Filling out 1040 tax form

Options for Paying Your Annual Taxes

Tagged as: Smart Spending
Everybody loves a tax refund. Often, it makes the energy spent preparing your tax return worth the effort. However, discovering you owe money can be discouraging.

Many people see a small tax bill or a small refund as a failure. However, both are considered good money management because you were able to use your money for your benefit all year rather than overpaying the government.

A larger tax bill means you didn’t send enough. And unless you owe less than $1,000 or had 90 percent of your taxes withheld, you might incur a penalty. Plus, now you need to figure out how to pay the tax bill.

Good ways to pay a tax bill

Here are a few smart ways you can approach paying a large tax bill.

Apply for an installment plan
The IRS provides two options to pay your bill in installments:

  • Short-term plan: This requires no application fee and gives you six months to pay, although you will be charged interest on the amount owed as well as any penalties incurred.
  • Long-term plan: This gives you more time to pay, but there is usually a fee for setting up the plan. With this plan, you make payments through an automatic deduction from your bank account or pay manually by check or electronic transfer. (Penalties and interest may apply.)
Get an extension
If you can’t pay by the filing date, you may want to apply for an extension. However, an extension doesn’t excuse you from making an estimated payment. If the IRS doesn’t have at least 90 percent of your expected bill, you may be subject to an underpayment penalty on top of any interest you’ll be charged.

A benefit of an extension is that you get extra time to further review your taxes and possibly identify ways you could decrease your tax bill. It might not reduce the pressure to pay your owed taxes, but it could decrease the stress you might feel as filing day approaches.

Dip into your emergency fund
An emergency fund can help cover an unexpectedly large tax bill. If you use your emergency fund, be sure to replenish it during the months following because you never know when the next emergency might come.

Find the money in your budget
With a little time spent examining your finances, you might be able to rework your budget to find the money to pay your bill. We don’t recommend skipping any monthly payments, but suspending a health club membership or waiting until summer for that home improvement project can help you gather the funds you need.

Reduce your tax bill
If you realize you’re going to owe more than expected, there are some strategies that can help you reduce your tax bill. For example, contributions to a traditional IRA are tax-free, can be made up until filing day, and could offer a tax deduction for some people. Consult a tax professional for more advice.

Not-so-good options to pay a tax bill

A big tax bill may be alarming, but some payment strategies can be more expensive in the long run. Be cautious of these options:

Tapping into retirement savings
Dipping into an IRA or 401(k) might incur a penalty for withdrawing from the account. Furthermore, the funds removed stop accruing compound interest, which can deny you thousands of dollars when you retire.

Charging your payment
The IRS charges the federal short-term interest rate plus three percent on installment plans. Unless you can get a low-rate transfer and pay off your balance before the introductory rate expires, you likely won’t get a better deal from a credit card.

Not filing
The penalty for not filing a tax return is five percent of your tax bill per month, on top of the interest you owe as you pay it off. Also, if you file but don’t pay or set up some sort of plan, you’ll receive an additional penalty. Either way, the IRS won’t be happy.

Taking out a high-interest loan
When the federal short-term interest rate is low, the IRS installment plan might make more sense than borrowing money to pay your bill. However, if you still want to avoid a payment plan, consider a personal loan, which will often be at a lower interest rate than a credit card.

Preparing for Next Year

If your tax bill is higher than expected this year, you should also think about how to avoid another surprise for next year. Check out the IRS's tool to figure out withholding and estimated tax payments, or consult with a tax advisor. And if you have any questions about saving for next year’s tax bill, IRAs, or budgeting, give us a call.

1st United Credit Union cannot give tax advice. Please consult your tax advisor or visit

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