.
But Ashley F. Morgan, a bankruptcy lawyer at Ashley F. Morgan Law, said to remember that an extension is an extension to file, not an extension to pay.
“So if you file an extension, you still will owe a failure-to-pay penalty and interest for April 15 forward,” Morgan said.
