Financial Literacy Month: Owe Taxes? Here’s what to do.

Financial Literacy Month (1)

 

If you’re one of those lucky people like me who owe taxes, welcome to the club! Let’s start from the beginning. What does it mean to owe taxes?

The simple answer is for the income you made last year, you didn’t pay the appropriate amount of taxes. So the amount you owe is the difference between what you should have paid and what you actually had withheld from your paycheck. 

How are you supposed to know the amount of taxes that you will owe and how to adjust the amount withheld from your paycheck at work? The easiest answer is that you don’t have to know. The way the IRS decides the amount of taxes each person is responsible for depends on a long list of items. Some of those items include the tax bracket where your income falls, the number of dependents (people you financially support like children and aging parents), the amount of taxable income you receive, and life events such as marriage or a natural disaster. Additionally, the amount you owe can be reduced by certain commitments that include things like student loan interest up to a certain amount. The IRS has a page dedicated to learning more about these life events here.

With all of that in mind, it’s not straightforward to know exactly how much should be withheld so you can be closer to the appropriate amount of withholding and not end up with a huge refund or a owing a huge amount. I recommend using the IRS withholding calculator to walk you through the steps, so you can hopefully have a better tax season next year =)

So let’s dig in to what needs to happen if you find out that you owe Uncle Sam, you do have several options:

  1. Electronic Funds Withdrawal: if you had your taxes prepared by a professional or tax software that offers this option, you can elect to have the money transferred from your account automatically on a scheduled date. All you have to do is make sure the money is available. (This is what I chose to do this year.)
  2. If you need a last minute solution, you have the option to do a Same-Day Wire to send the funds to the IRS. Beware, this may come with a fee from your bank or credit union. There is a form you’ll have to print out to take with you to the bank, if you follow the link above it will take you to the site where you can find it.
  3. If you’re not a fan of online transactions or don’t have a bank account, you can submit your payment via mail using a check or money order.
  4. The Electronic Federal Tax Payment System: The average person probably wouldn’t need to go this route but it can be useful if you run a business.
  5. You also have the option to pay with cash at an approved retail partner of the IRS, but this method requires multiple steps, can take up to a week for your payment to be received and there’s a small fee. But it is an option if you feel this is the best fit for you. (Reminder, it’s best not to send cash through the mail!)

But what do you do if you can’t pay your full tax bill right now? If you don’t have all of the money, you are not doomed! There are some choices for you:

  1. Monthly Installments: You can apply for online payments but if you’re not approved, you can still do installments if you complete some paperwork. To qualify for this option, you cannot owe more than a total of $50,000 as individual and you must have filed a return.
  2. Offer in Compromise: If you’re in a situation where paying the full amount that you owe would be causing a severe hardship but you can pay some of it, you can apply to settle for less than you owe. You’ll need a tax professional’s help and it’s not a free application, but it could be worth considering for those of you who have found yourself in dire straights.
  3. Delay Collection: If you absolutely cannot spare the money to pay your bill due to life circumstances, you may consider this option until you can get back on your feet. If you’re approved for this, you should have serious plans for getting back on your feet and paying off that bill. And if you don’t, reach out so someone can support you! The IRS has the ability to put a lein on all your assets if they deem it appropriate for giving you this chance. What does this mean for you? The IRS will have the right to your property if you don’t pay your debt to them. Should you decide to continue to avoid them, they will be able to up the stakes and levy (confiscate and sell) any and all of your assets to satisfy your debt. That can include vehicles, your home, or even garnishing your wages!

To summarize all of this, if you owe taxes, please pay them. Do not avoid the IRS, as there are options for you if you’re struggling financially right now. If you want to read more about the penalties and IRS collection procedures, this page has good information. Hopefully, you are now armed with some tools to pay your taxes this year and have a better tax season next year. If you’d like, I made a printable resource guide for this process with the link below.

If you do owe taxes, which method do you think is best for you? Comment or Tweet me to let me know!

2016 Tax Payment Guide

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