Your total payable tax might be way more than what you can pay right now. If you find yourself in a situation like this, here are 4 steps to pay off your income tax bill:
1. File Deductions Correctly
Calculating how much taxes you owe can be quite overwhelming, especially with so many deductions to file. Go through the return very carefully to examine whether at all you owe taxes. It's not uncommon to make miscalculations or miss a deduction or two. To avoid any such mistakes, take a close look, and make sure you include all the deductions you are eligible for. If you forget even a single deduction, it can cost you a significant amount of money.
2. Pay Quickly
You might not have the entire amount to pay taxes, but if you don't make payments by the deadline, you'll have to pay interest and penalties on the total debt amount. Do not wait until the deadline. Make an estimated payment early to avoid any extra interest or penalty. This rule applies even if you plan to file for an extension or an installment.
3. Request for Removal of Penalties
When penalties get added up to your existing tax bill, your debt further goes up. The good news is, that if you're going through a difficult situation, you can write to the IRS requesting abatement of taxes. There you can mention honestly why you have been unable to pay taxes. If the IRS thinks it to be legitimate, they will waive the penalty charges.
4. Opt for A Repayment Plan
When your current tax liability is high and you don't have the money to pay off all of it, you can request the IRS to set up a repayment plan. This plan can be both short-term and long-term.
- Short Term
If you think you'll be able to pay off the tax debt within 120 days post the deadline, this is the right option for you. However, please remember that this 120-day extension doesn't offer relief from late penalties or interest, so the faster you can repay, the less you'll have to pay. Your total tax debt has to be less than $10,000 to be eligible for this extension.
- Long Term
When you think you'll need more than 120 days to clear your debt, this is the way to go. You have to file Form 9465 to put forward the Installment Agreement Request. You can do this both online and offline. We would suggest filing online, as it will lower your user fee.
To be eligible for this installment payment plan, you have to make sure you'll be able to pay off the debt within 3 years or less. The total debt should not be more than $10,000. Another condition is that you are bound to follow federal tax laws. If you have entered into an installment agreement with the IRS within the past five years, you cannot go ahead with this plan.
To make the repayment process easy, make sure you choose to pay by direct debit.
Things to Avoid When Paying Your Income Tax Bill
- Don't Withdraw from Retirement Account
Leave your retirement account alone. If you withdraw money from that account, you'll be liable to pay the interest plus penalty charges for premature withdrawal.
- Avoid Credit Card Debt
You might feel tempted to clear off your tax debt using your credit card, but that's not a sound financial decision. The interest on your credit card bill is way higher than the interest charged by the IRS. Opting for an extension or installment plan will be better than taking credit card loans.
- Don't Try to Evade Taxes
If you're unable to pay the due taxes, don't try to evade them. This can result in greater penalties, so it's always a wise choice to come clear to the IRS and make them aware of your situation.
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