Tax day is finally here, and it’s almost time to file your tax return. If you have applied for an extension, you have more time to file, but any taxes you owe are still due now. If you don’t have enough cash to pay your bill, I’ll walk you through the options for checking out with Uncle Sam.
1. Pay as much as you can
If you don’t file your taxes on time, the IRS can impose a 5% penalty for failing to file your taxes. You can get around it if you file an extension, but you’ll still face a separate penalty if you don’t pay on time. This penalty is calculated at 0.5% of the total tax due and accrues monthly, up to a maximum of 25%.
If you cannot raise the full amount at once, you must pay all possible amounts by the stroke of midnight. Even if it is only a few hundred dollars, there is no shortage of fines. Not only that, but it also reduces the amount of added interest. Currently, the IRS default rate is set at 3%, compounded daily.
Here is an example that will give you an idea of the accumulation of pending payments. If you owe $5,000 and don’t pay anything by the October renewal date, you’ll be charged an additional $225 in penalties and interest. If you pay $1,000 now, the interest and penalty will drop to $180. The more you can afford to spend, the cheaper your tax liability will be in the long run.
Tip: You can avoid default penalties by applying for an extension and paying at least 90% of your tax liability by April 15 and the balance by October 15.
2. Charge your tax bill by credit card
The IRS accepts credit cards for personal and corporate income tax payments, which comes in handy when you want to pay your bills but are short on cash. This way, you don’t have to worry about additional penalties or interest for not paying on time.
If you ask for a larger amount, you can even get some nice bonus points along the way, or hit your minimum spend (if you’ve just opened your credit card).
However, paying taxes with a credit card has some drawbacks, first and foremost the fees you have to pay. The IRS works with several third-party companies to process payments, all of which charge a fee for their services. The fee varies from 1.87% to 2.35% of the payment amount, depending on the company you use. That alone could easily net you any possible reward.
Another thing to consider is what interest the credit card company will charge you if you can’t pay right away. For example, if you charge your credit card with a $5,000 tax bill at 18%, you’ll forgo over $260 in interest, assuming you pay it back within six months. Spread the payment over a year, and the interest soars to just over $500. That’s a big difference compared to the 3% interest charged by the IRS.
Tip: If you pay your taxes with a credit card, look around for an introductory credit card that offers 0% APR to minimize interest.
3. Ask for a last-minute extension
If you only need a few months to collect your taxes, the IRS may grant you a short-term extension. This gives you an additional 120 days to pay, although penalties and interest will still accrue during this time.
You can apply for short-term renewals online and there is no fee to establish such an agreement. In the online application, you can choose the payment amount, due date and payment type. The IRS accepts automatic money orders, paper checks, or payroll deductions, so it’s actually pretty easy to get started.
4. Apply for an installment agreement
If paying your taxes within the next four months isn’t practical, an installment agreement can give you longer time to pay your bills. As long as you owe less than $50,000, you can apply using the same online form you use to apply for a short-term extension. The main difference in the application process is that there is a fee to set it up. Fees range from $43 to $120, depending on your income and whether you pay by direct debit.
The IRS approves installment agreements on a case-by-case basis, but if your application is approved, you have up to 72 months to pay off your debt. Again, interest and penalties will continue to accrue until the balance is completely zero, so it’s in your interest to pay it as soon as possible. If you owe more than $25,000 in tax, you must opt in to automatic deductions to cover your monthly payments.
If your tax bill is over $50,000, you can still apply for installment payments, but not online. Instead, you must complete Form 9645, Installment Agreement Application and Statement of Collection Information, detailing your income, assets, and expenses. The same repayment terms, penalties, interest and fees apply.
Do you owe a large tax bill this year but can’t pay cash? Tell us in the comments how you handled it.
- American Express Centurion Black Card Review
- X1 Credit Card – Check how to apply.
- Destiny Credit Card – How to order online.
- Delta Skymiles® Reserve American Express Card Review – See more.
- American Express focuses on customer experience with new checking account and redesigned application