February 20, 2020
The IRS has an entire decade to collect your taxes. So, whether you owe $5,000 or $50,000 it’s best to start paying down your bill as soon as possible. Avoiding payment can lead to the IRS taking money directly from your wages or bank account, or even putting a federal tax lien against your property, which may impact your ability to take out loans, access your home equity, and more.
If you owe money this year or from prior years—don’t panic. Here are some options to get your finances back on track.
1. File—Even if You Can’t Pay in Full
As you get ready to prep your 2019 taxes—and any back taxes you still need to file—remember that filing can help reduce the amount of money you owe in the long run. As H&R Block notes, the IRS imposes a hefty “failure to file” penalty, equal to 5% of the unpaid balance each month, up to 25% of your unpaid taxes. With the added penalties, that means the interest accruing on your unpaid taxes will be higher, too.
2. Request an Extension
If you need more time to organize files for your taxes, or come up with a game plan because you know you owe more than you can pay, you can file for a six-month extension.
While filing an extension for your 2019 taxes doesn’t buy you more time for paying taxes (you still need to estimate the amount you owe and pay it), it does ensure you won’t begin to accrue late-filing or late payment penalties right away. As TurboTax explains, “if you pay less than 90% of the tax you owe, you’ll end up owing a penalty of 0.5% of the underpayment every month” until your balance is paid.
3. Explore IRS Payment Options
The IRS allows multiple options for paying your taxes. You may even be able to temporarily delay collection of your taxes based on your financial situation. You can also set up a short- and long-term payment plan. Each has an application fee that varies depending on your plan and financial status. However, note that interest and other penalties that will continue to add up for either of these options as long as you have an outstanding balance. The IRS interest rates are subject to change quarterly.
Another option may be to file an Offer in Compromise that allows you to settle your IRS debt for an amount that’s less than the total you owe. If you’re a homeowner, you may find your home—likely your biggest asset—disqualifies you. Since you have equity in your home, the IRS sees that at as means to pay your taxes.
4. Access Your Home Equity
Not paying your taxes can result in a lien on your home, making it harder—if not impossible—to access your home equity. But you can access your home equity to settle your debt before a lien is placed on your home.
Paying off your taxes with a home equity loan, especially if you owe more than you can pay off in a single credit card payment, allows you to avoid taking on bad debt. Unlike credit cards that average more than 17% interest, a home equity loan has an average of 8.4% interest. When you file, you’ll know the lump sum you owe, which may make a home equity loan more appealing than a home equity line of credit (HELOC). With either, you’ll want to make sure you can afford payments, as you risk foreclosure if you can’t make your payments.
Note that following the 2017 Tax Cuts and Jobs Act, the interest you pay on a home equity loan or HELOC is no longer tax deductible if you use it for paying off taxes. Interest on these loans, as U.S. News & World Report explains, only qualifies for a tax deduction if you use the loans to make home improvements.
Another option is accessing your home equity via a home equity investment. Unlike a loan, a home equity investment gives you cash now in exchange for a share of the future value of your home.
Since it’s an investment, rather than a loan, there are no monthly payments and there is no interest. Instead, you settle the investment when you sell your home or buy out the investment. Plus, with home equity investments from companies like Hometap, your debt-to-income ratio isn’t a qualification factor as it is with home equity loans.
You should always do the research and the math to find out which payment method works best for your financial situation. You may find accessing your equity is a more affordable way to pay off your taxes than the IRS payment plan—or vice versa.
The opinions expressed in this post are for informational purposes only and should not be considered legal or financial advice. The author is not a licensed financial advisor or tax expert. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.
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