April 15 is stressful. So stressful, in fact, that car crash fatalities increaseby 6 percent on that day, according to a study in the Journal of the American Medical Association — which sure gives some extra punch to the old adage about death and taxes. Owing taxes — especially if you don’t have the funds to pay them by the deadline — is a cause of much tax-day anxiety. But there are ways to manage it.
If you know you’ll owe, it’s tempting to postpone the day of reckoning. But skipping the due date entirely to buy yourself more time is a costly mistake. Doing so can add a hefty late-filing penalty to your bill — 5 percent of the amount owed per month. Once you know the total damage, cough up whatever cash you can by April 15 and send it to Uncle Sam. Depending on your situation and the amount owed, that may require seemingly drastic options like draining your emergency fund and borrowing against other assets. You’ll still pay a penalty on what you can’t pay, but it’s a less onerous 0.5 percent to 1 percent per month on the unpaid amount.
Still Owe? The IRS Has a Plan or Two
This is when the going gets tough. Can you pay within 120 days? If you’ve got a bonus or other funds coming your way (or can scrimp for a few months) and you owe less than $50,000, request a short-term payment extension. You’ll be responsible for a late-payment penalty of 0.5 percent per month and interest charges (equal to 6 percent per year), but there’s no cost to establish the extension. If you need more than a few months, for a fee, you can set up a monthly installment plan (if you owe less than $50,000, there’s a handy online form). For most folks, it’s $52 if you opt for direct debit or $120 if you choose payroll deduction or an old-fashioned check. You’ll also pay the interest and late penalty charges mentioned above.
The IRS does a reasonable job of making it easy to request an extension or installment plan. However, it comes at a high price when you add up the fees, penalties and interest it charges. Even the IRS itself admits, “You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution or a credit card. The interest rate and any applicable fees … are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code.”
Alternatives for Desperate Times
Consider these options against the IRS’ payment plan. Also realize that getting cash using these methods may take more time than you have. In a previous article, I detailed the pros and cons of several ways to get cash fast, including borrowing from family, getting a cash advance on a credit card or taking out a 401(k) loan. All carry risks and costs, but they’ll give you more flexibility over how you repay the loan and may save some money in fees.
For example, you can usually pay a 401(k) loan back over a longer period (up to five years, depending on your employer), and you’re paying the interest to yourself, not the U.S. Treasury. On the downside, there are limits on what you can borrow, and if you lose (or leave) your job, you have to repay the loan within 60 days.
The IRS mentions home equity loans as another option (this would also include home equity lines of credit, or HELOCs). I’m generally not a fan of borrowing against your home to pay other debts — defaulting on these loans is especially risky, since your home is on the line. That said, if you already have an HELOC or can get approved for a loan or line of credit quickly, these loans are cheaper (right now, the average HELOC rate is less than 5 percent) than many other types of credit.