Tax Day is coming, but that doesn’t mean you need to start panicking. Ideally, you don’t end up owing the IRS money. Or if you do, hopefully you can easily pay your taxes. But that’s not always the case. The IRS reported that from 2008 to 2010 there was an estimated $458 billion in unpaid taxes.
If you do end up owing money to the IRS after filing your taxes, you may have options. Of course, you can dip into your emergency fund, but if you don’t have one yet, there are other options available for borrowing money when you’re in a pinch.
Everyone’s financial situation is different, so there’s not one right answer for covering your tax bill. We’ll go through the pros and cons of using a credit card, an IRS payment plan, a personal loan, and a few other methods to pay your tax bill.
We should, of course, mention that this article is just a very broad overview of this matter. It’s always a good idea to consult a licensed tax professional for questions and help with tax-related stuff.
Options to Pay Tax Debt
IRS Payment Plans
The IRS offers payment plans and the potential for an offer in compromise (which, for those eligible, may allow you to settle your debt for less than you owe if paying in full would create financial hardship). In some instances, you may also be able to temporarily delay collection until your financial situation improves. Depending on your situation , there can also be set-up fees, application fees, and of course, interest and penalties that continue to add up onto the amount you owe until it’s paid in full.
Another option is to charge your tax expense to a credit card. There is an IRS processing fee if you pay with a credit card which varies depending on the payment system you choose.
One potential issue with paying by credit card is if you fail to pay off your credit card balance when it’s due, then you start accruing interest.
Friends and Family
There’s a reason most people advise against borrowing money from friends and family. Yes, it might be great to borrow money without fees or interest, but it also could affect your relationship.
If you do choose to borrow money from friends or family, be clear about expectations from the beginning. For example, setting up a repayment plan could ensure everyone is on the same page. This is essentially you getting a loan to pay taxes, but without having to go through a bank.
Lines of Equity or Credit
Whereas a loan lets you borrow a set amount of money, a line of credit gives you a maximum amount you can borrow and you make at least a minimum payment each month toward your balance. There are secured and unsecured lines of credit and home equity lines of credit (HELOC), which are tied to your home.
The upside is they typically have lower interest rates than credit cards. The downside is interest rates are often variable and can rise. Plus, if the line of credit is tied to your house, then you could lose your home if you can’t pay it back.
You can take out either a secured or unsecured personal loan, basically meaning secured by collateral or not. A secured loan generally has a lower interest rate, but if you default on the loan then you could lose the asset securing it (like a house or car).
Interest rates on personal loans tend to start out lower than credit cards, but they can vary widely depending on your credit score and finances. The average interest rate on a traditional personal loan is 10.3% to 12.5% for those with excellent credit, and as high as 32% for those with a poor credit history. Additionally, some personal loans charge application and origination fees. SoFi, however, does not.
SoFi offers personal loans with no origination fees. You pay back the loan in monthly payments over a period of two to seven years, though SoFi doesn’t charge fees for paying the loan off early.