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You might have missed that your unemployment benefits were taxed, or you may have hidden taxable dividends from stocks in your portfolio. In any case, an unexpected tax bill can take you by surprise, especially when funds are tight. If you're unable to pay the tax bill by May 17, it's worth considering various IRS payment plans to minimize penalties and ease the financial burden.
What options does the IRS offer for repayment?
The IRS, along with many state tax agencies, provides direct payment plans through their websites or as part of the e-filing process. Thankfully, there are several installment options based on how quickly you can pay off the debt and the total amount you owe.
However, keep in mind that while you are on a repayment plan, you will still be responsible for setup fees and ongoing interest. The interest rate will decrease from 0.5% to 0.25% per month (for more details on IRS penalties, click here). On the bright side, a repayment plan can help you avoid wage garnishment or property claims by the IRS. If you wish to avoid extra charges altogether, paying your tax bill by the deadline is essential. Below is an overview of the plans
Short-term payment plan: This plan allows for a payment period of 180 days or less (extended recently from 120 days) and applies when the total debt is under $100,000 in taxes, penalties, and interest. There's no setup fee, though interest continues to accrue until the debt is fully paid off. The maximum penalty for non-payment is 25% of the unpaid amount until the balance is settled.
Long-term payment plan: If the payment period exceeds 120 days, you can opt for monthly payments, extending up to six years, provided the amount owed is below $50,000, including taxes, penalties, and interest. The non-payment penalty also caps at 25%. You can choose automatic monthly withdrawals (with a setup fee of $31), or non-automated payments (with a fee of $149, or $43 for low income earners).
To get started, simply click on the blue button that says “Apply/Revise as Individual” here.
Can you use a 0% APR credit card to pay your taxes?
You might be able to pay your tax bill using a credit card offering a 0% introductory APR for the first 12 to 18 months, but this approach comes with risks. Essentially, you're transferring low-interest debt onto the card, which will likely have an APR between 10%-25% once the introductory period ends. Essentially, you are buying yourself extra time to pay off the debt—but you must be absolutely sure you can clear the balance before the interest kicks in, or you’ll be facing even more debt later on.
This post was initially published on May 11, 2021, and later updated on May 12, 2021, to amend the payment period for the short-term plan. The correct duration is 180 days, not the previously stated 120 days.
