What to do When You Owe Taxes
So you’ve sat down and filled out your tax return this year, but now you’ve got another problem. You owe Uncle Sam more money. Ouch. It’s obviously better to get a refund or pretty much break even, but there are times when things change and you use TurboTax to figure out what you owe, you need to come up with some extra cash. Here’s what you need to know.
Pay on Time
Above all else, you need to pay what you owe by the tax filing deadline, which this year is April 18th. I know what you’re thinking. You can just file an extension and get more time, right? Sadly, that isn’t how it works. An extension does give you additional time to file your return, but it does not extend the payment deadline. When you don’t file your taxes on time you’re hit twice.
First, there is a failure to pay penalty. The penalty is 0.5% for each month the tax is not paid in full. There is no maximum limit to the failure-to-pay penalty. The penalty is calculated from the original payment deadline. Second, the IRS assesses interest on unpaid taxes. The interest is calculated based on how much tax you owe, computed daily, at a current rate of 4 percent per year.
As you can see, not paying by the deadline can make matters even worse, so the sooner you realize you owe money, the faster you should get going on coming up with the cash to pay by the deadline. If something doesn’t seem right with your taxes and the deadline is looming you may still want to file an extension so you can have a little more time to go over your return, but at the very least you better mail the check for the amount it says you owe right now. You can always get money back later if you realize there was a mistake.
Set Up a Payment Plan
If the amount is substantial and you just don’t have the money available to pay what you owe in full, you may want to look into setting up a payment plan with the IRS. The IRS does offer an installment agreement that allows you to pay your taxes over time, but it can still cost you.
You will spare yourself the stiff penalties of not paying on time, but there is a fee to enroll in the program. It’s $105 to set up an agreement, or just $52 if you establish automatic payment through your bank account. There are additional fees to make changes to the agreement once in place. Obviously, you need to weigh your options based on how much tax you owe. If you’re having trouble coming up with $500 by the tax deadline it may not make sense to pay the setup fee for the installment plan if you can have the money to pay in full a few weeks after the deadline. Here, the interest and penalties of just being slightly late is less than the fee.
Using Other Sources of Money
If for whatever reason you don’t set up an installment plan you can always use funds from alternative sources to pay your tax bill in full. If you have some emergency savings you could use that. Or maybe try to sell some stuff you don’t need to get some extra money, and so on. What you typically don’t want to do is tap into sources of money that will penalize you or also charge you interest. For example, paying by credit card. Unless you have a zero percent or very low interest card, the rates on a credit card may outweigh the penalties assessed by the IRS. Granted, it’s better to owe a bank money versus the IRS, but be careful when weighing that option. Another thing people mistakenly do is tap into retirement accounts to pay Uncle Sam. This can be even worse because most retirement accounts will penalize you for early withdrawals, which you may also owe even more taxes on that amount next year. In addition, you’re jeopardizing your future just to settle a one-time bill. Don’t rob Peter to pay Paul.
Whatever you decide, the sooner you find out you owe taxes the better. You still have a few weeks so if you haven’t done your taxes yet, get on it. If it looks like you will owe some money this year you’ll have a few weeks to either get some money together or put a plan in place to come up with the money or get in touch with the IRS about a payment plan.