What is the best Way to Pay Large Tax Amount Owed to IRS?
I recently did a preliminary calculation of my taxes for 2018 and discovered that I am going to owe the IRS about $16,000. I do not have this amount of money in reserve.
My question pertains to the best way to pay this amount. Options as I see them:
- Sell an asset to raise the money (such as a car)
- Put it on the credit card
- Withdraw from 401k to raise funds
- Use an IRS payment plan
Unfortunately, #1 isn't a great option (I need my car). So it's going to be something from 2-4:
- Credit card. My interest rate on purchases is 18.24% annually. Could work.
- Withdraw from 401k. Doing this would put me in the 24% income tax bracket, plus the 10% penalty on the total amount withdrawn, plus the state wants a piece. This amounts to about a 39% hit. This is a terrible idea.
- IRS payment plan - I read up a bit on this and couldn't get a good understanding of what the actual costs are. The annual interest rate is 3%, but there are fees and also a late payment penalty of 0.25% per month.
united-states income-tax irs
edited 1 hour ago
Ben Miller
78.4k19212278
asked 2 hours ago
MarkMark
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |
I recently did a preliminary calculation of my taxes for 2018 and discovered that I am going to owe the IRS about $16,000. I do not have this amount of money in reserve.
My question pertains to the best way to pay this amount. Options as I see them:
- Sell an asset to raise the money (such as a car)
- Put it on the credit card
- Withdraw from 401k to raise funds
- Use an IRS payment plan
Unfortunately, #1 isn't a great option (I need my car). So it's going to be something from 2-4:
- Credit card. My interest rate on purchases is 18.24% annually. Could work.
- Withdraw from 401k. Doing this would put me in the 24% income tax bracket, plus the 10% penalty on the total amount withdrawn, plus the state wants a piece. This amounts to about a 39% hit. This is a terrible idea.
- IRS payment plan - I read up a bit on this and couldn't get a good understanding of what the actual costs are. The annual interest rate is 3%, but there are fees and also a late payment penalty of 0.25% per month.
united-states income-tax irs
edited 1 hour ago
Ben Miller
78.4k19212278
asked 2 hours ago
MarkMark
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
2
Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable.
– Ben Voigt
2 hours ago
1
Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year?
– Hart CO
1 hour ago
add a comment |
I recently did a preliminary calculation of my taxes for 2018 and discovered that I am going to owe the IRS about $16,000. I do not have this amount of money in reserve.
My question pertains to the best way to pay this amount. Options as I see them:
- Sell an asset to raise the money (such as a car)
- Put it on the credit card
- Withdraw from 401k to raise funds
- Use an IRS payment plan
Unfortunately, #1 isn't a great option (I need my car). So it's going to be something from 2-4:
- Credit card. My interest rate on purchases is 18.24% annually. Could work.
- Withdraw from 401k. Doing this would put me in the 24% income tax bracket, plus the 10% penalty on the total amount withdrawn, plus the state wants a piece. This amounts to about a 39% hit. This is a terrible idea.
- IRS payment plan - I read up a bit on this and couldn't get a good understanding of what the actual costs are. The annual interest rate is 3%, but there are fees and also a late payment penalty of 0.25% per month.
united-states income-tax irs
edited 1 hour ago
Ben Miller
78.4k19212278
asked 2 hours ago
MarkMark
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
I recently did a preliminary calculation of my taxes for 2018 and discovered that I am going to owe the IRS about $16,000. I do not have this amount of money in reserve.
My question pertains to the best way to pay this amount. Options as I see them:
- Sell an asset to raise the money (such as a car)
- Put it on the credit card
- Withdraw from 401k to raise funds
- Use an IRS payment plan
Unfortunately, #1 isn't a great option (I need my car). So it's going to be something from 2-4:
- Credit card. My interest rate on purchases is 18.24% annually. Could work.
- Withdraw from 401k. Doing this would put me in the 24% income tax bracket, plus the 10% penalty on the total amount withdrawn, plus the state wants a piece. This amounts to about a 39% hit. This is a terrible idea.
- IRS payment plan - I read up a bit on this and couldn't get a good understanding of what the actual costs are. The annual interest rate is 3%, but there are fees and also a late payment penalty of 0.25% per month.
united-states income-tax irs
united-states income-tax irs
edited 1 hour ago
Ben Miller
78.4k19212278
asked 2 hours ago
MarkMark
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 1 hour ago
Ben Miller
78.4k19212278
asked 2 hours ago
MarkMark
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 1 hour ago
Ben Miller
78.4k19212278
edited 1 hour ago
Ben Miller
78.4k19212278
edited 1 hour ago
Ben Miller
78.4k19212278
78.4k19212278
asked 2 hours ago
MarkMark
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 2 hours ago
MarkMark
1112
asked 2 hours ago
MarkMark
1112
1112
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
2
Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable.
– Ben Voigt
2 hours ago
1
Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year?
– Hart CO
1 hour ago
add a comment |
2
Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable.
– Ben Voigt
2 hours ago
1
Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year?
– Hart CO
1 hour ago
2
2
Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable.
– Ben Voigt
2 hours ago
Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable.
– Ben Voigt
2 hours ago
1
1
Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year?
– Hart CO
1 hour ago
Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year?
– Hart CO
1 hour ago
add a comment |
1 Answer
1
active
oldest
votes
Of the options you've listed, setting up a payment plan with the IRS is the best, cheapest option. The current interest rate from the IRS is 6%. This interest rate is updated once every three months based on the federal short term rate. The penalty charged is an additional 0.25% per month (roughly another additional 3% per year). This works out to a rate of around 9%, which is much better than your credit card or your 401(k).
You may be able to get a better loan rate by talking to a local bank or credit union. If you can beat 9%, then that would probably be a better option than IRS installments.
However, more important than the interest rate you can get is how quickly you pay it off. Dedicate yourself to eliminating this debt as fast as possible. Work as hard as you can to save up as much as possible between now and April 15 to minimize the amount you have to borrow, and keep working at it afterwards until this debt is paid off.
Finally, there must be a reason that you have found yourself with a large tax bill and no money. Hopefully, you know what went wrong so you don't make that mistake again. If not, be sure to figure it out.
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
add a comment |
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votes
Of the options you've listed, setting up a payment plan with the IRS is the best, cheapest option. The current interest rate from the IRS is 6%. This interest rate is updated once every three months based on the federal short term rate. The penalty charged is an additional 0.25% per month (roughly another additional 3% per year). This works out to a rate of around 9%, which is much better than your credit card or your 401(k).
You may be able to get a better loan rate by talking to a local bank or credit union. If you can beat 9%, then that would probably be a better option than IRS installments.
However, more important than the interest rate you can get is how quickly you pay it off. Dedicate yourself to eliminating this debt as fast as possible. Work as hard as you can to save up as much as possible between now and April 15 to minimize the amount you have to borrow, and keep working at it afterwards until this debt is paid off.
Finally, there must be a reason that you have found yourself with a large tax bill and no money. Hopefully, you know what went wrong so you don't make that mistake again. If not, be sure to figure it out.
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
add a comment |
Of the options you've listed, setting up a payment plan with the IRS is the best, cheapest option. The current interest rate from the IRS is 6%. This interest rate is updated once every three months based on the federal short term rate. The penalty charged is an additional 0.25% per month (roughly another additional 3% per year). This works out to a rate of around 9%, which is much better than your credit card or your 401(k).
You may be able to get a better loan rate by talking to a local bank or credit union. If you can beat 9%, then that would probably be a better option than IRS installments.
However, more important than the interest rate you can get is how quickly you pay it off. Dedicate yourself to eliminating this debt as fast as possible. Work as hard as you can to save up as much as possible between now and April 15 to minimize the amount you have to borrow, and keep working at it afterwards until this debt is paid off.
Finally, there must be a reason that you have found yourself with a large tax bill and no money. Hopefully, you know what went wrong so you don't make that mistake again. If not, be sure to figure it out.
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
add a comment |
Of the options you've listed, setting up a payment plan with the IRS is the best, cheapest option. The current interest rate from the IRS is 6%. This interest rate is updated once every three months based on the federal short term rate. The penalty charged is an additional 0.25% per month (roughly another additional 3% per year). This works out to a rate of around 9%, which is much better than your credit card or your 401(k).
You may be able to get a better loan rate by talking to a local bank or credit union. If you can beat 9%, then that would probably be a better option than IRS installments.
However, more important than the interest rate you can get is how quickly you pay it off. Dedicate yourself to eliminating this debt as fast as possible. Work as hard as you can to save up as much as possible between now and April 15 to minimize the amount you have to borrow, and keep working at it afterwards until this debt is paid off.
Finally, there must be a reason that you have found yourself with a large tax bill and no money. Hopefully, you know what went wrong so you don't make that mistake again. If not, be sure to figure it out.
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
Of the options you've listed, setting up a payment plan with the IRS is the best, cheapest option. The current interest rate from the IRS is 6%. This interest rate is updated once every three months based on the federal short term rate. The penalty charged is an additional 0.25% per month (roughly another additional 3% per year). This works out to a rate of around 9%, which is much better than your credit card or your 401(k).
You may be able to get a better loan rate by talking to a local bank or credit union. If you can beat 9%, then that would probably be a better option than IRS installments.
However, more important than the interest rate you can get is how quickly you pay it off. Dedicate yourself to eliminating this debt as fast as possible. Work as hard as you can to save up as much as possible between now and April 15 to minimize the amount you have to borrow, and keep working at it afterwards until this debt is paid off.
Finally, there must be a reason that you have found yourself with a large tax bill and no money. Hopefully, you know what went wrong so you don't make that mistake again. If not, be sure to figure it out.
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
answered 1 hour ago
Ben MillerBen Miller
78.4k19212278
78.4k19212278
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
add a comment |
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. I'll research and re-visit.
– JoeTaxpayer♦
36 mins ago
add a comment |
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2
Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable.
– Ben Voigt
2 hours ago
1
Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year?
– Hart CO
1 hour ago