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 and total surprise since I made more cash last year than I did the year before, but it’s a large amount all the same. As a freelancer I’ve learned to sock away 30% to 40% of each paycheck into a savings account labeled “for taxes,” so I’ll be OK to pay it. But, since a recent survey by the Federal Reserve found 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, some other people might not be so lucky when Uncle Sam comes calling.
Luckily there are a few things you can do if you’re saddled with a tax bill you just can’t pay. Here’s how to tackle that debt to Uncle Sam.
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. 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 in due time. If you don’t have good credit but you’d still like to consider this option, there are ways to go about getting a personal with bad credit. You can try talking to the bank or credit union with which you already do business. You can also see if there’s anything you can do to improve your credit ahead of filling out applications. Some ways to do so include paying down high credit card balances, disputing errors on your credit report and shoring up any late payments. If you’re not sure where your credit falls, you can view two of your scores for free, updated every 14 days, 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 on this type of payment could mean losing your home — not something you want 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 taking some time to pay it off in full on your credit card. If this is the way you’ll be paying your taxes, it’s worth researching the best 0% annual percentage rate (APR) credit cards on the market right now so you can take your time paying off the bill without paying interest while doing so. (Quick explainer: 0% APR credit cards let you avoid paying interest on a balance for a set period of time, usually between 12 and 18 months. After that, the leftover balance will be subject to the card’s go-to purchase APR.)
The IRS outlines on its website how you can go about paying taxes with a credit card or debit card, but keep in mind that there will be an additional fee — which could be quite substantial, depending on how much you owe — to do so.
Remember, back taxes can cause all types of financial problems — including damage to your credit scores — so it’s important to be proactive about paying Uncle Sam. However, whatever option you decide to take, be sure to research all the options before jumping in to really understand which one is best for your financial situation.