4. Gamble on the float.
It takes the government an average of five business days to actually cash your check, sometimes longer in mid-April when there are tractor-trailers full of forms in the parking lot of every IRS processing center. If you get paid the day after taxes are due, chances are the check you mailed April 15 won't bounce. But be aware that you're still taking a chance. If your check does bounce, the government considers it as nonpayment, meaning you can expect to cough up a 0.5 percent per month penalty. Plus, your bank is likely to charge you an insufficient funds fee. 3. Dig into your retirement account.
Many 401(k) and 403(b) employer-sponsored plans have provisions that allow you to borrow your own money and pay it back to yourself without penalty. The interest rate is usually low. You can't borrow against your IRA, but you can withdraw the money and use it for 60 days without penalty as long as you redeposit it into the same or a new IRA account. If the money doesn't find its way back into an IRA account within the 60-day period, it will be subject to taxes and penalties. You can only use this 60-day provision once a year. The clock starts ticking on the date you receive the distribution. While it's easy to temporarily withdraw some retirement money, most financial experts advise against it unless it's an absolute last resort. Your retirement nest egg should be a safe haven rather than an emergency fund. Bankrate's 401(k) loan calculator can help you figure the cost of raiding your retirement account. 2. Hit up the folks.
Borrowing from relatives has one big drawback: It can ruin a relationship. But if you only need the money for a short period and dad (or mom or sis) can afford it, ask. And make it formal. A note from you specifying the terms of repayment will make you feel less like a 12-year-old begging for your allowance. If dad says "no," accept the turndown graciously and assume he has a good reason. 1. Pay off the government monthly.
For an initial $43 set-up charge, the IRS will let you pay on the installment plan if you file Form 9465, Installment Agreement Request . The current interest rate is 7 percent annually, but the IRS adjusts it quarterly so it will go up when the rest of the rates head that direction. And while the government payment plan will cut your late payment penalties in half (to one-quarter percent per month), on a $300 balance that saves you less than 50 cents a month. Plus, you have to give the IRS permission to attach your bank account if you fail to pay. Eva Rosenberg, publisher of TaxMama.com, says if you decide to file your return without paying, but you're confident you can pay what you owe before the end of the year, don't file the installment agreement. That way you save the $43 upfront fee and don't hand over your bank account information to the IRS. Instead, Rosenberg suggests you simply file your taxes and send the IRS as much as you can afford at that time. Then save up and send money every time the agency sends you a notice about your balance due. Otherwise, put your tax return on an extension and buy yourself up to six months before IRS starts collections actions. But be very careful. If you're not disciplined enough to pay off Uncle Sam, without the paperwork, if year-end arrives and you find you owe 2005 taxes and you've still not paid off your 2004 bill, you'll be in instant default. In this case, the penalties and interest are brutal. And so that you don't have to worry about coming up with tax cash next year, make sure your payroll withholding amount is correct now. Through this process, wage earners have a percentage of pay taken out each pay period and sent to the IRS where it is credited toward the taxpayer's final tax bill. If you have too little taken out, you'll owe money when you file your annual return. You can adjust your withholding simply by filing a new W-4 with your payroll office. True, you'll have to deal with a slight cut in take-home pay, but you won't have to write a big check to Uncle Sam next April. Jennie L. Phipps is a contributing editor based in Michigan. |