When Life Gives You Taxes: 6 Strategies to Deal with an Unexpected Tax Bill

Americans work hard. We grind, day in and day out, developing our skills and maturing within our chosen careers. In a world of unpredictable inflation and soaring cost of living expenses, we know all too well that nothing in life is free. But it is easy to forget that this saying also applies to your pay.

Whether a self-employed entrepreneur or a wheel in the corporate machine, being blindsided by Uncle Sam with an unexpected tax bill is just one of those life events that occur. Some individuals are prepared for these life hiccups, while others have to sweat it out and devise a strategy. Here are a few ideas to help manage that unexpected tax bill this year.

1. Set up an installment plan.

Depending on your tax situation, you are eligible for several payment options. If you can’t afford to pay in full, pay as much as possible and attach Form 9465 (Installment Agreement Request) to the front of your tax return. According to the IRS, several options include, if you can’t pay in full, a short-term payment plan (paying in 180 days or less) or a long-term payment plan (installment agreement, paying monthly).

To qualify, you must meet these requirements:

• You can apply for a short-term payment plan if you owe less than $100,000 in combined tax, penalties, and interest.
• If you owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns, you can apply for a long-term payment plan.

2. Claim hardship to delay your payment.

If you are having a tough year, you can prove your tax hardship to the IRS for some much-needed relief. You are required to submit details of your financial situation and hardship to the government in a “hardship request” using IRS Form 433A/433F (for individuals or self-employed) or Form 433B (for qualifying partnerships or corporations).

3. Borrow money.

This strategy is a last resort. If you can avoid it, don’t borrow money unless from a trusted friend or family member. However, taking out a high-interest personal loan can create more problems than just owing the IRS money. Debt, particularly high-interest loans, is notoriously difficult to pay back, and if you owe a substantial amount, it could take years. Hard credit checks, late or missed payments and credit utilization all impact your fragile credit score. Safeguarding your credit score is one of the most financially astute moves you can make. All the same, the option to borrow money responsibly does exist.

4. Apply for a postponement to pay due to a natural disaster.

If you happen to reside in an area devastated by a natural disaster, for example, people who suffered hardships due to severe storms and tornadoes in Tennessee in 2023, you may be able to get relief through a postponement to file various federal individual and business tax returns and make tax payments until June 17, 2024.

5. Use your emergency fund.

When you think of an emergency, you probably imagine a hole in the roof, or a sudden medical issue, and the procedure is with an out-of-network doctor and only partially covered by insurance. When dealing with a debt like an unexpected tax bill, you might not consider your emergency fund. However, an emergency fund can be a great option to relieve the stress of this payment.

6. Consult your financial professional.

Consider consulting a financial professional to learn what strategies for paying your taxes would work for you and your financial goals.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Sources:

IRS announces tax relief for taxpayers impacted by severe storms and tornadoes in Tennessee | Internal Revenue Service

Payment Plans Installment Agreements | Internal Revenue Service (irs.gov)

7 Steps for Handling Unexpected Tax Bills - TurboTax Tax Tips & Videos (intuit.com)

How to Pay a Surprise Tax Bill - Experian

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