How to Pay Back Taxes if You Do Not Have the Money

• Author: Chris Remington
• Posted: 2024-06-07

The CARES Act extended the due date for 2019 income tax filings through the middle of July. However, taxes may present a difficult challenge for many people and small businesses this year, especially when people end up owing some money to the government. The stress for these people is to find the money that they may no longer have to pay the government. In many cases, people have had to draw from the savings that they would have used to pay their taxes. Here are three ways to come up with the money to pay taxes to the federal government.

Negotiate an Agreement with the IRS

Depending on how quickly you can pay the taxes back, the IRS has several different options that could get you through until you can settle your tax debt. If you think that you will have the money in a short period of time, you can enter into a short-term payment plan with the government. This is when you know that you will be able to pay the taxes back in 120 days or less. There is no cost to set this payment plan up, and you only owe interest and penalties on top of the taxes that you already owe.

You could also enter a long-term installment agreement with the IRS. This can be either through automatic direct debit or making monthly payments on your own. There is a fee to set up this program, and these fees can be steep. If you do not owe a large amount of taxes, it may suit you better to look into using a credit card or another means to pay. The IRS does not offer these plans to everyone too. Plus, if you default on your installment agreement, the IRS can take some serious enforcement measures against you.

Psy Them with a Credit Card

Ordinarily, you do not want to finance your tax bill with your credit card because you could end up paying an interest rate well over 15% for a prolonged period of time. However, you could use your credit card to your advantage here in several ways. First, if you have a generous rewards program, you could use this expenditure to get cashback or rewards points. However, you do end up paying for this because the IRS does not take credit card payments directly. Instead, it uses processors who may charge a fee of their own.

Second, you could charge the texas on your credit card and then find another credit card that allows you to transfer balances with a low or no interest rate as an introduction. This would make sense if your tax obligation was not large enough that you would still be paying it after the introductory period ended. This option works well for lower tax bills that you know that you can pay off soon.

Cash in Retirement

One of the changes made by the CARES Act to help people who have been affected by COVID has been to make it easier for them to take out money from their retirement without some of the harsh penalties that they would ordinarily face. Thus, a 401(k) can be an easier source of money that you already have that you can tap without going into further debt. This is one way to make your tax problem go away without setting you up for other adverse consequences that go along with owing money to the IRS.

There are still some negative things that you need to be aware of when you cash in retirement. First, when you cash in retirement savings, it requires you to sell holdings in your account. This may not be advisable when the market has already dropped as much as 20% or more after COVID-19 hit. In other words, you will be selling at the low and will not be able to recover that money once you are able to reinvest in your retirement account.

Second, you will still end up owing taxes on the holdings that you have sold, even if you do not have to pay penalties. Of course, you will not have this issue if your retirement account is a Roth IRA. However, this will hold true for an IRA or a 401(k). The tax burden will simply hit you the next year when you need to pay taxes on what you sold.