Do you owe the IRS money for taxes? Can you afford the tax penalty on the money you owe to the IRS?
Nothing can be more taxing than to discover you owe the IRS money. When calculating your taxes, especially when you already are struggling financially, this is stressful. The concern, of course, is where do I get the money and how long do I have to pay it? You are responsible to file your tax return on time, regardless whether you can’t pay the taxes you owe. Unfortunately, you will face a tax penalty if the money is paid late. This is just one reason why people hate tax time! Here are 5 things you should know when you owe the IRS money.
We have this video to show some options you should consider when you are caught in this stressful situation of owing taxes to the IRS and facing a tax penalty.
Watch this video Do You Owe Taxes to the IRS.
What is the Tax Penalty for Not Paying the IRS On Time?
The tax penalty for not paying taxes on time is high, that being half a percent (1/2%) each month. The most you will pay is 25% plus interest at the current rate. And, if you fail to file, it is 5% (five percent). So if you fail to file and pay, it is automatically 5%. That adds up fast! And, this applies even when you file an extension later on this year. Therefore, we strongly recommend that you find a way to pay the taxes you owe the IRS by the April due date.
These 5 Solutions May Help You Pay Your Taxes On Time.
1) Ask a family member or close friend for a short term loan.
Borrowing money from families and friends to pay your taxes is not always the best solution; however, it is something to consider. For the sake of keeping a healthy relationship with either, you should work out a payment plan up front, put it in writing, and follow through on your agreement. Keep the payment plan affordable to guarantee you follow through. With that said, think about it, you don’t want to be in this tight spot in the first place and you certainly don’t want to repeat this pattern. Therefore, we suggest you consider a savings plan for the next tax year, or increase your withholdings to the IRS so you break even.
2) Take out a home equity loan.
Usually, a home equity loan low interest rates and should provide just enough to cover your tax deficit.
3) Pay with a Credit Card
With this as an option, we don’t recommend you make this a preference. Borrowing against a credit card results in relatively high interest rates, usually in the double digits. And, the interest rates are rising, so that will put you in deeper debt. Also, a convenience fee will apply.
4) Request an IRS Installment Agreement
This agreement with the IRS will include fees and interest. This intallment plan accumulates interest starting the day the tax return is due.
5) Tap into Your Pension Plan
This is an ABSOLUTE LAST RESORT when you owe the IRS! First of all, there is a 10% penalty when you withdraw against your pension. Next, when you take money against your pension plan, this money will become taxable income.
How do I stop owing money to the IRS every year?
So as you can see, you don’t want to make a habit of these types of borrowing to pay your taxes. It could result in putting you deeper and deeper in a whole finacially. Ideally, you want to break even when it comes to your tax commitment. The flip side to underpaying taxes is over paying taxes.
What if I over paid the IRS on my Taxes. What if I get a refund from the IRS?
When you over pay on your taxes and you expect a refund, you are basically giving the IRS a tax free loan on your money. Some people like that big lump sum check coming to them. They can take that dream vacation, get that repair made on the house or have that down payment for a new car. Another option is to put that money in the bank or toward your retirement. Whatever you chose to do, remember that you could have put that money away weekly, biweekly or monthly by direct deposit into your personal bank or IRA account.
Do you need guidance on how to meet your tax liability?
If you would like our office to give you a second opinion regarding your tax returns, we offer that service. It could be that there was a mistake made on your original filing. Alex of Worthtax can review the tax form and discover what areas may have incorrectly posted. Give Alex Franch, BS EA a call at 781.849.7200 for details. Alex Franch is an enrolled agent with the IRS.
Have you made an appointment to file your taxes?
You are welcome to meet with someone from our tax team, or you may book your appointment online. Oh, and right now we have an incentive for you. Drop off or mail your taxes to one of our three locations in locations in Quincy, Weymouth and Dedham and you will save $35 on your tax preparation click here for details and other incentives. Please note some exclusions may apply.
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