This year I owe quite a bit of money in taxes.
This amount (let’s call it “in the many thousands”) doesn’t come as a complete surprise since I made more cash last year than I did the year before, but still, it’s a large amount. As a freelancer I’ve learned to sock away 30% to 40% of each paycheck into a savings account set aside for taxes, so I’ll be OK to pay it. Other people might not be so lucky when Uncle Sam comes calling. A recent survey by the Federal Reserve found that 31% of people couldn’t even pay for a $400 emergency expense and 28% said they would need to borrow that money from friends or family
Luckily there are a few things you can do if you’re saddled with a tax bill you can’t pay.
1. Start at the Source
If you can’t pay your tax bill in full come April, fear not — you won’t be thrown in jail. (At least not yet!) The IRS offers a few ways to potentially alleviate the sticker shock. You could apply for an online payment agreement that allows you to pay your tax liability over time, or you could work with the IRS to settle for less than the full amount owed. That’s called an Offer in Compromise, and you can learn more about it — and if you qualify — here.
2. Ask to Have Your Penalties Reduced
Under certain circumstances — as in you or your spouse dealt with a serious illness last year or had an unusual tax event — the IRS has been known to work with taxpayers to waive certain penalties. Try writing a letter to explain the situation in detail, and be sure to specifically ask for an abatement. It’s worth a try.
3. Consider a Loan
If you’re in good financial standing otherwise, a personal loan through your bank with a decent interest rate could help you pay off a large tax bill right away. A better credit score will help secure a lower interest rate. You can view two of your scores for free on Credit.com.
4. Take out a HELOC
A HELOC — or home equity line of credit — often offers interest rates that are lower than credit cards or potentially even personal loans, plus your interest could be tax deductible. The downside is that defaulting could mean losing your home — not something to take lightly. Be sure you know what you’re getting into before taking this course of action — learn more about it here.
5. Put It on Your Credit Card
While it should only come as a last resort, paying your bill on a credit card allows you to pay your debt on time (at least as far as the government is concerned), while giving you some time to pay it off in full on your credit card. If this is the way you’ll pay your taxes, it’s worth researching credit cards with 0% APR introductory offers that can allow you to take your time paying off the bill without paying interest. Keep in mind there will be an additional fee — which could be quite substantial, depending on how much you owe.
Whatever option you take, be sure to research all the options before jumping in to understand which one is best for your financial situation.