It’s that time of year again—dread tax day. This year two-thirds of Americans are expecting a tax refund. If you are one of the fortunate ones—congratulations this article is not for you. However if you’re part of the one-third who owes Uncle Sam—have you given any thought as to how you are going to pay your taxes?
The IRS offers several ways to pay your taxes: cash, electronic funds transfer, check/money order or credit/debit card. Obviously the government has made it extremely easy to pay them, however some of the ways are more desirable than others.
Cash-If you don’t have a bank account, don’t want to buy a money order and you don’t owe that much money you could, in theory, pop over to your local tax office that accepts cash payments but it seems rather risky to carry huge amounts of money around Philadelphia. They only accept exact change.
Electronic Funds Transfer-This option is free (Unless your bank charges you a convenience fee.) as well as convenient for those people who owe taxes but have money in the bank. You can pay by using the Internet or phone. The only downfall is if you overdraw the account which could cost you bank fees.
Check or Money Order-This option is a good ole standby but what happens if your check or money order gets lost in the mail? Your payment could be late and you may have to stop payment on the check or replace the money order which could cost you more money.
Credit/Debit Card-On the surface, paying by credit card can seem like a great idea if you don’t have the money to pay your taxes or you want to rack up rewards. Unfortunately, the IRS uses a 3rd party processor which charges a processing fee that ranges from 1.89-3.93 percent. Therefore if you owed $1000 and you paid a 2% processing fee that adds up to an additional $20. Plus if you don’t pay the balance in full, you have to worry about paying interest on $1,020. Most experts believe the costs outweigh any rewards you might receive. In addition, you could end up causing yourself additional financial hardship.
What are my options?
Payment plans-If you can’t pay your taxes all at once, your best bet is to make payment arrangements with the IRS. Although there is interest to be paid, it is far less costly than high interest credit cards. Also if you don’t file your taxes because you can’t pay you are looking at huge penalties, interest, additional costs as well as tax liens.
Short-term administrative extension-The IRS sometimes allows individuals an extension if they can pay the full amount within 120 days. This option is often used when individuals are obtaining a home equity loan or 401k loan. The interest rates are typically less than what the IRS would charge although it is not always ideal to incur more debt.
Sell your future payments-Many individuals who have illiquid assets such as future annuity payments are discovering that their best option for paying their tax bill is to sell some of their payments. The rates are significantly lower than credit cards, you will not incur additional fees and your balance can be paid off in full. When you sell your payments you are not borrowing money so you are not incurring new debt and you will be up to date on your tax bill so you won’t get in trouble with the IRS.
No matter which payment method you chose it is important to remember to file your taxes yearly and make timely payments.
If you are interested learning more about how you can pay your tax bill using the proceeds from the sale of your future annuity payments, give Rescue Capital a call today at 866.688.3532.
With banks saying no to small businesses as well as other “high-risk” borrowers there is definite need for alternative financing. One fast growing market segment is the peer-to-peer loan which allows borrowers to sidestep banks to secure loans from peer lenders. Prosper and Lending Club, the two most popular services, managed to generate more than $500 million in loans during the past 5 years. The majority of which were used to pay off debt but many small business owners are using the sites as well.
The way the sites typically work is that borrowers pay a fee to connect with lenders who in return lend anywhere from $25-$1,000 per loan. The lenders are paid interest on the money based upon the degree of risk. In other words, the better the credit score, the lower the interest rate. Lenders pay a servicing fee to the services and receive their payments monthly through the site. Typically these loans are more affordable but there are some pitfalls.
So if you’re looking to pay off debt, which is a better option selling your future payments from your annuity, structured settlement or illiquid asset or obtaining a peer-to-peer loan.
Peer-to-Peer Loan Pros
- Apply in minutes
- Get funded in days
- Potential for lower interest rates
- No court approval process
- Borrowers build credit
Peer-to-Peer Loan Cons
- Not offered in every state
- Loan terms are inflexible
- Monthly payments
- Fees for missed/late payments
- Missed or late payments could hurt credit score
- People with low credit scores can pay as much as a 5% origination fee and as much as 34% interest depending upon the site.
- Credit checks (Not everyone is approved)
Selling Future Payments Pros:
- Get access to your money quicker than waiting for your periodic payments
- No monthly payments to make
- There is no defaulting or affect on your credit score
- You don’t have to sell all your payments
- The discount rate is usually less than what you would pay on the riskier loans or sub-prime credit cards
Selling Future Payments Cons:
- Since selling your future payments is not a loan it has no impact on your credit history
- When you sell some of your future payments, you will be decreasing the amount of money you will receive in the future. Therefore it is important to determine a budget
- When you sell your future payments from a structured settlement you need to go through the court approval process which takes a little bit longer than getting a peer-to-peer loan
According to the Wall Street Journal, 401(k) loans are on the rise. In spite the fact that experts have been advising against such practices for decades, 1 in 7 workers borrowed from their 401(k) plans in 2010. Last month two Senators introduced legislation to ban products that promote withdrawals.
While many people have found these loans tempting because of their low interest rates, they are not without risk. In my blog post from last August, “Which is the best option: 401(k) loans or selling your annuity for cash”, I discuss the pros and cons of 401(k) loans including the penalties for defaulting, losing your job as well as the loss of future retirement income. Like it or not, in these uncertain times there is a real possibility of layoffs. If you can’t afford to pay the money back within 60 days you will have to pay taxes and withdrawal fees leaving you with a bigger financial burden.
Some issues to consider before borrowing against your 401(k) include:
- If you default on the loan, you will have to pay income tax plus an early withdrawal fee on the unpaid balance
- If you quit or lose your job you have to pay the loan back within 60 days or you will have to pay income tax and an early withdrawal fee
- If the amount you are paying in interest on the loan is less than the amount of interest your money was earning through investments you are actually losing money
- You have to pay the money back within 5 years unless you used the money to buy a home
- If you default there is a loss of future retirement income
If you have an annuity it may make sense to sell your payments rather than taking out a loan against your 401k because the discount rate could be less than the fees and taxes if you default. If you don’t have an annuity to sell, reducing expenses is the best route. Withdrawing money from a Roth IRA, selling your life insurance policy as well as unwanted items on eBay are other options to consider.
I was reading a blog post this morning from a divorce lawyer about the different ways to pay for a divorce when you don't have the money. One way was to get your spouse to pay, which is quite difficult. Another way was to borrow from family and friends. The third way was a divorce funding service that allows you to borrow money for lawyer’s fees in exchange for a "reasonable" percentage of your divorce settlement. But what about the people who won't be receiving a hefty divorce settlement? What are their options?
If you have an illiquid asset such as an annuity, structured settlement, life insurance policy, royalties, inheritance, pensions, cell tower leases, mortgage notes, lottery payouts or other period payments; you have options. You can sell all or part of your future payments in exchange for a cash lump sum. You can use the money any way you want ??make car payments, pay medical bills, attorney's fees. It's your money, your way.
Depending upon your payment structure you can defer selling your payments for a few years. This allows you get your cash immediately but your periodic payments won't be reduced until later.
If you have any questions about selling your future payments for cash, call Rescue Capital for your free no-obligation quote at 866.688.3532.