If you are hit with an unexpected tax bill, don’t panic. The strategy that you implement after this unfortunate situation arises ultimately dictates how you fare. Though paying an unexpected tax bill when you were expecting a refund will be quite painful, it is possible to do it without disrupting your financial affairs. In fact, even if the majority of your money is tied up in investments or an emergency fund, you can still pay the tax bill if you implement the right strategy.
Determine if the Bill was Issued in Error
There is a chance the tax bill is simply a mistake. If this is the case, take a look at your tax bill with your accountant. Be sure to bring a copy of your income taxes with you so your accountant can determine whether the bill is legitimate or was issued in error. Your accountant will double-check to ensure your exemptions and credits are completely accurate.
It Might Make Sense to Take out a Loan
Though the prospect of taking out a loan might give you a headache, this option is worth considering simply because you cannot escape a debt to Uncle Sam. Consider either a home equity loan or a line of credit based on securities. This approach has the potential to prove more cost-effective than selling some or all of your securities that comprise your investment plan. Such loans provide rapid liquidity along with flexibility to ensure you can pay your debt in a timely manner. Furthermore, taking out a loan also helps you sidestep potential capital gains taxes that have the potential to be triggered when selling investments that have appreciated in value.
Does It Make Sense to Sell Investments?
Though no one wants to sell their investments, doing so might prove prudent to eliminate an unexpected tax bill. Discuss this option with your investment advisor. It might be possible to harvest certain securities for capital losses. Furthermore, selling other securities might facilitate realigning your portfolio with your overarching investment goals. It is also possible unused realized capital losses might offset subsequent tax bills.
Don’t Try to Fight the Tax Bill Unless Absolutely Necessary
The IRS does not take kindly to offers in compromise unless you are willing to pay associated costs along with a filing fee and meet other requirements. The bottom line is you want to remove yourself from the IRS’s radar as quickly as possibly by paying your tax bill in full. The moral of this story is to choose your battles wisely. Bypass a battle with the IRS and you will be liberated to square your focus on your family and your job rather than fighting a tax bill.
Does It Make Sense to pay With a Credit Card?
An unpaid tax debt will compromise your credit score, triggering fees and making it challenging to pay down the principal. The IRS charges interest yet it won’t be nearly as much as that charged by a credit
card company. When in doubt, discuss all payment options with your financial and tax advisors so you understand all the potential payment forms and act accordingly.
Any opinions are those of the author and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.