Use your home to pay your tax bill
If the amount on line 76 of your tax return, "Amount You Owe," exceeds the GDP of a small country, don't despair: The IRS will not unleash its attack dogs on you as long as you stay in contact and take the proper steps to pay your tax bill.
What are the steps you can take to pay the Internal Revenue Service (IRS) if you don't just have the cash sitting in your savings account? The best answer for some taxpayers in this situation may surprise you: Take out a home equity loan or line of credit (HELOC).
First things first
Before weighing your options, however, be sure to file your tax return on time, even if you don't know how you'll pay your debt in full. The IRS will send you a bill or notice for the balance due. Extra penalties kick in if you fail to file your tax return on time.
Traditional tax payment options
The IRS does give you several options for taking care of tax obligations. They are:
- The short extension: If you cannot pay the total immediately, the IRS allows you up to 120 extra days to pay in full. No fee is charged for choosing this payment arrangement, but interest accrues until the bill is paid. Simply call the IRS at 800-829-1040 to ask for this option--you will save on the fees associated with an IRS payment plan.
- The six-month extension due to hardship: If the IRS approves your Form 1127 request (Application for Extension of Time for Payment of Tax Due to Undue Hardship), you can get up to six months to pay the tax you owe. In your application, you must include information regarding your hardship and why you can't pay your taxes along with details on your assets, liabilities, income and expenses.
- Installment plans: You can request an installment payment plan for your tax debt. You can propose a monthly payment amount and "self-qualify" by applying online when you have a balance of $50,000 or less. If you owe more than $50,000, you can still apply for a monthly installment plan, but you can't go the online route; instead, file IRS Forms 9465 and 433F.
Paying by monthly installments will cost you, though. First, there's a setup fee of up to $225. Then there's floating interest of 4 percent as of March 2017 --compounded daily--and finally a penalty of 0.25 percent per month that you carry a balance under an installment plan. As the interest rate changes quarterly, you could be looking at a total annual interest rate higher than 6 percent, and that's assuming short-term interest rates don't increase.
- Credit card payment: You can also use a credit card to pay taxes owed, but you'll have to pay a "convenience fee" for the privilege, in addition to credit card interest. The IRS will take payments from Visa, MasterCard, Discover or American Express (up to your credit limit). Depending on your credit card's current interest rates, this could be a very expensive way to clear your tax debt.
Paying with a home equity mortgage loan
A better solution may be the one suggested by IRS Topic 202: "You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution."
Using your home's equity may be the best way to finance your tax obligations, and it could be your only option if you owe more than $50,000.
The fees for setting up a home equity loan or a HELOC are generally minimal if anything. With good credit and adequate equity, you can find HELOCs at less than 5 percent and fixed home equity mortgage interest rates at perhaps 6 percent. As well, rather than being charged interest, the interest you pay may be deductible on next year's returns, too, and you may also be able to get lower payments than the IRS is willing to offer. Talk to a mortgage lender to see what terms you may be able to get.
Don't put your head in the sand
Whichever option you choose, don't ignore the problem. Snubbing the IRS is likely to trigger the filing of a lien against your home--a public record that can trash your credit. You will not be able to refinance your home loan, sell your property or get any sort of government mortgage without first clearing this obligation. It's far less expensive to take care of your tax problem now by using your home equity than to ignore it.