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I recently did a preliminary calculation of my taxes for 2018 and discovered that I am going to owe the IRS about $16,000. I do not have this amount of money in reserve.

My question pertains to the best way to pay this amount. Options as I see them:

  1. Sell an asset to raise the money (such as a car)
  2. Put it on the credit card
  3. Withdraw from 401k to raise funds
  4. Use an IRS payment plan

Unfortunately, #1 isn't a great option (I need my car). So it's going to be something from 2-4:

  1. Credit card. My interest rate on purchases is 18.24% annually. Could work.
  2. Withdraw from 401k. Doing this would put me in the 24% income tax bracket, plus the 10% penalty on the total amount withdrawn, plus the state wants a piece. This amounts to about a 39% hit. This is a terrible idea.
  3. IRS payment plan - I read up a bit on this and couldn't get a good understanding of what the actual costs are. The annual interest rate is 3%, but there are fees and also a late payment penalty of 0.25% per month.
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    Do you have sufficient credit rating to open a new credit card with a 0% promotional APR? 18.24% is completely unreasonable especially on top of 2% up-front for the convenience fee, but a promotional APR can make paying taxes on credit card very reasonable. – Ben Voigt Feb 10 at 1:19
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    Did you have a windfall or are you self-employed and haven't been paying estimated taxes throughout the year? – Hart CO Feb 10 at 2:00
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    Compare 18.24 percent and 3 percent. Compare 39% to 3%. – gnasher729 Feb 10 at 12:44
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    You didn't mention when you will actually have the money (and how solid that plan is). E.g. tax payment on April 15th, money becomes available on April 19th, credit card due on May 10th is a very different calculation from "I have no idea how I'll ever get the money". – user3067860 Feb 10 at 16:15
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    @gnasher729 it's not quite as simple as comparing rates. I also have to consider my ability to pay an additional amount per month. If I were to withdraw the correct amount from my 401k, I'd have nothing to pay off. – Mark Feb 10 at 18:38
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Of the options you've listed, setting up a payment plan with the IRS is the best, cheapest option. The current interest rate from the IRS is 6%. This interest rate is updated once every three months based on the federal short term rate. The penalty charged is an additional 0.25% per month (roughly another additional 3% per year). This works out to a rate of around 9%, which is much better than your credit card or your 401(k).

You may be able to get a better loan rate by talking to a local bank or credit union. If you can beat 9%, then that would probably be a better option than IRS installments.

However, more important than the interest rate you can get is how quickly you pay it off. Dedicate yourself to eliminating this debt as fast as possible. Work as hard as you can to save up as much as possible between now and April 15 to minimize the amount you have to borrow, and keep working at it afterwards until this debt is paid off.

Finally, there must be a reason that you have found yourself with a large tax bill and no money. Hopefully, you know what went wrong so you don't make that mistake again. If not, be sure to figure it out.

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    No details yet, but I had read the IRS will negotiate the time for those in this situation, although there may be a limit, like $10K. Edit - The change for 2018 is the 90% threshold for penalty. That has been reduce to 85%, i.e. if one has paid 85% of final tax bill, no penalty. I can't find a change for payment plans. – JoeTaxpayer♦ Feb 10 at 3:06
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    A loan from my 401k is at 6.5% right now and I would pay that back to myself. – AbraCadaver Feb 11 at 21:46
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Ben is right as far as your options. I'd use the IRS payment plan. You're allowed to use a payment plan every few years I believe. I owed around that amount ($18K) and was able to make $2K a month payments. I don't remember exactly what the fees were, but it wasn't much. That allowed me time to make additional income as I'm always paying $20K a year in taxes.

Pay what you can in the next 2 months and get a payment plan. If you're going to be in the same scenario again, start putting back money as you can.

Best of luck.

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