Should You Use a Loan to Pay Your Tax Bill? – About Your Online Magazine

SAN JOSE, California, May 4, 2021 / PRNewswire / – Finding out that you owe taxes to the IRS can cause a lot of stress, especially if you don’t have money available to pay in full by the due date. The good news is that the tax term for 2021 has been extended by just over a month to may 17.

This gives you a little more time to earn, save and pay as much of your taxes as possible before tax day. But as that deadline approaches quickly, you may be wondering if it would be a smart move to pay the rest of your tax bill with borrowed funds.

Using a loan to pay your taxes can certainly help you pay on time. But would borrowing from a private lender cost more or less than an IRS payment plan? And what other potential disadvantages need to be considered? Here’s what you need to know.

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Costs of non-compliance with the tax term

There are a variety of penalties that you may be charged by the IRS if you don’t pay your taxes on time. Interest will also be charged on the unpaid amount.

The two most common penalties related to non-compliance with the tax term are failure to file and non-payment. Below, we explain how these penalties are calculated, as well as the IRS interest rates.

Penalty for file failure

This fine is 5% of all taxes that were not paid on the due date of the tax return. If you must $ 3,000 in taxes, failure to file your tax return by the tax day would result in a non-filing penalty. $ 150. The fee is charged monthly for up to five months or until the return deposit.

It should be noted that the filing failure rate applies to an entire month, even if you are less than 30 days late in filing your return. In addition, when you are more than 60 days late, you will be subject to a minimum late filing penalty. This penalty is the smallest of all taxes that you owe or $ 435.

The penalty for late filing is much heavier than the penalty for non-payment (which we will see below). In addition, every day that you wait to file your statement increases your risk of becoming a victim of tax identity theft. For these reasons, it is essential that you make every effort to file your statement on time, even if you are unable to pay your taxes.

Penalty for non-payment

This fine is usually 0.5% of all taxes not paid on the due date of the claim. The fee is charged monthly until the taxes are paid in full or until the charges reach 25% of the outstanding balance.

The monthly fee is increased to 1% after ten days have passed since the IRS issued a final notice of intent to collect or confiscate assets. On the other hand, it is reduced to 0.25% for taxpayers enrolled in a long-term payment plan.

This means that a $ 3,000 unpaid tax bill would result in a monthly non-payment penalty of $ 15 if you had no IRS payment plan or were on a short-term payment plan. If you later adhered to a long-term payment plan, the rate would drop to $ 7.50 a month.

Interest rates

The interest rate that the IRS charges individuals on insufficient payments is the federal short-term funds rate plus an additional 3%. Inside March 2020, the Fed cut its target rates from 0% to 0.25% in response to the COVID-19 crisis. A year later, rates are still close to historic lows.

For this reason, the IRS interest rate is (at the time of writing) at a lower level of just 3% for individuals. Large companies, in turn, are paying an interest rate of 5%. Note that the IRS interest rates are recalculated every quarter.

Advantages of using a loan to pay your tax bill

The first reason why someone would choose to pay their taxes with a loan would be to avoid all of the penalties and interest charges listed above. Using a loan to pay your taxes in full by may 17, you won’t have to worry about accumulating any of those extra costs.

In addition, some people may feel more comfortable owing money to a private creditor than to the IRS. The IRS has a legal right to garnish wages and / or adding encumbrances to personal property after sending some warning notices. Private creditors, however, have much less autonomy in their debt collection efforts.

In the case of a secured loan (such as a home loan), the lender has the right to confiscate the property that was used as collateral if you do not pay. But with unsecured debts, neither wages nor property can be adorned, unless the creditor takes the debtor to court and is able to obtain a judgment.

The disadvantages of using a loan to pay your tax bill

The loan to cover your taxes will help you avoid some charges from the IRS. But it is important to understand that loans are by no means free. They come with their own set of initial and ongoing costs to consider.

In many cases, what a private lender will charge you may be more than what you would pay to the IRS. For example, while the IRS charges a 3% interest rate, the average interest rate on a 24-month personal loan is currently 9.46%, and the average credit card interest rate is 14.75%.

There are also one-time fees to be considered. Personal loans, for example, often come with origination fees and real estate loans normally charge closing costs. Staying with home loans, it is important to understand that they put your home at risk. Failure to meet your monthly payments can result in foreclosure.

Understand the IRS payment plan options

The IRS offers short and long term services payment plans for taxpayers who owe money. The short-term plan is for those who can pay in full in 180 days (temporarily extended from the standard 120 days due to COVID-19). There is no setup fee with this plan.

If you are unable to pay your taxes in full within 180 days, you can request a long-term payment plan. These are installment agreements where you make monthly payments. For these plans, the minimum installation fee is $ 31 (for those who apply online and set up automatic payments), but it can go as high as $ 225.

You are eligible to apply online for a long-term payment plan if you owe less than $ 50,000 and presented all necessary returns. Short-term plans can be applied for online if you owe less than $ 100,000 (in the combination of taxes, fines and interest). If you do not meet these criteria, you must apply by phone or mail.

With any of these plans, you will still have a non-payment penalty until your tax debt is paid or until the total amount paid in the fines reaches 25%. The rate is 0.5% for short-term plans and 0.25% for long-term plans.

Comparison of consumer loans with IRS payment plans

There are three types of consumer debt products that are often mentioned as options for paying a tax bill: home loans, personal loans and credit cards. How does each compare to the IRS payment plans? Let’s take a look.

Installment loans (mortgage and personal loans)

The truth is that neither a home loan nor a personal loan offers a better rate than the IRS. The current 3% IRS rate will simply be difficult for any private lender.

In addition, unless you plan to take out a loan for at least 12 months or more, your initial costs are likely to be higher than what you would pay in monthly IRS fines. Personal loan origination rates typically range from 1% to 8%. And most home loans charge final costs which often equates to 2% of the 5% of the amount borrowed.

If it takes you several years to pay your taxes, an installment loan may make more sense, since your fees are charged only once. Meanwhile, the IRS ‘monthly penalties may actually increase over time. For example, if it took you 72 months (the maximum normally allowed) to complete your IRS installment plan, you would end up paying 18% of the total in fines for non-payment (0.25% x 72 = 18%).

Of the two installment loan options, personal loans would probably be the best choice, as they generally do not require collateral. However, for extremely large tax accounts, a mortgage loan may be your only option for getting the loan amount you need.

Related: Online lenders vs. banks: which option should borrowers choose?

Credit cards

But while installment loans are no less expensive than an IRS payment plan, a credit card with a APR of 0% would certainly be. Taxpayers with a strong I AM® Scores can be able to pay taxes by credit card and receive an interest-free period of 12 months or more.

Credit cards also do not come with origination fees or closing costs. However, you should know that all three payment processors from the IRS charge a credit card fee. At the time of writing, these fees are:

  • PayUSATax: 1.96%
  • Pay1040: 1.99%
  • ACI Payments, Inc.: 1.99%

It is also important to remember that cards with APR of 0% revert to normal interest rates as soon as the promotional period ends. Therefore, you should only use this strategy if you are sure that you will be able to reach a zero balance before this happens.

The Bottom Line

In short periods of time, IRS payment plans are likely to be the cheapest way to pay your taxes. However, applying for a loan may make more sense if you have been in repayment for several years, and your FICO® The score would qualify you for an attractive interest rate.

If you are eligible for one, paying your taxes with a 0% APR credit card may also be worth it. But you must make every effort to pay your balance during the introductory period. To get a better idea of ​​your financing options, you can qualify for, check your credit reports and scores on myFICO.

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Paula Fonseca