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Should You Use a Loan to Pay Your Tax Bill?


SAN JOSE, Calif., May 4, 2021 /PRNewswire/ — Finding out that you owe taxes to the IRS can lead to a lot of stress, especially if you don’t have the cash on hand to pay in full by the due date. The good news is that the tax deadline for 2021 was extended by a little over a month to May 17th.

That gives you a little more time to earn, save, and pay off as much of your taxes as you can before tax day. But as that deadline fast approaches, you may be wondering if it would be a smart move to pay off the remainder of your tax bill using borrowed funds.

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

For more loan and credit education, visit myFICO’s blog at https://www.myfico.com/credit-education/blog

Costs of Missing the Tax Deadline

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

The two most common penalties related to missing the tax deadline are failure-to-file and failure-to-pay. Below, we explain how these penalties are calculated as well as IRS interest charges.

Failure-to-File Penalty

This penalty is 5% of all taxes that are unpaid as of the tax filing due date. If you owe $3,000 in taxes, failing to file your return by tax day would result in a failure-to-file penalty of $150. The fee is charged monthly for up to five months or until a return is filed.

It should be noted that the failure-to-file fee applies for a full month even if you’re less than 30 days late on filing your return. Also, once you’re more than 60 days late, you’ll be subject to a minimum late filing penalty. That penalty is the lesser of all the tax you owe or $435.

The late filing penalty is much heftier than the failure-to-pay penalty (which we’ll look at next). Additionally, every day that you wait to file your return increases your risk of becoming a victim of tax identity theft. For these reasons, it’s critical that you make every effort to file your return by the deadline, even if you’re unable to pay your tax bill.

Failure-to-Pay Penalty

This penalty is generally 0.5% of all taxes that are unpaid as of the tax filing due date. The fee is charged monthly until the taxes are fully paid or until the charges reach 25% of the unpaid balance.

The monthly fee is increased to 1% once ten days have elapsed since the IRS has issued a final notice of intent to levy or seize property. Conversely, it’s reduced to 0.25% for taxpayers who are enrolled in a long-term payment plan.

This means that a $3,000 unpaid tax bill would result in a monthly failure-to-pay penalty of $15 if you weren’t on any IRS payment plan or were on a short-term payment plan. If you later joined a long-term payment plan, the fee would drop to $7.50 per month.

Interest Charges

The interest rate that the IRS charges individuals on underpayments is the short-term federal funds rate plus an additional 3%. In March 2020, the Fed cut its target rates to 0% to 0.25% in response to the COVID-19 crisis. A year later, rates are still hovering near these all-time lows.

For this reason, the IRS interest rate is (as of writing) at a rock-bottom level of just 3% for individuals. Large corporations, meanwhile, are currently being charged an interest rate of 5%. Note that IRS interest rates are recalculated every quarter.

Advantages of Using a Loan to Pay Your Tax Bill

The first reason that someone would choose to pay their taxes with a loan would be to avoid all of the penalties and interest charges listed above. By using a loan to pay your taxes in full by May 17th, you won’t have to worry about accruing any of these extra costs.

Additionally, some people may feel more comfortable owing money to a private lender than to the IRS. The IRS has the legal right to garnish wages



Read More: Should You Use a Loan to Pay Your Tax Bill?

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