Tax day is finally here and the clock is ticking to get your return in. You’ve got some extra time to file if you requested an extension but any taxes you owe are still due now. If you don’t have enough cash to cover the bill, I explain what your options are for settling up with Uncle Sam.
1. Pay as much as you can now
When you don’t file your taxes on time, the IRS assesses a 5 percent failure-to-file penalty against what you owe. Filing an extension allows you to dodge it but you’ll still owe a separate penalty if you don’t pay on time. This penalty is calculated as 0.5 percent of the total tax due and it accrues monthly, up to a maximum of 25 percent.
If you can’t come up with the full amount all at once, you need to pay whatever you can before the clock strikes midnight. Even if it’s only a few hundred dollars, that’s less money you’ll pay a penalty on. Not only that but it reduces the amount of interest that’s added. Currently, the IRS rate for underpayments is set at 3 percent, which is compounded daily.
Here’s an example to give you an idea of how waiting to pay adds up. If you owe $5,000 and don’t pay anything until the October extension deadline, you’d owe an extra $225 in penalties and interest. If you pay $1,000 now, that knocks the interest and penalties down to $180. The more you can afford to pony up, the less expensive your tax debt ends up being in the long run.
Tip: You can sidestep the failure-to-pay penalty if you file an extension and pay at least 90 percent of your tax liability by April 15th and the remaining balance by October 15th.
2. Charge your tax bill to a credit card
The IRS accepts credit card payments for personal and business income taxes, which is convenient if you want to pay off the bill but you’re short on cash. That way, you don’t have to worry about any extra penalties or interest getting tacked on because you didn’t pay on time.
Paying taxes with a credit card does have some drawbacks, however, starting with what you’ll pay in fees. The IRS works with several third-party companies to process payments, all of which charge a fee for their services. The fee ranges from 1.87 percent to 2.35 percent of the payment amount, based on which company you use. That alone could easily into any rewards you might earn.
Something else to think about is what kind of interest the credit card company’s going to charge you if you can’t pay it off right away. If you charged a $5,000 tax bill to a credit card with an 18 percent interest rate, for example, you’d hand over more than $260 in interest assuming you paid it off within six months. Stretch the payments out over a year and the interest shoots up to just over $500. That’s a big difference compared to the 3 percent interest the IRS charges.
Tip: If you’re going to pay your taxes with a credit card, shop around to find one that offers a 0 percent introductory APR to minimize the interest.
3. Ask for a short-term extension
If you only need a couple of months to get the money together for your taxes, the IRS may grant you a short-term extension. This gives you an extra 120 days to pay, although the penalties and interest will still add up during this time.
You can apply online for a short-term extension and there’s no fee to set this kind of arrangement up. The online application lets you pick the amount you want to pay, your due date and how you want to make the payments. The IRS accepts automatic draft payments, paper checks or payroll deductions so it’s really pretty easy to get going.
4. Apply for an Installment Agreement
If paying your taxes in the next four months isn’t realistic, an Installment Agreement gives you a longer period of time to resolve the bill. As long as you owe less than $50,000, you can use the same online form to apply as you would for a short-term extension. The main difference in the application process is that there’s a fee to set it up. The fee ranges from $43 to $120, depending on your income and whether you pay by direct debit.
The IRS approves Installment Agreements on a case-by-case basis but if your request is granted, you’ll have up to 72 months to pay off what you owe. Again, interest and penalties keep adding up until the balance is completely zeroed out so it’s to your advantage to get it paid down as quickly as possible. If you owe more than $25,000 in taxes, you’re required to enroll in automatic debit for your monthly payments.
When your tax bill is more than $50,000, you can still request an installment plan but you won’t be able to apply online. Instead, you’ll need to fill out Form 9645 Installment Agreement Request as well as a Collection Information Statement, which lists out your income, assets and expenses. The same repayment period, penalties, interest and fees apply.
Do you owe a big tax bill this year but you can’t afford to pay it off with cash? Tell us how you’re dealing with it in the comments.