First I would like to point out to Andrea that I ended the title with a Question Mark.
Next it is tax time again as my recent posts have mentioned and this year was a bit of a shock to us as we owe quite a bit more than expected. First my wife was on unemployment during last summer (teacher, need I say more?) and no withholding is performed on those checks. Second it seems to me at least that the her regular withholding by the school district is light (lesson here boys and girls is to check with your HR dept before tax time to be sure enough is being withheld if you dont want a big bill come April 15th). Lastly I actually made more money than the year before. Now I was setting aside $125 a week to an ING account for income taxes but this was based on last years and I didnt really think it all out (maybe a bit more on my thinking another time) also I only started doing this mid year. Bottom line is the set aside and what ever the wife can dig up quickly is no where near enough.
So what options are their when off the top you dont have enough to pay the IRS? Well here are some strategies I have going through my mind, of course kicking up anxiety levels as they do.
Refinance the Mortgage
This was my first option to explore. We currently have a mortgage at 6% along with a second at 4.5% So I thought if we could refinance the first to a 4.1% with my credit union which was showing 0 points and take out just enough to cover the tax liability we would be set. Taxes paid, House down to 4%, lower monthly payments and getting the insurance and property taxes back to an impound (been hell with out it). So I went ahead and started the application…
First road block, due to our wonderful credit scores (being sarcastic in case you cant tell) there would be points. This would make the loan cost us $15k to refinance. No problem I have always financed the closing costs before. Well doing that puts us outside the LTV ratio and would only get maybe $2K cash out. Not enough. Second road block, checking for the ballpark value of our home came in at $280K way below my estimate of $350k. This along with the balance on the second puts us in the category of underwater on our home I.E owing more than the house is worth. This wipes out any chance of using the home, even if I agreed to a 7/1 ARM (no closing costs and at 3%) there is no chance of getting it done.
If our home loan was held in some way by Freddie Mac/Mae then we could have been eligible fo the HARP2 program to refinance down but alas we are not.
Payment Plan With the IRS
As long as you file on time you can apply to do installment plans with the IRS. The one nice thing about this option is you tell them what you think you can afford each month. Niceties stop there. You will pay an interest rate of 6% APR on the balance as well as a monthly penalty of 1% of the balance. Oh and there is a set up fee of $43 if what you owe is less than $50,000. So in all reality I would be paying an interest rate lets just say 7% just to make it easy, which really isnt that bad. BUT in my opinion it also puts you on their radar which is not a spot any of us wants to be.
I dont have to mention how totally unfair (I really hate that word though) it is that you have to pay interest when you owe and can’t pay right away, but if they owe you of course no interest and they’ll get it to you when they can.
Credit Cards and Loans
If you read the IRS material about not being able to pay they really push you towards other financing, seems they really want all their money up front. Well with the effort I have been making towards paying off my credit cards I do have room there. Lets see I have my capital one card with $750 available (they even owe me $.68) which I could ask for an increase on, oh wait it has an interest rate of 18% (24% on cash advances). The next card I have been working on has over $4k available but does have a rate of 12.9%. Finally there is the equity line (second) with about a $1k available at that 4.5%
So their would be higher rates than going with the IRS but will be off their radar and going back to square one paying them off again.
The Ole Emergency Funds
I had been good and got my emergency fund up to $10k mark and was still adding a little bit to it each week. Along with what I had set aside it would cover the bill but would be back to the beginning here if an emergency came up. Not a prospect I really like thinking about. Speaking of cash funds I do also have a large cushion in the business account for slow months (which April is looking like). If its slow and cant pay the lease thats were it comes from. If its not there then Im out of business.
Im not even considering this at all but mention it because maybe somebody out there is at that point. If you have a retirement account of some sort you can withdrawal some from there, as long as you are aware of the costs. Most retirement accounts have an early withdrawal penalty and of course taxes. Since it usually goes in tax free when you take it out it is taxed as income, as well as a 10% early withdrawal penalty. Done that before and its not pretty. There are some retirement accounts where you can borrow from your funds and you make payments back to yourself, if you have one of these this might be a good alternative to credit cards.
So What do I do?
Now Im sure there may be other options out there, like borrowing from family, but its not something I’m looking at. The more I think about it I will most likely end up doing a combination of credit and emergency funds so I dont deplete either. If you read my previos post you know I also have property and sales taxes this month to contend with as well. As of right now I’m increasing the withdrawal to the ING account to $175 a week for next year and the wife is going to talk to HR about her withholding. We have other issues coming up and I think this one will be handled fine so we can move on.
How were your taxes this year? What did or would you do if you owed a large amount?