Getting a large and unexpected tax bill can be stressful. However, there are several options to help you pay off your tax debt. The key is not to panic and have a plan. By understanding the different payment options, you can find the right approach for your financial situation.
Assess The Tax Bill
The first step is to carefully review your tax bill and make sure it is accurate. Compare it to your previous years’ tax returns and look for any errors. For example, verify your income sources, tax deductions and credits. If you find any mistakes, you can file an amended tax return to correct it.
If the tax bill is correct, understand why you owe taxes. Common reasons include:
- Underpaying taxes during the year through withholding or estimated quarterly taxes.
- Having additional income that wasn’t taxed, like freelance work or investment income.
- Claiming deductions or credits you weren’t actually eligible for.
- Having life changes like getting married or divorced, having a child, or buying a house.
Knowing why you owe more helps you plan for next year’s taxes and avoid another unexpected bill
Pay As Much As You Can
It’s important to pay as much of your tax bill as possible, as soon as possible. This minimizes interest and penalties. The IRS charges interest on unpaid balances, currently 6% annually. There are also late payment penalties of 0.5% per month.
First, use your emergency savings fund if available. Paying even a portion of the tax debt reduces the amount that accrues interest and penalties. Next, cut discretionary spending to put more cash toward your taxes. You may need to temporarily pause contributions to your retirement or investment accounts.
If you can’t pay the full amount immediately, pay what you can by the tax filing deadline. You can continue paying down the remainder over time through an IRS payment plan.
Explore Your Payment Options
Luckily, there are four repayment options you can consider:
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Short-term IRS payment plan: This repayment plan, offered through the IRS, gives you 120 extra days to pay off your tax bill. A 0.25% monthly interest applies until it’s paid in full. Enroll online or fill out Form 9465.
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Long-term IRS payment plan: If you need more time, an installment agreement allows you to make monthly payments over 6-72 months. Fees apply based on the payment timeline. You’ll also owe interest until the balance is paid off. Use the Online Payment Agreement tool.
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Credit card: The IRS allows you to pay taxes with a credit card. However, credit card companies charge a processing fee, currently around 2%. Compare this fee to IRS interest and penalties to see if it makes sense for your situation.
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Loan Taking out a personal loan from your bank may provide a lower interest rate than the IRS or credit cards Just be sure you can manage the loan payments, You can also borrow from your 401(k) or home equity if appropriately structured
Compare all options to find the most affordable monthly payment plan for your budget. Avoid options that create an unmanageable financial burden.
What To Remember
When tackling a large tax bill, keep these tips in mind:
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File your tax return on time, even if you can’t pay in full. The failure-to-file penalty is much more expensive.
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Pay as much as possible by the tax deadline. Every dollar helps minimize interest and penalties.
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Research payment plans and loans to find the right solution for your financial situation. Understand all fees and interest charges.
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Create a monthly budget to ensure you can make the payments. Adjust expenses if needed.
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Discuss options with a tax professional or financial advisor to determine the optimal approach.
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Update your withholding to avoid another tax bill next year. Use the IRS calculator.
Ready To Pay Down Your Tax Bill?
It’s completely understandable to feel stressed about a large, unexpected tax bill. The most important thing is not to ignore it – that will just create more fees and interest charges. Instead, take control by understanding all your options to pay off your tax debt in a manageable way. With a plan in place, you can feel confident about handling this challenge.
File on time and pay what you can
To help lower penalties and interest fees :
- File your return on time
- Pay as much of the bill as possible
- Find out if one of your credit cards has a lower annual percentage rate than the combined interest and penalty rate the Internal Revenue Service (IRS) will apply to your outstanding balance.
- If so, save money and avoid additional tax bills by using your credit card account to make the full payment to the IRS.
Utilize your employer’s benefits
Your employers benefits can help you foot your tax bill. Many employers gift their workers stock options in addition to 401(k) matching benefits. If youve been at your job for several years, you might be vested in company shares that can be cashed out immediately.
- You typically wont face a penalty for accessing these, but they do qualify as taxable income.
- If youre negotiating the terms of a new job, push for a signing bonus or work toward a short-term incentive bonus to cover your tax bill.
Options for paying a large tax bill
FAQ
What happens if you owe the IRS over $100,000?
What happens if you owe the IRS more than $25,000?
How much will the IRS usually settle for?
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?
Electronic Federal Tax Payment System If you have a bank account, you can pay your tax bill by check or you can pay from your checking or savings account using an electronic bill paying service known as direct pay.
Does the IRS charge a fee to pay my tax bill?
Credit and debit cards You can use your debit or credit card to pay your tax bill online or over the phone. The IRS doesn’t charge a fee for this service, but the service providers charge a fee for processing the payment. The three providers — PayUSAtax, Pay1040, and ACI Payments, Inc. — charge a fee.
How much does it cost to pay tax online?
You can use your debit or credit card to pay your tax bill online or over the phone. The IRS doesn’t charge a fee for this service, but the service providers charge a fee for processing the payment. The three providers — PayUSAtax, Pay1040, and ACI Payments, Inc. — charge a fee. Debit card transactions are often between $2 and $4.
Where can I pay my tax bill?
You can pay your tax bill with cash at certain participating retail stores (including popular convenience stores and pharmacies) or at IRS Taxpayer Assistance Centers (TAC). No one wants to end up with a tax bill. But if you do owe money for taxes, you’ll want to know what your payment options are.
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.