It’s tax time, and that means that you are probably getting your paperwork together, and preparing to pay what you owe. Even though there are many households who don’t pay federal taxes, and you might be one of them, you might find that you have to pay state taxes. If you already have your taxes withheld, it makes things easy. Tax withholdings as part of a regular job simplify the process. You might even have a refund coming!
However, some of us are not in such a position. I have a home business. I pay quarterly estimated taxes, which helps on the federal end, but my state taxes are often due in one big lump sum. Plus, since my business has grown each year since I started it, I usually owe some federal taxes — and, of course, the first quarterly payment is due the same day as the payment for the amount I underpaid by.
No matter the reason, even with what you thought was good planning, you could find yourself trying to come up with the money you need to pay federal or state taxes. Here are some things you can try to meet your obligation:
- Raid the emergency fund: I admit that I have done this in the past. In fact, I’m doing it this year. After my basement flooded, I had car repairs and some other unexpected expenses, all within the space of a couple of months, the money I had been saving up for my state taxes was pretty much gone. I am tapping into the emergency fund for the state taxes, and replacing the money as quickly as possible.
- Withdraw from retirement: You can also withdraw from your retirement account. You can borrow from your account, with a plan to pay it back, or you can take an early distribution. You can withdraw your contributions to a Roth IRA without penalty at any time. However, you can’t replace the earning power of that capital in your retirement fund. So be careful. And remember that you might have additional taxes and penalties to pay.
- Use a credit card: If you have room on your credit card, it might be tempting to use it to pay what you own in taxes. However, using a credit card to pay taxes can be a problem (read why it may not be a good idea). If you get the rewards points and can pay off the balance immediately, then it might not be so bad. But what if you have to carry a balance? The interest charges can quickly override the value of your rewards. Think twice before you swipe your card.
- Installment agreement from the IRS or state tax commission: If you are really having trouble paying your taxes, sometimes your best choice is to go to the source. I researched my state tax commission’s policy on installment agreements. I would have to pay a late penalty, and interest, but it would still be less than putting it on my credit card, and it wouldn’t set my retirement efforts back. The IRS also offers a very reasonable installment agreement option, with a fee for the loan, and a competitive interest rate. If you owe less than $25,000, you can apply for the agreement.
Before you decide how to pay your taxes, consider your options. If you have ready cash, you can right a check, or even arrange for a withdrawal from your account. Many people pay their quarterly federal taxes automatically. Consider what works best for you, and what is likely to cost you the least in the long run.
Photo credit: tizzie