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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.
In 2011, the average federal income tax refund was $2,985 and two-thirds of taxpayers are expecting a tax refund this year. While some individuals will use the money for every day purchases, vacations or big ticket items, here’s a list of more frugal things to do with your money.
- Pay off debt – This one is obvious but paying off your high interest debt can save you money and give you piece of mind.
- Start an emergency fund – Avoid getting in debt by create an account specifically for emergencies that crop up such as home or car repairs, job loss and vet visits.
- Fund your retirement – The longer you contribute money into IRA accounts, the more compound interest you can accumulate.
- Save for the medium term – Save money for future purchases such as a newer car or new hot water heater.
- Start a 529 account – By contributing $2,985 into a 529 account for your child and it grew at a rate of 6.5% annually; you would have about $9,587 after 18 years.
If you are not receiving a tax refund this year or you owe taxes there are still ways to pay off your debt as well as fund your savings. By selling some of your future periodic payments for a cash lump sum to use to pay off your debts or taxes. Once your debts are paid off, use any remaining money to fund your emergency fund. In addition, the money that you previously allocated towards debt should be reallocated towards funding your various savings accounts. Need help figuring out your finances? Visit our helpful tools to get started.