What should you do if you can’t pay your taxes? Should you still file your tax return?
What are the reasons you may not be able to pay your taxes?
There are several reasons you may not be able to pay your taxes this tax season. These include the following:
- Incorrect withholding at your W-2 job
- Failing to pay estimated taxes on business, self-employment, or investment income
- Penalties for early IRA or 401(k) withdrawals if you lost income or had unexpected expenses
- Ineligibility for expected tax credits or deductions
How would you know you can’t pay your taxes if you haven’t filed?
You may have used a tax calculator to estimate what you will owe. You may also have income that you haven’t paid any taxes at all on.
Should you file your tax return if you can’t pay what you owe?
Yes, you should always file your tax return once you’re sure it’s accurate. Your payment is due on the due date of your return not when you file. Not filing doesn’t give you extra time to pay. Filing early doesn’t mean you have to pay sooner.
So if you’re an individual filer who files in January, you still have until April 15th to send in your payment. Similarly, if you file late, you’ll get charged interest and penalties based on the return due date not the date you filed.
The most important thing to understand is that there are additional penalties for filing late. You’ll pay extra penalties if you can’t pay on time and don’t file until you can pay.
Should you make a partial payment?
Yes, you should always pay as much as you can. IRS interest and penalties are based on the current amount you owe not your total taxes for the year. Just like a credit card balance, you can save interest by making partial payments when you’re able to rather than waiting until you can pay off the entire amount.
Are there other ways to pay?
The IRS accepts credit cards. Once you pay with your card, the IRS considers your taxes paid in full. It doesn’t matter if you haven’t paid the credit card company off yet, since that’s between you and the credit card company. If you get a good promotional offer with a low interest rate, paying with a credit card may even be cheaper than other options.
You may also be able to sign up for a payment plan (installment agreement) directly with the IRS. The major downside is that interest and late payment penalties still apply on your outstanding balance. There is also a setup fee. Finally, if you miss a payment or pay other taxes late, you may go into default on your installment agreement.
Can you request an extension?
Generally, the IRS only allows extensions of time to file but not to pay. Even if you get more time to file your tax return, you still need to pay by the original due date. For example, if you request the automatic extension to file by October 15th, you still need to pay by April 15th.
Occasionally, the IRS will extend payment deadlines for groups of taxpayers such as those in federally-declared disaster areas such as hurricanes.
If you know you’re going to owe more than you can pay, don’t wait to file your tax return. You can avoid the late filing penalty even if you can’t avoid the late payment penalty.