One of the worst things about paying taxes is that you often don’t know what your tax bill is going to be until right before the deadline.
Some years, you learn that you’ve paid more than enough taxes thanks to withholdings and estimated tax payments. You get a tax refund. Great!
Some years, you discover that you haven’t been withholding enough cash from your paychecks—which means you have a tax bill due on April 15. Less great, especially if you don’t have enough money in your bank account to cover the tax burden.
This year, thanks to the Tax Cuts and Jobs Act, many Americans found themselves faced with an unexpected tax bill. As The Washington Post reports:
Millions of Americans filling out their 2018 taxes will probably be surprised to learn that their refunds will be less than expected or that they owe money to the Internal Revenue Service after years of receiving refunds.
This isn’t necessarily because the new tax laws raised our taxes. Although some people did end up paying more taxes in 2018, thanks to various deduction changes, more people ended up with a surprise tax bill thanks to changes to the withholding tables.
In other words: since fewer taxes had been withheld from their paychecks throughout the year, they owed more taxes on April 15.
“There’s a difference between taxes and your refund,” said Joseph Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center at the Urban Institute. “People generally got a piece of their tax cut last year gradually in the form of lower withholding on their paychecks.”
Getting $20 extra in your paycheck every few weeks is nice, but if that money is long spent by the time you realize you owe the IRS additional cash, what should you do?
Well, the IRS is happy to take payments by installment—and MarketWatch has an excellent summary of the process:
[…] you can usually arrange to borrow from the IRS by requesting permission to make installment payments on your tax bill. Do this by filing Form 9465 (Installment Agreement Request) with your 2018 return — either on April 15 or by Oct. 15 if you extend.
Form 9465 is pretty simple. (Really.) You suggest your own terms. For example, if you owe $4,000, you might offer to pay $200 on the first of each month. Approval is generally automatic if you owe $10,000 or less (not counting interest and penalties) and propose a repayment period of 36 months or less. You are supposed to get an official answer within 30 days of filing Form 9465, but it sometimes takes a bit longer. (After all, this is the government.) On approval, you’ll be charged a $31 “user fee” if you apply online and agree to have payments automatically debited from your bank account.
Yes, you’ll be charged interest on any tax owed, but it’ll only be 0.25% a month—probably lower than what you might pay if you used credit cards or took out a personal loan to cover your tax burden.
Once you and the IRS enter into an installment agreement, you have to stay current on future taxes. That is, you can’t pay 2018’s taxes via installment and then request to pay 2019’s taxes via installment as well. Do what you need to do, whether it’s working with your HR department to update your withholdings or setting aside extra money for freelance estimated taxes, to make sure you can pay 2019’s tax bill in full.
Have you ever taken the installment option on your taxes? Are you planning to take it this year? If you did, let us know how it worked for you—and whether you’d recommend other taxpayers follow this advice.