(WMBF) - Tax season can be extremely stressful time, especially for anyone who has doubts about being able to pay what is owed to the IRS.
If you know you can't pay everything you owe, the worst thing you can do is to do nothing. The deadline to file your tax return and pay your taxes is April 15. Local and online financial experts have some advice to minimize your tax troubles as we inch closer to that deadline.
If you know there's no way you'll be able to pay it back, you need to apply for an extension. There will be an application fee for the extension, plus interest, plus a monthly late fee. The IRS currently charges 3 percent interest on underpaying, plus a monthly late fee of 0.5 percent of what you owe. But those rates could ultimately depend on who much you owe. Then you'll set up an installment plan with the IRS to pay it all back.
"The key is with the payment plan is making sure you stick to the amount that you agreed to in the front end. If you pay more, if you set up a payment plan and you're paying $50 a month and you pay $200 a month, they're going to expect $200 a month from that point going forward," says Rad Lowery with the Carolina Wealth Advisors. So pay it off at the same increments. Then if you have enough to pay it all off all at once, you can pay it one final lump sum.
No matter what, submit your return by April 15, even if you don't have the money to pay. The IRS has separate penalty fees for failing to pay taxes and failing to file the tax return. So at the bare minimum, you want to eliminate at least one of those penalties.
The IRS does accept plastic to pay off your taxes. Financial experts say the obvious downside of paying your taxes with a credit card is the processing fee. But this downside can actually be offset if you have rewards offered from your credit card company. But, paying with your credit card isn't always considered the best idea, if you're going to carry a balance. A balance could mean you're looking at high processing fees, high interest rates, and potential damage to your credit score. So the cost of paying with plastic depends on the amount you owe.
"It is one way to make a payment, depending on the interest rate of your credit card and the interest rate that the IRS is going to charge you. It's something to compare and go with the lower of the two," says Lowery.
Taking on a significant balance with your credit card always comes with the risk of damaging your credit score, which could make it much harder to take out a loan, rent an apartment, or buy a car down the road. Your insurance premiums may even go up.
There are some things you can do to potentially avoid all this stress of owing the IRS next year. One thing you might want to consider that could help solve your tax trouble, is to re-evaluate your withholdings. While it won't help you this year, it's important to understand that owing money on your taxes means you're not putting enough aside to cover your obligations. So, to prevent this problem from following you, start saving a bit more from each of your monthly payments. You should fill out a new W-4 form and submit it to your employer in order to get a larger amount withheld from your paycheck.
Another suggestion, try to improve your budgeting. The situation of owing money to Uncle Sam underscores the importance of financial planning and carefully constructed budget. So, take this opportunity to cut your spending on anything that is not a necessity in order to build positive habits for the future and repay the IRS as quickly as possible.