How to Handle a Surprise Tax Bill
Introduction
As the April 15 deadline to file your taxes approaches, many Americans are understandably worried about getting hit with a surprise tax bill, especially in light of the major changes in tax law recently put into effect. Here’s how to handle a surprise tax bill and avoid unnecessary stress.
Image Description: A stressed individual looking at a tax bill and financial documents.
File Your Taxes as Soon as Possible & On Time
You may think shirking your responsibility to file your taxes on time will delay the pain until a later day. Unfortunately, that is not the case. Penalties and interest start accruing from the moment that you miss your filing deadline.
The interest rate for underpayment on your taxes is 6% compounded daily. Even worse, you’ll get hit with two penalties: one for late filing and another for late payment. Filing as early as possible will help you avoid an unexpected bill and give you more time to pay it off.
Image Description: A person filing their taxes early to avoid penalties.
Enter into a Payment Plan
If you can’t pay your tax bill upfront, the IRS offers three alternative payment arrangements:
- Individual Payment Plan: The IRS could allow you to pay your taxes through a long- or short-term payment plan. Short-term plans are 120 days or less, while long-term plans are over 120 days, referred to as an installment agreement.
- Delay Collection: The IRS may choose to delay collecting on your bill if you do not have the means to pay. You’ll need to apply by contacting the IRS directly.
- Offer in Compromise: This allows you to settle your entire tax debt for less than what you owe but is the most drastic option.
Image Description: An infographic explaining the different IRS payment plan options.
Put Your Taxes on Your Credit Card
While the interest rates on your credit card may be high, paying your taxes on your credit card may buy you some time if you can’t fully pay your tax bill. Weigh whether paying your taxes on your credit card is more financially advantageous than other payment arrangement options.
Image Description: A person paying their tax bill using a credit card.
Review Your Tax Situation & Withholding
Make sure you don’t make the same mistake twice. If you’re hit with a surprise tax bill this year, look back and see what caused it. Then make changes going forward. For many individuals, it may be that you’re not withholding enough from your paycheck. Sit down with a tax advisor to better understand how you can avoid this problem during the next tax year.
Image Description: A person reviewing their tax situation and withholding with a tax advisor.
Conclusion
Facing a surprise tax bill can be stressful, but by filing on time, considering payment plans, and reviewing your withholding, you can manage the situation effectively. Taking proactive steps can help you avoid surprises in the future and ensure a smoother tax filing experience.
Image Description: An infographic summarizing steps to handle a surprise tax bill.
