Source: 401kcalculator.org via flickr,
You've entered all of your income information, and made sure to claim every deduction and credit you're entitled to... and you owe the IRS money! How can this be?
People end up owing taxes for a variety of reasons, such as having business income, selling investments for gains, or simply not choosing to have enough money withheld from their paychecks. This is also common among people who have more than one job, because your employer withholds taxes based on each individual job, and the two incomes could combine to put you in a higher tax bracket.
Nobody wants to write a big check at tax time, but it's fairly common. According to TurboTax, about 75% of taxpayers receive a refund each year, meaning 25% will have to pay. And you have two basic options: Pay now or pay later.
Pay it now (or at least before April 15)If you can, you should pay the IRS before the April 15 filing deadline. And you don't have to wait to file in order to pay. You can actually submit your tax return without payment, as long as it's made in full by April 15.
The IRS allows you to mail in your payment via check or money order, and an address will be provided when you file your return, whichever method you choose to use. In fact, if you owed money last year, the IRS may even send you a special payment envelope to use in anticipation of you owing money again.
If you want to pay now, but don't have the cash sitting around, the IRS takes credit cards. According to the IRS website, there are six payment processors that can accept tax payments, with credit card fees ranging from 1.87% to 2.35% of the payment amount.
If you have good credit, it may not be a bad option to apply for a new card with a 0% introductory APR. These deals now exist with terms of up to 18 months, and it could really ease your tax burden to spread the balance over time. I actually did this last year when I owed money, and it turned the large tax burden staring me in the face into a manageable series of smaller payments.
Pay it later with a payment plan Another option available to taxpayers who owe money is to establish a payment plan. For individuals who owe less than $50,000, this can be done by filling out IRS form 9465, Installment Agreement Request, or online with the Online Payment Agreement Application.
You can stretch out the payment plan for up to 72 months; but to avoid paying as little in the way of interest and penalties as possible -- which start accumulating after April 15 -- you should pay as much as you can up front, and as much as you can reasonably afford to pay each month.
Beware of filing an extension for the wrong reasonsBy submitting IRS form 4868instead of your tax return, you can be granted a six-month extension, making your tax return due on October 15 instead of April 15. However, it's a common misconception that this process delays the date your taxes are due.
Unfortunately, this is not the case. The purpose of an extension is so you have extra time to gather information for your return, so that you can file a complete, accurate return without getting penalized for filing late. However, any taxes you owe are still due on April 15, and you can be charged interest and penalties on the unpaid balance. If you file for an extension, you still need to pay the estimated amount of taxes you owe before the April 15 due date.
You will owe interest on any unpaid balance, starting from April 15, no matter what your reason for not paying. And you may be assessed a late-payment penalty of 0.5% of the outstanding balance for every month it remains unpaid, up to a maximum of 25%. The late-payment penalty can be waived if you can show "reasonable cause" for not paying on time; but you shouldn't count on it.
How to prepare for next year If you owe taxes this year and there's no reason to suspect you won't owe money next year, the IRS can require you to make estimated tax payments every three months. The current tax law states that you'll have to make estimated tax payments if you expect to owe tax of $1,000 or more; so if this applies to you, you'll be expected to make estimated payments.
Generally, the amount you owed this year will be divided into fourths, and you'll be expected to pay that much four times throughout the year. While this may seem like quite a burden throughout the year, it's better to prepare a little bit at a time rather than get hit with a massive tax bill all at once.
The article What to Do If You Owe the IRS Money? originally appeared on Fool.com.
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