Short on Cash? Here Are 7 Ways to Pay Off Your Tax Bill

2. The long-term payment plan. An installment agreement is available for taxpayers who owe $50,000 or less in combined taxes, penalties and interest. It requires a setup fee of $22 if you opt to pay via automatic monthly withdrawals from a checking account or $69 for monthly payments by check, money order or debit or credit card. Plus, you must pay accrued penalties and interest on the amount owed until your balance is paid in full. The setup fee can be waived or reimbursed for certain low-income applicants.  

Moreover, “the IRS installment plan is a good way to pay your taxes versus using a credit card,” says Sallie Mullins Thompson, a certified public accountant and certified financial planner (CFP) working in New York and Washington, D.C. “IRS interest rates are likely lower than credit card rates,” she adds.

3. The Offer in Compromise (OIC) Program. If you can’t pay your tax bill in full through an installment plan or if doing so would create financial hardship, you can apply to settle your tax debt for less than what you owe. This program allows you to make an offer for what you can pay, but the amount must be appropriate based on what the IRS considers you can afford to pay.

There is a $205 application fee, unless you meet low-income certification guidelines. You must select one of the two payment options and include the first payment with your offer (the initial payment is waived if you meet low-income certification guidelines). The lump sum payment option requires an initial payment of 20 percent of your offer amount and five or fewer payments within five months of the offer being accepted.

The periodic payment option allows you to make monthly payments to pay off your balance within six to 24 months, and you must make payments while the IRS is investigating your offer. Penalties and interest will accrue as the IRS considers your offer, and initial payments will be applied to what is owed if the IRS rejects your offer. The IRS will investigate your financial situation thoroughly before accepting an OIC.

4. A payment extension due to financial hardship. You may delay payment, without penalties and interest, if you’re facing undue financial hardship or difficulties. To be considered, you must provide a detailed explanation and document the undue hardship and its effect on your livelihood that would result if you pay your taxes by the due date.

7 potential sources for cash

What if working with the IRS has no appeal? “Cash and liquid assets are the first option to be considered to pay the tax bill,” says Michelle Crumm, a CFP at Belle Eve Financial in Ann Arbor, Michigan. For example, you could use money you’ve saved in an emergency fund. Even if you can’t cover your full tax bill, paying a portion can help reduce your failure-to-pay penalties.

If you don’t have enough cash to pay your taxes on time, discuss the options below with a financial professional, Crumm says, and make sure that you understand the tax and financial ramifications.

1. Cash from liquidated investments. You could sell investments or assets that aren’t in retirement accounts while keeping the potential tax implications of the sale in mind, says David Silversmith, a CFP and senior tax manager at EisnerAmper in New York City.

“One shrewd way to raise cash for taxes would be to sell an investment that has an unrealized loss,” Silversmith says. “That way, the sale of the investment will not generate a tax bill for the following year.”

You pay capital gains taxes only on profits from selling investments, not losses. You can use losses to offset capital gains and up to $3,000 in ordinary income, if your losses exceed your gains.

2. Income from required minimum distributions (RMDs)​. If you’re 73 or older, you must withdraw a certain amount each year from any IRA you have. “We have some clients who take their required minimum distributions for tax payments,” says Crystal McKeon, a CFP at TSA Wealth Management in Houston. “You will be filing taxes shortly after you have found out what your RMD for the year will be, so this is a good opportunity to make sure two government responsibilities are taken care of at the same time.”

3. Funds from a Roth IRA. If you have a Roth IRA that has been open for five years and you’re over 59½, you can make withdrawals tax-free, with no penalties. This will provide you with cash you can use to pay your tax bill.

One caveat: If you’ve converted or rolled over funds from a traditional IRA or 401(k) to your Roth IRA less than five years ago, you may incur a 10 percent early-withdrawal penalty.

4. A personal loan, home equity loan or home equity line of credit. Taking out a personal loan may be another way to raise cash, as no collateral is required. Shop around for the most competitive rates and make sure you repay the loan on time because the lender might report your payment record to the three major credit bureaus. If you’re late or default, you may have trouble getting credit in the future.

A home equity loan or home equity line of credit (HELOC) also are options. “These loans use the equity in the home as collateral and often have lower interest rates compared to other forms of credit,” Crumm says.

With a home equity loan, you’ll receive a check for the full amount and repay it in installments over time. A HELOC, meanwhile, provides a line of credit that you can borrow from as needed over a certain period. These options could make sense if you plan to stay in your home and can make the payments; if you fall behind, you risk foreclosure. Shop around for the best rates and terms.

5. A 401(k) loan. If you’re still working, your employer’s 401(k), 403(b) or 457(b) plan may allow you to take a loan of as much as 50 percent of your savings, up to $50,000 within a 12-month period. You won’t incur taxes or penalties, but you’ll have to pay back the money you borrowed from your retirement plan, plus interest, within five years.

However, if you leave your job, you have until the due date of your tax return (for the year you left) to repay the loan. If you can’t, the loan could be considered in default, resulting in both taxes and a 10 percent penalty if you’re under 59½. You’ll also miss out on potential growth of the funds you withdraw.

6. A side job or gig work. “I encourage clients to explore temporary side jobs, gig work or freelancing opportunities to generate additional income specifically earmarked for paying the tax bill,” says Crumm. Pressed for time? It may be worth working a side hustle on nights and weekends to pay your taxes on time and avoid penalties.

7. Borrowing from family or friends. Asking a friend or relative for a loan could be a solution, but it can also create complications. If you decide to borrow money, state the terms of your agreement in writing and stick to them.