You’d be hard-pressed to find someone who actually enjoys filing taxes. Between the mountains of paperwork and forms to fill out and the April deadline, this time of year is notoriously stressful for us all. However, filing for a refund is one thing—filing when you owe taxes is another completely. Not only do you have to worry about filing on time to avoid unwanted penalties and fees, you also have to worry about how much money’s going to come out of your bank account.
That being said, if you owe taxes this year, you’ve come to the right place. While paying the government a chunk of money can be scary, we reached out to two financial experts for their insight and guidance on how to adjust your finances and make things easier, as well as the different options you can look into before you file. This is exactly what to do if you owe taxes this year. Keep scrolling to learn more.
CPA, Money Educator and Financial Strategist
Megan Naasz uses her financial expertise to help creatives, coaches and online business owners organize and manage their finances so they can confidently scale and avoid tax stress.
Founder of YNAB
Jesse Mechan is the founder of YNAB, a money management app with a proven four rule method for less money stress.
1. Get your finances in order
According to Naasz, you can hold off on making your payment until the tax filing and payment due date, which is Tuesday, April 18, 2023. “This will give you extra time to get your funds together and ensure that you have the right amount in your account before the automatic payment comes out if you’re planning on paying electronically,” she explained.
Additionally, Naasz also stressed the importance of trying to pay as much as possible when you file your return. “Interest and penalties accrue on taxes that aren’t paid by the filing due date—even if you file an extension for your return,” she said. “However, paying something can reduce the amount of interest and penalties that may accrue on the outstanding balance.” So, take some time to get your finances in order. Look at what you owe and compare it with what you have saved. This will give you a better idea of what you’re working with and how you should adjust your budget moving forward.
2. Reassess and adjust your budget
Reassessing and adjusting your budget will help you save more so you can pay more when you file, and Naasz recommends using the 50/30/20 rule as a guide. This rule states that 50% of your income should go towards needs, 30% towards wants or “fun” expenses (think: a night out, travel, cable, etc.) and 20% towards savings, investments, and debt payments. “Maybe you take that 20% and split it in half, then put one half towards taxes and the other half into savings,” she told me. Also, doing things like canceling streaming services or memberships and opting to make meals at home can help you reduce your spending and save more.
In addition, Mecham also suggests taking a look at your “flexible” expenses—AKA things you’re saving for in the future but don’t need at this time. “Taxes are a must—you don’t mess around with them. So if you’ve been setting aside money for future car repairs, you can take that money and put it towards a more pressing, immediate matter, like paying the IRS, and focus on saving again later in the year,” he told me. Likewise, he also suggests looking into a side hustle—like selling old clothes or furniture or picking up a side gig like DoorDash or Uber—to come up with extra income quickly.
3. Determine how much you can realistically afford to pay
Draining your bank account to pay back what you owe is the last thing you want to do. Sure, it may help you avoid extra, unwanted fees, but it won’t be worth it because it’ll put you in an extremely compromised position. This is especially true with inflation being what it is right now—you need a financial cushion to fall back on, and most financial experts recommend having at least three to six months’ worth of expenses saved up for emergencies.
The best thing you can do is determine how much you can realistically afford to pay without blowing through savings. This is where the 50/30/20 rule comes in handy; if you already know the total amount you need to stay afloat, figuring out a number will be so much easier. For example: If you make $5,000 a month but need $3,000 for living expenses and discretionary spending, you can then figure out what to do with the leftover $2,000. “Maybe you commit to putting half of your leftover money towards taxes, and the other into savings for emergencies,” Naasz said. “Either way, the $3,000 will act as a natural buffer and prevent you from draining your bank account,” she clarified.
Of course, every person and financial situation is unique, but knowing what you’re working with will help you figure out whether or not you need to look into entering a payment plan with the IRS.
4. Look into payment plans
If you’ve exhausted all your options and still find yourself unable to pay your taxes, consider entering into a payment plan with the IRS. While this won’t stop penalties and interest from accruing on the unpaid balance, Naasz says it will stop the IRS from sending you collection letters, which is a win. “Many people think the IRS is scary, but they are not out to get you. They’re just people doing their job, and they’re willing to work with you,” Mecham clarified.
Below, Naasz has outlined two payment plans the IRS offers. You can sign up for both of these directly on the IRS website:
Short-term payment plan
If your combined tax, penalties, and interest is $100,000 or less and you need just a little extra time to get your funds together, consider entering into a short-term payment plan. “If you know you can pay the balance within 180 days or less, this is a great option,” Naasz said. She then went on to explain that although there’s no fee to set this up, penalties and interest will continue to accumulate until the debt is paid in full.
Long-term payment plan
On the other hand, if you’ve filed all your tax returns and owe $50,000 or less in combined tax, penalties and interest but need more than 180 days to pay back what you owe, Naasz suggests entering into a long-term payment plan, or installment agreement, with the IRS. “Long-term payment plans are broken down over the course of 72 months,” Naasz explained. “The fees to set this plan up range anywhere from $31 to $225, depending on how you apply and the payment method you choose.”
Generally, the IRS will let you decide your monthly payment. However, with a long-term payment plan, the monthly minimum must be equal to your outstanding balance divided by 72, and failure to meet this minimum payment may result in a default on the agreement. Additionally, the IRS also has the ability to garnish your wages and seize your property and bank accounts on your unpaid debt, so make sure you can pay at least the minimum of what you owe each month. “If you need to modify your payments for any reason, you can do so right online,” Naasz said.
That said, if you cannot afford to pay the monthly minimum, Naasz recommends reaching out to the IRS. “The IRS has the ability to temporarily delay collection on your unpaid taxes if they determine you’re facing financial hardship,” she explained. “The taxes you owe don’t go away, but there will be a hold put on your collections.” Unfortunately, this hold won’t eradicate interest and penalties on your unpaid balance, but you might have to bite the bullet for the time being. “If you’re struggling, reach out to the IRS and fill out a Form 433-A, Form 433-F or Form 433-B to initiate this process.”
Source: Cosmo Politian
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