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TurboTax / Tax Calculators & Tips / All Tax Guides / General Tax Tips / 7 Steps for Handling Unexpected Tax Bills

7 Steps for Handling Unexpected Tax Bills

Updated for Tax Year 2015


OVERVIEW

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.


1. File on time and pay what you can

Man working on laptop holding pen

File your return on time and pay as much of the bill as possible to lower penalties and interest fees. Check to see 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, use your credit card account to make the full payment to the IRS, while saving money and avoiding additional tax bills.

2. Request a payment extension

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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 being forced 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

IRS 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 helps you steer clear of additional penalties associated with missed deadlines.

4. Utilize your employer's benefits

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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)

Senior couple using tablet

If you don't have any savings or investments to liquidate, borrow 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

Senior couple standing on porch

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

Sitting on couch

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 a W-4 withholding calculator to determine how much should be withheld from your future paychecks. Amending your W-4 will help you reduce the possibility of an unexpected tax bill next year.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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