If you owe money at tax time, try to remember that rainy-day funds exist for just such unexpected expenses. Even if you don't have the resources to pay what you owe on time, don't panic. The following steps can help make the process as easy as possible.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
1. File on time and pay what you can
To help lower penalties and interest fees :
- File your return on time
- Pay as much of the bill as possible
- Find out if one of your credit cards has a lower annual percentage rate than the combined interest and penalty rate the Internal Revenue Service (IRS) will apply to your outstanding balance.
- If so, save money and avoid additional tax bills by using your credit card account to make the full payment to the IRS.
2. Request a payment extension
If you're in extremely difficult financial circumstances, request a payment extension. The IRS might grant a six-month grace period, but you will need to demonstrate a substantial financial loss—such as having to sell property at a sacrifice price—if you were forced to pay the amount of your tax bill on the due date.
3. Set up a payment plan
If you are unable to pay your bill in full when you file your return, establish a payment plan with the IRS. There's a small fee to set this up, and you will also be subject to interest, but a payment plan can help you steer clear of additional penalties associated with missed deadlines.
4. Utilize your employer's benefits
Your employer's benefits can help you foot your tax bill. Many employers gift their workers stock options in addition to 401(k) matching benefits. If you've been at your job for several years, you might be vested in company shares that can be cashed out immediately.
- You won't face a penalty for accessing these, but they do qualify as taxable income.
- If you're negotiating the terms of a new job, push for a signing bonus or work toward a short-term incentive bonus to cover your tax bill.
5. Borrow from friends, relatives or your 401(k)
If you don't have any savings or investments to liquidate, consider borrowing money from a friend or relative. If you turn to a family member, put in place a written repayment plan. You can also opt for a low-interest, penalty-free 401(k) loan that you repay by deducting funds from your paychecks.
6. Take out a home equity line of credit
If you're fortunate enough to have purchased your home during a buyers' market, you might have substantial equity in your property. When taking out a line of credit, make sure to borrow only the amount you'll need to pay the tax bill, since you want to keep your monthly payments and principal balance as low as possible.
7. Update your W-4
Visit your payroll department and fill out a new Form W-4. Your employer uses this information to withhold taxes from your income.
- If you owe the IRS additional taxes at the end of the year, the amounts your employer deducted from your paycheck were—and likely still are—insufficient.
- You can use the IRS Tax Withholding Estimator to determine how much should be withheld from your future paychecks.
- Updating your W-4 can help you reduce the possibility of an unexpected tax bill next year.
Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.