If you owe money at tax time, try to remember that rainy-day funds exist for just such unexpected expenses. Even if you dont have the resources to pay what you owe on time, dont panic. The following steps can help make the process as easy as possible.
Getting a big tax bill can be stressful and hard to handle. If you thought you were going to owe a certain amount, seeing the actual amount can be a rude awakening. There are a few things you can do if you owe a lot of money to the IRS.
Don’t Panic – Know Your Repayment Options
The first step is to not panic. Take a deep breath and realize you have repayment options to handle the situation. While no one wants an unexpected large tax bill, having a plan to pay it off responsibly can give you peace of mind. Here are some of the main options to consider:
Short-Term IRS Payment Plan
The IRS offers short-term payment plans that give you an extra 120 days past the April tax deadline to pay your balance due This can help ease the burden of coming up with a large lump sum payment all at once. To qualify, you need to owe less than $100,000 in combined taxes, interest and penalties An added bonus is that the setup fee is only $45, much lower than the $225 fee for a long-term installment agreement. Just be sure to pay as much as you can by April 15 to minimize interest and penalty charges.
Long-Term IRS Payment Plan
If you need more than 120 days, the IRS also provides long-term installment agreements. These let you pay down your tax debt over 6-7 years. To qualify, you must owe less than $50,000 in combined tax, interest and penalties. The $225 setup fee can feel steep, but spreading payments out over several years may be your only option for managing a large balance due. The monthly payment amount is based on your ability to pay. Just be sure to stick to the payment schedule once it’s arranged.
Credit Card Payment
Charging your taxes on a credit card allows you to pay off the balance over time according to your card’s terms. This effectively creates a payment plan you control. The IRS allows you to pay by credit card through approved third-party processing services. The fees vary by provider typically ranging from 1.87% to 1.99% of the tax bill. So on a $10,000 liability, you’d pay $187-$199 in convenience fees. Not cheap, but could be worth it if you need flexible repayment terms.
Explore Other Potential Payment Sources
If the standard repayment options don’t work for your situation, get creative about possible sources to pay down your tax obligation. Here are some other potential ways to fund a large tax bill:
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401(k) Loan—You might be able to borrow money from your 401(k) with a fair interest rate and pay it back by having money taken out of your paycheck every month. There are no credit requirements. Just be sure to repay on time to avoid penalties.
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Home Equity Line of Credit (HELOC): A HELOC lets you borrow money against the value of your home, and the interest rates are usually low. If you don’t pay back the loan, this route puts your home at risk.
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Hardship Withdrawal – For extreme cases, you may qualify for a 401(k) hardship withdrawal. This should be a last resort since you lose contribution room and pay a 10% penalty if under age 59 1⁄2.
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Personal Loan—You could pay the IRS with a personal loan from a bank or credit union. Compare interest rates and repayment terms carefully. Good credit is required.
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0% Credit Card – Consider doing a balance transfer to a 0% introductory APR credit card. This delays interest costs but make sure you pay off the balance before the intro period ends.
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Family Loan – Ask relatives for a loan at favorable terms. Put the details in writing to avoid misunderstandings.
As a last resort, you may have to liquidate assets, tap savings, or trim expenses temporarily to pay the tax bill on time. The key is exploring all options to find the right approach for your financial situation.
Submit Payment On Time To Avoid Penalties
Once you’ve figured out how to obtain the funds, be sure to make the payment by the tax filing deadline of April 15. The failure-to-pay penalty is 0.5% of the unpaid tax owed per month. So a $10,000 tax bill would generate a $50 monthly penalty. The interest rate is currently 6% but fluctuates quarterly. These charges add up quickly, so pay on time if at all possible.
If you really can’t make full payment by April 15, file your return on time and pay as much as you can. Then contact the IRS right away to establish one of the payment plans described above. This shows good faith effort to comply and may help limit penalties.
You can make a payment when e-filing your return or mail a check with your paper return. The IRS also offers online payment options through their Direct Pay system, which makes paying a large tax bill quick and secure.
Amend Your W-4 to Avoid Future Shortfalls
Once this tax season has passed, look ahead to avoid another big bill next year. File a new W-4 form with your employer to adjust your tax withholding. Use the IRS Tax Withholding Estimator tool to determine the proper withholding amount.
Having too little withheld from your paycheck is the main reason people get hit with big yearly tax bills. Fixing your withholding now prevents the same headache next April.
Deductible Expenses Can Reduce Future Tax Burden
Proper withholding should prevent another unmanageable tax bill. But you can take it a step further by lowering your taxable income through deductible expenses. Here are some potential ways to increase deductions:
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Max Out Retirement Contributions – Putting more money into 401(k) or IRA accounts reduces your taxable income.
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Health Savings Account – HSA contributions can be deducted if you have a qualifying high deductible health plan.
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Self-Employment Expenses – If you are a freelancer or contractor, track business expenses to deduct on your tax return.
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Mileage Deduction – Keep mileage logs for any business driving you do as that mileage is deductible (based on the current standard rate set by the IRS).
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Charitable Donations – All qualifying charitable contributions are tax deductible, so keep good records.
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Medical Expenses – Out-of-pocket medical expenses above 7.5% of your adjusted gross income are deductible.
While owing taxes isn’t the end of the world, it can present a financial challenge. By understanding your repayment options, taking advantage of available deductions and fixing your withholding, you can handle a large tax bill this year and avoid the same problem in future tax seasons.
Set up a payment plan
If you are unable to pay your bill in full when you file your return, establish a payment plan with the IRS. Theres a small fee to set this up, and you will also be subject to interest, but a payment plan can help you avoid additional penalties associated with missed deadlines.
Borrow from friends, relatives or your 401(k)
If you dont have any savings or investments to liquidate, consider borrowing money from a friend or relative. If you turn to a family member, put in place a written repayment plan. You can also opt for a low-interest, penalty-free 401(k) loan that you repay by deducting funds from your paychecks.
I Have A Big IRS Tax Bill, How Do I Deal With It?
FAQ
What to do if you owe $100,000 in taxes?
Monthly Payment Plan If you owe $50,000 or less and set up direct debits or a payroll deduction agreement, you can set up a payment plan online. However, if you owe the IRS 100K or more, you can’t apply online. You must file Form 9465 (Installment Agreement Request) and Form 433-F (Collection Information Statement).
What happens if you owe the IRS more than $50,000?
You may still be able to get an installment plan if you owe more than $50,000, but you will need to fill out Form 433-A, Collection Information Statement. The IRS offers various electronic payment options to make a full or partial payment with your tax return.
What is the IRS 6 year rule?
Sixteen years—If you don’t report income that you should have reported and it’s more than fifteen percent of your gross income shown on your tax return or comes from foreign financial assets and is more than five thousand dollars, you have sixteen years from the date you filed your return to file your tax return.
How do I make a tax payment?
To make a payment of $1,000,000 or greater through WorldPay US, Inc. , call 855-508-0159. To make a payment of $1,000,000 or greater through ACI Payments, Inc. , call 888-889-7228. For more information on card payments, visit Pay your taxes by debit or credit card. High-dollar payments must be coordinated with your service provider.
How do I pay my federal tax bill online?
The IRS recommends that if you want to pay your federal tax bill in a different way, you should first use an online payment method like Direct Pay or a credit or debit card. Still, a few more payment options, including same-day wire and cash, are available.
How do I make a high-dollar payment?
High-dollar payments must be coordinated with the service provider. To make a payment of $10,000,000 or greater through the Link2Gov Corporation, call 866-734-8212. To make a payment of $1,000,000 or greater through WorldPay US, Inc., call 855-508-0159. To make a payment of $1,000,000 or greater through ACI Payments, Inc., call 888-889-7228.
Do I need a payment plan for my taxes?
The IRS is usually quite willing to set taxpayers up on a payment plan—especially if you’ve always paid your taxes in the past. When you request a payment plan, you’ll need to watch your mail for a notice that your payment plan has been approved.
How much does a cash tax payment cost?
Note that some local IRS offices may also be able to accept an in-person cash tax payment — but you’ll need to make an appointment 30 to 60 days in advance. Cost: From $1.50 to $2.50 per payment. Doesn’t require a bank account. Could be cheaper and more convenient than getting a money order or cashier’s check. Available in all 50 states.
How do I get a tax extension?
So, if you want an extension that will give you more time to pay, not simply more time to file, you need to contact the IRS either on the phone or through their online payment agreement application. This extension is also known as a “short-term payment plan,” and it gives you 120 additional days to pay off your tax bill.
