Posts Tagged ‘debt consolidation loan’

Possible Solutions for an Unexpected Tax Bill

Posted on: April 14th, 2010 by

IRS Debt - Accountant - Rockville, MDFor many people, April is tax refund time; but for others, it brings about very unpleasant thoughts.  What would you do if your accountant called you to tell you the results of your processed return and it turns out you owe thousands of dollars you don’t have?  Or if you did your own return, how many times can you re-run the numbers?  There are possible options you can use to help pay your tax bill.  One option available is paying with one or more of your credit cards.  This may not be the best option, however, given how high the interest rates are on credit cards.  Also, when you pay your taxes with your credit card, you will incur a 2.25-3.93% convenience depending on the third-party company you use.

Another option is to obtain a bank loan.  Banks and credit unions offer loans to help consolidate debt secured by your property, but this option may or may not be much better than putting the money on your credit card.  A debt consolidation loan may charge between 6-21% APR depending on your credit rating.  If you currently have good credit and this tax debacle is a one time thing though, your credit score might be better off if you take out the loan versus racking up a credit card balance with a high interest rate.

Unexpectedly owing money to the IRS, in my humble opinion, definitely counts as an emergency situation.  You may want to consider using your savings, your emergency fund to pay off the debt.  If you can afford to pay it off from savings, it is best to do so and not incur any further penalties or interest.  Any good accountant would tell you the same thing.

There is also the option of selling off investments.  But the problem with selling off investments in an emergency situation is that you may have to take a loss.  But, if you speak to your accountant about this, there are two positive things that may come of it.  The first being that your tax bill is paid off and you are not accruing interest and penalties furthering your debt.  The second being that if you have to sell at a loss up to $3000, you can use this to offset any gains from selling appreciated investments in the same year.  This will minimize next year’s tax bill.  Any losses over $3000 can be carried over to the following year.

You can also contact the IRS about setting up an installment agreement.  You will still face penalties and interest while you are paying off the debt, and you’ll need to make the payments in full and on time every month.  There is also a fee to setting up the plan, as well as a fee to reinstate the plan if you fail to meet your obligations.  One reason you may not want to go this route though is that the government can still file a a Notice of Federal Tax Lien on your property until your debt is paid off, making moving or using your equity near impossible.

The last option is taking out a home equity line of credit if you own a home.  Borrowing against your equity is an attractive option because interest rates tend to be low and the interest may be tax deductible.  The problem is, if you fail to make payments on the loan, you risk losing your house.  The extra interest you may pay by putting it on your credit card may be worth not putting your home at risk.

Don’t feel alone if you fall into this category of owing money to the IRS.  Many people find themselves in this position every year, and every year accountants help their clients try to work things out.  Weigh out all of your options, sit down with a professional, and determine the most suitable option for your position.  But don’t stick your head in the sand like an ostrich and think the problem will just go away; the IRS will eventually come knocking.