Albert Einstein once quipped, “the hardest thing in the world to understand is the income tax.” Everyone must file an income tax return, but it’s certainly not the easiest process to understand. While some may boast about how their tax return paid for a family vacation or a new pair of shoes, for some, tax time could actually mean owing money to the IRS.
Keep reading to learn about your options to pay your taxes. And, if you're getting a tax refund, learn how to get the most out of it.
If it turns out that you owe the IRS, you aren’t alone. Nearly 60% of Americans are projected to owe federal taxes for 2022. There are fewer people unemployed, which means more people have to pay more income tax. Plus, many of the tax credits and government payments offered during the start of the pandemic have expired.
If you owe taxes for 2022, consider what steps you might take to ensure you don’t owe the IRS for the 2023 tax year. You might consider increasing the withholdings from your paycheck to decrease the amount you owe or adding more money into your savings throughout the year in case you end up owing the IRS. It also might be worthwhile to revisit your household budget and see if you can put more money aside.
If you need money when it comes time to file your income tax, you have some options:
You can always borrow money to pay your taxes. A personal loan may help you secure the cash you need to make your tax payments. Before you commit to a personal loan, assess the impact a loan will have on your monthly budget.
If you own your home, you might consider taking out a home equity loan or home equity line of credit (HELOC). Since you would be converting the equity in your home to pay your taxes, you might consider using any extra money for a home improvement project. Check the rates for a home equity loan or HELOC before you decide to take this route.
Yes, the IRS does take credit cards. You could put your tax payment on a credit card, but be sure you are prepared to carry the additional credit card debt. The interest rate on credit cards tends to be higher than for a loan.
You could convert some of your retirement savings into cash to pay your taxes. Of course, borrowing from your 401(k) or individual retirement account (IRA) means you will have less money available for retirement. You also will likely have to pay penalties for early withdrawal. And since IRAs and retirement savings are tax-deferred, you will have to pay taxes next year on money you withdraw this year.
You may need to use your emergency fund to pay your taxes. That’s why you have one.
With fewer tax breaks and other economic changes, many taxpayers can expect smaller refunds when they file their 2022 taxes. If you are fortunate enough to get a tax refund, consider how to make the most of the windfall.
You can use your tax refund as seed money if you don’t already have an emergency fund. Or you can add to an existing emergency fund.
Receiving unexpected money is always a good reason to save for a rainy day. You have different savings options, such as a savings account or money market account. You might also consider using a certificate of deposit (CD) ladder. When you ladder CDs, you divide your money with CDs with different terms, such as three, six, nine, and 12 months. That way, you get a regular payout every quarter—and you won’t be tempted to spend it all at once.
Use your refund to add to or open an IRA or some other retirement fund. You could reduce your taxes for this year using last year’s refund.
If you are carrying credit card debt, an auto loan, or some other form of debt, use the refund to reduce your debt burden.
If you invest wisely, you can see a good return. You can buy stock, invest in mutual funds, or put your money in bonds. Talk to an investment professional to review your options.
If you need help paying your taxes or determining the best way to take advantage of your tax refund, the financial professionals at iQ Credit Union can help you review your options. Contact iQ Credit Union to schedule an appointment or visit a local iQ branch. We are always here to help.