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Each year, almost three out of four American taxpayers get a refund when they submit their income tax returns, but others owe money for various reasons. Many of individuals who owe Uncle Sam do not have the wherewithal to pay by the return due date (typically in mid-April).
If you reside in a federally designated disaster region, your return file and tax payment deadline may have been automatically extended. The extension will apply if you live in the disaster region, and you do not have to be personally impacted by the catastrophe to be eligible. Check the IRS website at Tax catastrophe Relief Situations
for information on catastrophe filing relief extensions. Call this office to check your eligibility and for information on state disaster aid due date postponements.
In general, tax due happens when a wage worker has under-withheld on his or her payroll or a self-employed person fails to make appropriate projected tax payments during the year. In certain circumstances, a transaction happened throughout the year that resulted in a big capital gain, but the taxpayer did not increase their withholding or projected payments to account for the additional tax, resulting in a huge tax bill at filing time. This might be a major issue for people who are unable to meet their obligations.
It is normally in your best advantage to make alternative arrangements to get the cash needed to pay your 2024 taxes rather than face the government's penalties and interest for payments made after April 15, 2025. Here are some choices to consider.
Obtaining a loan from a cousin or friend may be the best option since these loans are often the least expensive in terms of interest.
Use your home's equity, which is the difference between its value and your mortgage debt, as security. Home equity loans provide highly competitive interest rates, which are often comparable to those of first mortgages. When compared to unsecured borrowing methods such as credit cards, you will pay less in financing costs for the same loan amount. Unfortunately, securing these loans takes time, so if you anticipate using the cash from such a loan to pay your April taxes, you should begin the application process as soon as feasible.
Be warned that interest paid on equity loans (HELOCs) is not tax deductible until 2025, unless the legislation changes later.
Another alternative is to pay with a credit card via one of the IRS's authorized service providers. However, since the IRS will not pay a credit card discount fee (the cost imposed by the credit card operator), you must pay the fees and accept the higher credit card interest rates. The IRS uses two service providers: Pay1040 and ACI Payments Inc. High-value payments must be handled with the service provider. For Link2Gov, the sum is larger than $10 million, while ACI Payments is $1 million.
Credit card interest rates are often higher than those on secured loans, such as home equity loans. As a consequence, although using a credit card to pay taxes is handy, it may result in increased financing expenses if the debt is not paid off in a timely manner.
If you can pay your taxes in full within 180 days and owe less than $100,000 (including taxes, penalties, and interest), you may apply for a short-term payment plan online at the IRS website. This technique is usually easy and does not need lengthy documentation. You will not be charged a setup fee, but you will be required to pay penalties and interest until the total outstanding is entirely paid. Set-up costs will apply if you apply for a payment plan by phone, mail, or in person rather than online. Payments may be made by direct debit, check, money order, or credit card. However, using a credit card may result in extra costs from the card issuer. Entering into a short-term payment plan has no direct effect on your credit score.
If you owe the IRS $50,000 or less, you may be eligible for a streamlined installment agreement, which allows you to make monthly payments for up to 6 years. You will still be liable to the late payment penalty, but it will be reduced in half. Interest will be levied at the prevailing rate, which has recently averaged 7% or 8% per year.
Fees: There is a user cost for setting up the payment plan. When making electronic debit payments, there is a $22 setup charge. However, the IRS often waives the cost for low-income taxpayers who agree to make electronic debit payments. If the amount outstanding exceeds $25,000, electronic debit payments are necessary. When the payment is not made by direct debit, there is a $69.00 setup charge.
Requirements: When a taxpayer seeks an installment arrangement with the IRS, they agree to the following terms:
Timely Payments: Timely Payments: Taxpayers must make full and timely installment payments.
Filing Future Tax Returns: Every subsequent tax return must be submitted on time.
Adequate Withholding or Estimated Payments: Taxpayers must have sufficient withheld or anticipated payments to avoid future tax liabilities when filing timely returns.
Refunds Applied to Debt: Taxpayers' future refunds will be put against their outstanding balance.
Statute of Limitations: The 10-year statute of limitations for collecting applies while an installment arrangement is in place and not in question.
Documentation: To get an installment arrangement for more above $50,000, you must provide the IRS with a Collection Information Statement (financial statements). You may also pay down your amount to $50,000 or less to take advantage of the simplified option.
This is perhaps the worst choice for acquiring cash to pay your taxes since you are compromising your retirement lifestyle, and distributions are often taxed at your highest tax band, adding to your already existing tax burden. In addition, if you are under age 59½, the withdrawal is subject to a 10% early withdrawal penalty, further compounding the difficulty.
An offer in compromise is a program provided by the IRS that enables taxpayers to settle their tax liability for less than the entire amount owing. This option is often used when taxpayers are unable to pay their whole tax debt or if doing so would result in financial hardship. An offer of compromise may apply in instances where:
To qualify for an offer in compromise, taxpayers must fulfill the following criteria:
Taxpayers must file an application with the IRS, along with a full financial statement, to offer a complete picture of their finances. A nonrefundable application cost of $186 is normally needed, unless the taxpayer is eligible for a low-income exemption.
If the offer is accepted, the taxpayer has the option of paying the agreed-upon amount in whole or in installments. If the offer is refused, the taxpayer has 30 days to appeal.
Offers in Compromise are a challenging procedure, and taxpayers are urged to contact our office to help them negotiate it.
Do not confuse the option to ask for an extension of time to submit your tax return with an extension to pay any tax liabilities. It is not and does not provide you with an extension of time to pay. Penalties and interest on the amount owing will continue to apply as of the return's original due date.
What happens if none of the following payment methods work for you? If taxes are not paid on time and the IRS is not informed of the reason, the law mandates that enforcement action be taken, which may include the following:
If you have any issues regarding the payment methods, please contact this office for help. Don't just disregard your tax due; that's the worst thing you can do.