Sometimes it happens that you wind up owing money to the IRS. It could be you took too many deductions on your W-4, or maybe you’re a subcontractor who didn’t pay quarterly taxes to avoid owing too much at tax time. Whatever the reason is, you can sometimes wind up owing an amount that’s difficult to pay off at once. A large bill can drain your savings all at once, hurting your ability to budget.
Thankfully, you don’t have have to pay your tax bill all at once. You can maintain your budget through an installment agreement and repay your taxes with the least amount of interest and penalties.
The Monthly Amount Never Changes
Image via Flickr by wuestenigel
When you enter into an installment agreement that lasts a few years, you can get the payments to the lowest amount possible. You will pay penalties and interest, but the monthly amount you pay does not change over the length of the agreement. What that means for your budget is that it’s easy to add it into the monthly outflows and you can rely on it staying the same. And the monthly amount you pay makes the amount owed go down in a predictable manner.
The idea of making a budget is to keep yourself from spending more money than you earn and make sure your most important bills are paid first. Adding to the monthly outflows is the last thing you want to do — and that’s understandable — but if you get your monthly payments low enough, you’ll stay within your budget.
Downpayments Are Accepted
If you want to get the payments as low as possible, you can pay a portion of the amount owed up front. This will reduce the payments and take less out of your monthly budget. It can hurt to take money out of your savings, but this is one of those times where you’ll be glad you did because you won’t have to spend as much money every month.
Stay Out of Trouble With the IRSÂ
You may be tempted to go for your credit card to pay off the amount owed. Don’t do that. Your credit card will wind up costing you more in the long run because the bank charges higher rates of interest than the IRS does. As long as you’ve filed your tax return and arranged a payment plan, you won’t get into trouble with the IRS in the form of an audit or punishing penalties.
Ultimately, you’ll be helping yourself, even if adding another payment to the budget feels like you’re piling on the debt. Also, you can always pay off the debt in one lump sum if you come into some money.
No one likes adding another debt to the existing pile of debts, but there’s no getting out of paying taxes to the IRS. Get into an installment agreement, do what you need to do in order to make the amount work in your budget, and retire the debt when you’re able to. And if you need help dealing with your taxes, speak to a professional who can help you get a better outcome.
