Federal Income Taxes and Your Payment Options

Federal Income Taxes and Your Payment Options

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It is a given that you’ll have enough money on hand to pay your income taxes, right? Try telling that to struggling freelancers and small business operators who find themselves pinched when quarterly taxes are due or when the year-end taxes are filed. If you do not have the money to pay your federal income taxes, there are some options to consider including the following.

1. Make installment payments. Notify the IRS if you cannot pay your taxes when due. Provided that your taxes owed come in at $50,000 or less and you haven’t had tax troubles previously, you may find that the IRS is willing to work with you.

Know that federal cooperation in the form of making installment payments comes at a price. Namely, penalties and interest payments. But, it does allow you to take up to three years to make your payments which is certainly better than facing the legal repercussions in not making any payments at all.

To find out if you qualify for payment plan and to apply for the same, you can fill out an online payment agreement application.

2. Just charge it. One option that the IRS pushes is for you to charge your taxes due. It is an easy way to handle a debt, but it may not be the wisest option either.

If you charge what you owe, you’ll pay a hefty interest rate to your credit card provider. With penalties and interest, the IRS will add about 10 percent to your tax bill. Most credit cards charge well above that amount, so dismiss this option if you’ll spend more by charging it.

3. Consider an offer in compromise. Perhaps your tax debt is so deep that you simply cannot afford to pay it off. The IRS may listen to your “offer in compromise” where they allow you to settle your debt for less than the amount owed. You must demonstrate a financial hardship to qualify.

The IRS will accept an offer in compromise when it finds that “…the amount offered represents the most we can expect to collect within a reasonable period of time.” That means demonstrating your ability to pay, and taking into consideration your income, expenses and your asset equity. Before you seriously consider this option, the IRS encourages you to use the Offer in Compromise Pre-Qualifier tool first.

Dire Straits

Perhaps your financial position is so critical that bankruptcy is the only way out. In that case you may be able to reduce or spread out your debt through Chapter 7 bankruptcy or eliminate what you owe completely through Chapter 13 bankruptcy. Talk with a bankruptcy attorney to explore your options.

See AlsoHow Charitable Donations Reduce Your Tax Burden

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