8 Different Ways To Pay Your Taxes, and Pros and Cons of Each

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For some people, tax time brings the biggest windfall of the year. For others, not so much.

According to a new GOBankingRates survey of more than 1,000 people, nearly one in five are not expecting a refund this year and about 13% are stressing about having enough money to pay what they owe to the IRS.

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If you have a tax bill that doesn’t fit your budget it can be a huge financial headache — but you also have options.

Here’s a look at some potential sources of cash for settling your tax tab with the government, including expert insight on the benefits and drawbacks of each, and which ones you should never tap into unless there are absolutely no other choices.

The Worst Thing To Do Is Nothing at All — Always File a Return

If you know an unpayable bill is coming your way the moment you file, you might entertain the idea of putting off filing to put off paying.

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It’s a bad idea. Get it out of your mind.

“First is making sure you do file your return, or file for an extension, even if you worry that you will owe a large amount,” said Kyle Enright, consumer finance expert and president of Achieve Lending. “Many people, upon finding the bill will be too high to pay, decide to wait and file later. That’s a mistake because the penalty for filing late is much higher than the penalty for paying late.”

Filing Is Easier Than Paying — and More Expensive To Put Off

The IRS offers a six-month filing extension that allows you to submit your returns by Oct. 16. Although it doesn’t give you more time to settle your bill, paying late costs more than filing late.

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“You still have to pay any amount due by April 18,” said Enright. “But if you can’t pay it by April 18, there is a half-percent penalty on what’s owed. That’s substantially less than the 5% penalty incurred for filing late. Plus, if you file more than 60 days late without an extension, you’ll be assessed a minimum penalty of $435 or 100% of your tax owed, whichever is less.”

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Forget Your Retirement Fund Exists — at Least for Now

If you can’t pay what you owe to the IRS, the experts agree on one source of funds you should never touch until you’ve expended all other options — your retirement savings.

“The worst way is tapping retirement saving plans and paying tax and penalties on the withdrawal,” said Lee Reams, Sr., co-founder of TaxBuzz.

Early withdrawals from 401(k)s incur a 10% penalty — plus you have to pay taxes on the amount you take out since pre-tax dollars funded the account.

What About a 401(k) Loan?

An alternative is a 401(k) loan. But according to TurboTax, most plans require borrowers to repay through payroll deductions. If you’re already so strapped that you’re considering an early withdrawal from your retirement plan, chances are good that a reduced paycheck won’t help your situation. Plus, you’ll typically have to pause future contributions until you repay in full, which could further harm your retirement plans.

If it comes down to it, the IRS can confiscate your 401(k), but there are many steps between this and that. So for now, guard your retirement fund with your life.

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Do Consider a Personal Loan

If you have to borrow money to pay the IRS, a personal loan might be your best bet — depending on where your creditworthiness lands you on a scale from 4% to 36%, which is what Forbes cites as the impossibly wide range of current personal loan rates.

“A personal loan could be an option, particularly if you have good credit and can get a good interest rate,” said Kyle Enright, consumer finance expert and president of Achieve Lending. “These loans also come with strict payment dates, so you will have to pay off the debt in full within the term. That’s unlike a credit card, on which you could end up making minimum payments for a very long time.”

But Never a Payday Loan

If your credit is insufficient to secure even a high-interest personal loan, you might be tempted to take out a short-term loan from a lender that doesn’t consider your ability to repay. 

This is a no-win solution in almost all cases.

“Taking out a loan could be an option, but beware payday and other quick-turnaround lenders, and the accompanying sky-high interest rates,” said Enright.

According to the Consumer Financial Protection Bureau, payday lenders charge high fees and interest rates equivalent to hundreds of percentage points, even in states where they’re heavily regulated.

Credit Cards Should Be a Last Resort

Somewhere between personal loan rates and payday loan rates are your trusty credit cards. You wouldn’t be the first to put a tax bill on plastic, but understand that revolving credit can start revolving so fast that it quickly spins out of control.

“If you pay the amount you owe directly by credit card, the IRS charges a fee of 1.87% on the amount,” said Enright. “The real problem, though, comes if you cannot pay off your credit card balance in full on the next due date. Then, you’re faced with typical credit card interest rates, which are averaging more than 20%.”

Work Out a Payment Plan With the IRS

The best solution for paying a bill you owe to the IRS might come from the agency itself.

“The IRS offers payment plans, which can be a good option if you don’t have the cash to pay your bill upfront,” said Sandeep Gill, an ACCA-qualified accountant and founder of Compare the Accountant. “You’ll need to pay interest and fees, but the rates are generally lower than those for credit cards or personal loans.”

First, Shrink Your Bill With as Much Cash as Possible

The IRS accepts both short-term payment plans for up to 180 days and long-term payment plans for those who need more time. In both cases, interest accrues only on the outstanding balance. Pay down as much of your bill as possible with whatever cash you have — but not too much.

“If you have an emergency fund, it’s not recommended to drain it to pay your tax bill,” said Gill. “Emergency funds should be reserved for unexpected expenses, such as medical bills or car repairs.”

Short of that, however, getting the IRS off your back is always money well spent.

“If you have the money to pay your tax bill in cash, this is the best option,” said Gill.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.
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