Once you have prepared your tax return, you may be disappointed to find that you owe income tax. Ideally, the amount of money your employer withholds from your paycheck would be enough to cover the income tax you owe. However, there are various reasons such as changes in your filing status, whether you use the standard or itemized deductions, and other reasons why the employer withholding may not be enough.
If you find you owe income tax, it is important to understand the options you have for paying that money. The purpose of this article is to touch on the various options you have for paying any income tax you still owe and the pros and cons of each option. This article assumes you do not have enough money to pay your tax liability in full at the time it is due.
Additional Time to Pay
The IRS realizes some people may not be prepared to pay their income tax when it is due. Therefore, the IRS has a process whereby a taxpayer can file for an extension of up to 120 additional days to pay.
Filing for an extension is free of charge. Although any taxpayer can file for an extension, not everyone will qualify. If you do qualify, the IRS will charge you interest on the unpaid balance at the rate of 3 percent.
Although paying an additional 3 percent on your unpaid tax liability may not be ideal, an extension is generally the least expensive payment option for those who can qualify.
If you need more time to pay your taxes than 120 days, the IRS also offers options for installment agreements. In an installment agreement, the taxpayer would make equal monthly payments over a set number of months—generally for up to 60 months—until the tax liability owed is paid in full.
As with applying for additional time to pay, you must qualify for an installment agreement. The process varies depending on how much money you owe to the IRS. If you qualify for an installment agreement, the IRS charges a one-time setup fee of up to approximately $100 depending on if your payments are automated or via check.
In an installment agreement, the IRS will charge you interest on the unpaid tax balance, as well as penalties should you miss a payment. Therefore, while this option is generally more expensive than a 120-day extension, it can provide an even longer period of time to pay your tax in full.
The IRS also accepts payment of tax owed by a credit card. While there is no qualification process to pay your tax liability using a credit card so long as you have a sufficient line of credit to cover the amount owed, paying with a credit card can often be the most expensive payment option.
The IRS works with several third-parties to facilitate the credit card payment. These third parties will charge you 2 percent or more of the amount charged as a convenience fee to cover their costs. While 2 percent may not be much money, you must also consider the interest rate on your credit card if you are unable to pay the balance in full.
Unless you are able to take advantage of a promotional offer for a low interest rate, it is not unusual for the interest rate on credit cards to approach 20 percent. Therefore, it is important to understand all the costs associated with your credit card before you pursue this payment option with the IRS.
Getting Help from a Tax Attorney
Remember the information above is general in nature. In many cases, it is difficult to evaluate the best payment option available for a given situation. Therefore, if you have questions about payment options best for you, you would be wise to speak with a tax attorney. A tax attorney has the training and experience to understand your individual situation and explain the available options in detail.
Therefore, if you want help, call the phone number at the top of this web site. Your first discussion with a tax attorney will be free of charge and does not obligate you to anything further, so you have every reason to make the call today.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.