You’ll have until July 15 to file your 2019 tax return and pay your tax liability.
Although most American taxpayers receive a refund each year when they file their income tax returns, there are always some who end up owing. However, many people who owe money to the IRS don’t always have the means to pay for it right away.
In an unprecedented move to dampen the economic hardship of COVID-19, the IRS has given taxpayers until July 15 to file their 2019 returns and pay their 2019 tax liability and without having to file a tax extension. The due date has also been put off to July 15 for some 2020 estimated tax payments. No penalties or interest will apply during the extended filing period.
Generally, those who owe taxes are either high wage earners who didn’t have enough in taxes withheld from their payroll or self-employed individuals who didn’t make adequate estimated tax payments during the year. This can be a huge problem for those who are unable to pay their liability.
If you are currently unable to pay the tax you owe, this deadline extension gives you additional time to make arrangements. It is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government’s penalties and interest for payments made after July 15, 2020. Here are a few options to consider.
Family loan
Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Credit card
Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee — the fee charged by the credit card company — you will have to pay the taxes due and pay the higher credit card interest rates.
Short-term payment plan
If you are able to fully pay the tax owed within 120 days, you can apply for a short-term payment plan online at the IRS website. You won’t be charged a set-up fee, but will still have to pay penalties and interest until the balance owed is fully paid.
Installment agreement
If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate.
There is a user fee to set up the payment plan. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed.
Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement.
Tap a retirement account
This is possibly the worst option for obtaining funds to pay your taxes. That’s because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing liability. In addition, if you are under age 59 and a half, the withdrawal is also subject to a 10 percent early withdrawal penalty that compounds the problem even further.
The bottom line
The IRS has automatically granted taxpayers a three-month extension to pay their taxes. The extended deadline to pay your taxes is good news for those struggling to afford it right now.
It gives you more time to both file your tax return and pay your tax liability. If you don’t have the money on hand to pay it all now, you can use this extension to find the funds by getting a family loan, applying for an installment agreement or tapping a retirement account, if necessary.
Want to catch up on other tax-related COVID-19 news? Visit our COVID-19 updates page.
