One of the worst feelings in the world is knowing that you can’t pay your taxes. This year, due to my divorce and the way my business is set up, my ex and I together owe about $25,000 dollars in state and federal taxes. We agreed to just splitting that bill down the middle because we are applicable and because we’re adults.
We can each pay our half of the bill in full, but neither of us wants to deplete our savings that far in order to make it work. As a result, we are acting as though we can’t pay our taxes and looking for other options. Here are a few solutions I found for our situation.
IRS Installment Plan
The easiest thing to do in the situation is to sign-up for the IRS installment plan. If you owe less than $50,000 in total taxes, interest, and penalties, it’s possible for you to fill out an online form and arrange a payment plan. This is pretty easy to do, and you can suggest an amount you can pay each month. The main requirement is that you are able to pay off the total you owe within 72 months.
You might have to share information about how much money you make and your current assets depending on your situation. We were able to get the installment payment plan without any trouble, and now the IRS will automatically deduct the required amount of each month.
It does cost a fee to go this route, but it is much less expensive than what you would pay if you didn’t pay at all. The total is also less than what you would pay if you got a loan or used a credit card. Plus, you don’t end up depleting your savings or having to withdraw money from your retirement account and missing out on possible future investment gains.
If you also have a much bigger tax bill than you expected, this is one way to make the liability manageable without breaking the bank.
0% APR Credit Card
While we are using the installment plan for our federal taxes, I’m taking a different approach with state taxes. For the state tax portion of the bill, I am using a 0% APR credit card. This is a great deal because I can earn rewards on my tax payment and avoid interest at the same time. I will have no problem paying off the total before the promotional interest rate runs out, so this is a good chance to apply for the card.
In the past, I’ve used one of my regular rewards credit cards to pay my tax bill. However, I only do this if I have the money in the bank to immediately pay off the credit card. The last thing I need is a high interest rate on top of my tax bill.
Going forward, I’ve adjusted how much I set aside for taxes so that I can pay my quarterly taxes effectively. The divorce changed the way my taxes are calculated, and my tax bill will be higher each year as a result. By planning ahead now, and taking advantage of the installment plan available to me through the IRS, I should be able to handle my tax bill in future years without falling behind.