“The IRS installment plan is a good way to pay your taxes versus using a credit card,” says Sallie Mullins Thompson, a CFP in Washington, D.C. “IRS interest rates are likely lower than credit card rates.”
3. The Offer in Compromise (OIC) program. Provided the IRS agrees that you qualify, you can settle your tax debt for less than the full amount owed because it would cause financial hardship, or you believe your tax bill is incorrect. You make an appropriate offer based on what the IRS considers your true ability to pay. Note: The IRS will investigate your financial situation thoroughly, and it will take time.
4. The Extension of Time for Payment of Tax Due to Financial Hardship. This is an opportunity to delay payment — without penalties and interest — if you’re facing undue financial hardship or difficulties. To be considered, you must provide a detailed explanation, and document the undue hardship and its effect on your livelihood that will result if you pay the tax by the due date.
8 potential sources of fast cash
What if working with the IRS has no appeal? Your first source of cash should be your emergency fund, says Charles Pastor, a CFP at Intellicents Investment Solutions in Golden, Colorado. “Even if you can’t cover the entire bill, you should still pay as much as you are able out of savings. This can help reduce interest and penalties that the IRS could levy against you.”
If you don’t have a fund, or have exhausted it, discuss the options below with a financial professional. You’ll want to understand the tax and financial ramifications, says Michelle Crumm, a CFP at Belle Eve Financial in Ann Arbor, Michigan. “And how the chosen strategies align with the overall financial plan.”
1. Cash from liquidated investments. You may opt to sell nonretirement investments or assets, while keeping the potential tax implications of that sale in mind, says David Silversmith, a CFP and senior tax manager at Eisner Advisory Group in New York City. “One shrewd way to raise cash for taxes would be to sell an investment which has an unrealized loss. That way, the sale of the investment will not generate a tax bill for the following year.”
2. Income from required minimum distributions (RMDs). “We have some clients who take their required minimum distributions for tax payments,” says Crystal McKeon, a CFP at TSA Wealth Management in Houston. “You will be filing taxes shortly after you have found out what your RMD for the year will be, so this is a good opportunity to make sure two government responsibilities are taken care of at the same time.”
3. Funds from your Roth IRA. If you have a Roth IRA, you’ve been contributing after-tax funds. Once the account has been open for five years and you’re over age 59½, you can make withdrawals tax-free, with no penalties, to pay your tax bill.
However, if you’ve converted or rolled over funds from your traditional IRA or 401(k) to your Roth less than five years ago, you may incur a 10 percent early withdrawal penalty on this money. While your Roth may still be a good source of cash, get some advice about how to make any withdrawals judiciously.
4. A personal loan, home equity loan or home equity line of credit. Taking out a personal loan from a bank, credit union or online lender may be another way to raise cash, as no collateral is required. Shop around for the most competitive rates, which may be better than a credit card. Make sure that you repay on time, as the lender is likely to report your payment record to the three major credit bureaus. Be late or default, and you may have trouble getting credit in the future.
What about a second mortgage on your home? Two options are a home equity loan or home equity line of credit [HELOC], says Crumm. “These loans use the equity in the home as collateral and often have lower interest rates compared to other forms of credit.”
With a home equity loan, you’ll receive a check for the full loan amount, which you repay in installments over time. A HELOC utilizes a portion of your home’s value through a revolving line of credit that you can use during a set time period. These options make sense if you plan to stay in your home and you’re sure can make the payments. If not, you risk foreclosure. Shop around for the best rates and terms.
5. A 401(k) loan. If you’re still working, your employer’s 401(k) plan may allow you to take a loan of as much as 50 percent of your savings, up to $50,000 within a 12-month period, with the consent of your spouse or domestic partner. You won’t have to pay taxes and penalties, and the interest goes back to your retirement plan.
However, if you leave your current job, you might have to repay your loan in full quickly. If you can’t, it’s considered in default, resulting in both taxes and a 10 percent penalty if you’re under 59½. You’ll also miss out on potential growth of the funds you took out.
6. Prudent use of a credit card. Sanchez also suggests taking advantage of the grace period a credit card grants, which is often 21 days, to raise funds while avoiding charges. “If using a credit card to pay your taxes, be sure to pay off the balance in full to avoid paying credit card interest. Confirm with the credit card company to understand their grace period timeline.”
7. A side job or gig work. “I encourage clients to explore temporary side jobs, gig work or freelancing opportunities to generate additional income specifically earmarked for paying the tax bill,” says Crumm. But what if you’re already pressed for time? Working nights and weekends to get off the hook with the IRS may be worth it, especially if it’s temporary.
8. Borrowing from family or friends. Should you or shouldn’t you? Good question. Money doesn’t always bring out the best in folks. Given the politics of relationships, consider this as your last resort. If you do borrow, clearly state your agreement in writing, with a payment plan, including interest. And stick to it, keeping accurate records of your payments.