By Kelly Phillips Erb
Even Though Tax Day was yesterday, If you know that you can't pay up by Tax Day, April 15, file anyway. Penalties apply for failure to file and failure to pay. To reduce the hit to your wallet, file your return even if you're going to owe and even if you know that you can't pay. After you file, there are payment options available - and options when you can't pay at all. Here's what you need to know:
1. Pay by credit card. I’m generally not a fan of replacing one kind of debt with another. But if your ability to pay is a timing issue – as opposed to an "I absolutely don’t have it at all" issue – you can pay your federal income taxes by credit card. The Internal Revenue Service (IRS) accepts all major credit cards (American Express, Discover, MasterCard, or Visa). To make a payment, head over to the credit card payment page on the IRS website and choose one of the payment processors to pay online or by phone (if you're paying by credit card and using e-file, your options are here).
The IRS doesn’t charge a fee for credit card payments. However, third-party credit and debit card providers may charge a fee, which may vary by provider, card type, and payment amount. Applicable fees for debit cards range from $2.00 to $3.95 while fees for credit cards range from 1.87% to 1.99% (minimum fees apply). Pay as much as you can upfront since you are limited to two credit card payments for individual income tax payments. If you’re paying more than $100,000 by credit card, call 1.888.734.8212; if you're paying more than $500,000 by credit card, call 1.888.877.0450. If you're paying more than $1,000,000, by credit call 1.888.889.7228 (you may also need a new tax preparer, just saying).
Remember, paying by credit card is a good option if you know you can pay the bill off eventually. Credit card interest and other fees can add up so if you know you won't be able to pay off the balance at all, consider other options.
2. Refinance your home. Again, I’m generally not a fan of replacing one kind of debt with another (see #1) but even the IRS will recommend a re-fi to pay your taxes if you can afford it. If you have sufficient equity in your home, using that equity to resolve your outstanding tax debt may make sense. Mortgage rates remain relatively low which is good, but remember that the rules for deducting home mortgage interest when you refinance have changed, so don’t count on the offset. Also, if you're already underwater, or headed that way, this isn't a good option: you don’t want to lose your home over a tax bill.
3. Enter into an Installment Agreement. Consider an installment agreement with the IRS. An installment agreement lets you pay what you owe over time. Depending on how much you owe, you won’t even have to speak with a real person: if you owe $50,000 or less in combined individual income tax, penalties and interest, you can apply for an installment agreement online. You can also apply for an installment agreement by mail using federal form 9465, Installment Agreement Request (downloads as a pdf). Fees do apply. Keep in mind that it's cheaper if you sign up online and even less expensive if you agree to pay by direct debit.
You must file all of your tax returns before you apply. The IRS will usually let you know within 30 days after receipt of the request whether it is approved or denied. The IRS will charge you interest while you're paying your bill and may file a federal tax lien until you pay in full. The IRS may also seize your tax refund while you’re in repayment (but you know that could happen anyway).
If you owe more than $50,000 or your taxes are other than individual income taxes, the rules are a bit different: check with the IRS directly in that event.