The bumper sticker is true: The IRS does have what it takes to take what you’ve got. But don’t be in such a panic to pay the tax collector that you make an unwise payment decision.
Frantic taxpayers too often come up with imprudent ways to raise tax cash, especially when the April deadline is looming and the Internal Revenue Service bill is relatively small. But even a small amount can quickly balloon if exorbitant interest rates — or other strings — are attached.
Before you make a tax-payment mistake, check out these 10 worst ways to pay Uncle Sam.
10. Get a cash advance against your paycheck.
9. Get a cash advance on your credit card.
8. Pawn your diamond ring.
7. Take out a personal loan.
6. Charge your tax bill.
5. Use your home equity.
4. Gamble on the float.
3. Dig into your retirement account.
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.
1. Pay off the government monthly.
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.