What to Do if You Can’t Pay Your Taxes
© 2024 Health Realizations, Inc.
April 15 is just around the corner, but not everyone will be breathing a sigh of relief once their tax returns are complete. Because for a growing number of Americans, those returns will come with a hefty tax bill, one that may be near impossible for you to pay.
In fact, this year with continued high unemployment rates and home foreclosures and with already strained budgets for many families, even the IRS is expecting more taxpayers to come up short.
So if you your tax return is done and you think that you won’t be able to pay Uncle Sam, don’t panic. The scenario is much more common than you may think, and the tips that follow will help you get the situation under control.
- File Your Return.
Not filing your return is a criminal act and one that could result in going to jail. Always file your tax return, even if you can’t send a payment along with it. The government's response will be an automatically generated letter stating how much tax, plus interest, is due.
- Pay as Much as You Can.
If you can pay even a portion of your tax bill, send it in along with your return. The IRS will send you an updated bill, plus interest, about 45 days later, which may be enough time for you to gather up the rest of the payment.
- Consider All Your Cash Options.
The government is one of the few creditors who can actually garnish your wages or take any assets you have (other than your home and business). Accordingly, choosing to pay by borrowing from friends or relatives, using a home-equity loan or even using a low-interest credit card may be a wise move.
Even the IRS states on their Web site, “The interest rate a bank or credit card charges and any applicable fees are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code.”
In other words, you may be better off charging your tax bill than working out a payment plan with the IRS.
- Communicate With the IRS.
Many people try to hide from the IRS when they owe money. What they don’t realize is that the IRS is a vast bureaucracy with extensive systems in place to make sure they keep track of and get what they’re owed. As long as you communicate your situation to the IRS, you’ll be able to work out a payment plan, and the IRS may even waive penalties or provide a short-term extension on your tax bill.
- Consider a Payment Plan.
The IRS does offer payment plans that allow you to pay your tax bill over a period of months or years. Although there are fees involved, and you will be charged interest and penalties, these plans may make your tax payment much more manageable. You can find out more about installment agreements at this IRS Web site.
- Consider an “Offer In Compromise.”
If you were faced with extreme financial hardship, such as losing your home to foreclosure, you can apply for an offer in compromise (there is a $150 fee to fill out the application). Under this program the IRS will settle your tax bill for less than what you owe. To qualify, for consideration, you must prove that you can’t pay the full tax bill, or that doing so would create economic hardship.
Finally, be sure that you have maximized all of your deductions to minimize what you owe. If you haven’t yet filed, here are five ways to lower your tax bill, or increase your refund, for your tax return.
Max Out Your IRA Contribution
You can contribute to your IRA right up until April 15 and still count it on your return.
National Disaster Losses Are Also a Standard Deduction
If you had qualified casualty losses in declared national disaster areas (such as Midwestern flooding, certain Kansas storms or California wildfires) you can add your losses to your standard deduction, less any relief income, insurance payments and a deductible.
Investment Losses
The silver lining to the down market is that you can deduct any losses you had in the prior year from selling investment assets for less than you bought them.
Tax Breaks for Teachers, College Tuition
Teachers can deduct up to $250 for classroom expenses that were not reimbursed. Meanwhile, if you paid college tuition and fees in the prior year, you can deduct up to $4,000.
Mileage Deductions
Remember you can deduct miles driven not only for business purposes but also (at a slightly lower rate) for medical or moving expenses, or driving in charitable activities.
Sources
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