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An expensive income tax bill can cause a lot of financial stress, especially if it’s unexpected.
If you don’t have enough savings, a personal loan can seem like a good way to settle the bill, but you may have cheaper options.
What happens if you can’t pay your income tax bill
The IRS charges you interest and penalty fees if you don’t pay your taxes by the deadline.
Interest: The IRS charges interest on the unpaid tax bill, equal to the federal short-term rate plus 3%. The interest rate can change each quarter but has most recently been set at 7%.
Fees if you file but pay late: The failure-to-pay penalty is initially 0.5% of the unpaid amount per month, with the ability to increase to 1%. This penalty fee is capped at 25% of the unpaid tax amount.
Fees if you don’t file: If you owe taxes but don’t file your return at all, you’ll be charged 5% of the amount owed monthly, up to a maximum of 25% of the unpaid amount. Those who are over 60 days late could also owe a late-filing penalty of either $525 or 100% of the amount owed, whichever is less.
If the IRS is charging you both the failure-to-pay fee and the failure-to-file fee, the failure-to-file penalty will be reduced by 0.5%. The failure-to-file penalty will max out after five months, but you’ll continue to get charged the failure-to-pay fee if you still haven’t paid your tax bill.
If you don't pay for a prolonged period, the IRS can resort to more severe actions, including wage garnishment, bank account seizure and property seizure.
Fees if your payment bounces: If you make a tax payment but don’t have enough money in your account to cover the amount, you face a 2% penalty fee if your tax bill is $1,250 or more. If you owe between $25 and $1,250, the fee is $25. If you owe less than $25, the fee is equal to your payment amount.
» MORE: 10 ways to pay your taxes
Can you use a personal loan to pay taxes?
You can use a personal loan for a wide variety of reasons, including paying a tax bill. Some lenders prohibit using a personal loan for certain expenses, like higher education costs or investments, but taxes generally aren’t among them.
But should you use a personal loan to pay taxes?
A personal loan may seem appealing because it can make a large tax bill more manageable by spreading the cost over time. However, interest rates can be high — some lenders charge annual percentage rates up to 36%. So it’s worth your time to consider the other options listed at the end of this article, like the IRS repayment plan or a 0% APR credit card.
You also might want to rethink using a personal loan to pay taxes if you only owe a few hundred dollars. Personal loan amounts typically start around $1,000.
Pros and cons of using a personal loan to pay taxes
Pros
Same- or next-day funding may be available.
Will avoid IRS penalties.
Fixed monthly payments.
Cons
APRs may be high.
Origination fees (up to 10% of the loan) may be deducted upfront.
Missed loan payments can damage your credit.
Will increase your debt-to-income ratio.
Tips for using a personal loan to pay taxes
Here are some things to consider if you’re thinking about getting a personal loan to pay your income tax bill.
- Determine how much you need to borrow. An origination fee could lower the amount of money you’ll actually receive from a personal loan since lenders typically deduct this fee upfront. Make sure you factor this in when requesting your loan amount.
- Pre-qualify with multiple lenders to compare offers. Pre-qualifying for a personal loan typically only involves a soft credit check, which means there’s no credit score impact. When you pre-qualify, you get to see your likelihood for loan approval and a preview of your estimated rates and terms.
- Make sure you can afford the monthly payments. Lenders will often share your estimated monthly payment amount when you pre-qualify, but you can also use a personal loan calculator to estimate the monthly cost. Compare this amount against your budget to figure out if you can comfortably afford the loan.
- Compare personal loan costs to alternatives. A personal loan may not be your only option if you have a tax bill that you can’t immediately cover. See additional options below.
🤓 Nerdy Tip
If you’re not able to pay your tax bill and can’t make other arrangements to cover the cost, the IRS may let you settle your debt for less than you owe with an “offer in compromise,” though it can be difficult to qualify for one. Use this tool to check your eligibility for an offer in compromise. Alternatives to using a personal loan to pay taxes
IRS payment plan
An IRS payment plan is a deal you make with the IRS to pay your tax bill over time. There are short-term IRS payment plans for taxpayers who owe less than $100,000 and can pay the balance in 180 days. There are also long-term payment plans for those who owe less than $50,000 but need more than 180 days to settle the bill.
Requirements for IRS payment plans
To enroll in an IRS payment plan, you need to fill out the online application or contact the IRS directly. For a long-term plan, you could submit an installment agreement request (Form 9465) instead. There are multiple ways you can make payments, including via a bank account, debit card, credit card, check, money order or cash at a retail partner.
Benefits and downsides of IRS payment plans
IRS payment plans let you spread the amount you owe into smaller payments without involving a third-party lender. Interest and penalties on your unpaid tax bill still accrue while you’re on an IRS payment plan. However, if you file on time, the late-payment penalty drops from 0.5% per month to 0.25% per month when you’re enrolled in a payment plan.
There’s also a setup fee involved with setting up a long-term plan: $22 if you enroll in an automatic withdrawal plan or $69 if you don’t. Low-income taxpayers may get some or all of those fees waived.
0% APR credit card
A 0% APR credit card may be an affordable way to pay an expensive tax bill over several months, as long as you pay the balance before the card’s zero-interest promotional period ends — typically the first 15 to 21 months.
» MORE: Best 0% APR credit cards
Requirements for 0% APR credit cards
Most credit card companies require borrowers to have good credit (a score of 690 or higher) to qualify for a 0% APR credit card. An issuer may also consider factors like borrowers’ income and employment status.
Benefits and downsides of 0% APR credit cards
Using a 0% APR credit card can be one of the least expensive ways to cover a tax bill, provided that you pay off the entire bill before the promotional period ends. Whatever balance you carry over after that period can be subject to a double-digit interest rate.
You’ll also have to pay a processing fee — typically less than 3% of the amount owed — if you use a credit card to pay your tax bill.
401(k) loan
If you have a retirement account through your employer, you could consider getting a 401(k) loan to cover the tax bill. You can typically borrow up to half of your vested account balance or $50,000, whichever is less, for up to five years.
Requirements for 401(k) loans
To take out a 401(k) loan that would fully cover your tax bill, your vested balance must be at least double that amount, since you can only borrow up to half of your vested account balance. You must be able to make quarterly payments.
Benefits and downsides of 401(k) loans
A 401(k) loan can be a quick way to access needed funds. There’s typically no credit check, and your APR is likely to be lower than with a personal loan. Also, the interest you pay goes back into your retirement account.
However, if you lose your job or leave the company, you may have to repay your loan immediately or be subject to early withdrawal penalties. You’ll also hinder potential growth of your investment portfolio if you take money out to cover your tax bill.
Home equity loan or line of credit
A home equity loan and a home equity line of credit (HELOC) are both types of secured financing where you use your home as collateral.
A home equity loan is a type of installment loan where you get a lump sum of money at a fixed interest rate. Monthly payments are consistent throughout the length of your loan term.
A HELOC is a type of revolving credit you can continuously draw upon until you reach your credit limit. Interest rates and monthly payments are usually variable.
Requirements for home equity financing
To qualify for home equity financing, you need to be a homeowner and typically have at least 85% equity in your home. You usually need an appraisal to confirm the current value of your home.
You also must meet a lender's credit and income requirements, but they’re generally softer than unsecured personal loan requirements.
Benefits and downsides of home equity financing
Home equity financing often comes with lower interest rates than unsecured loans. But if you default on your home equity loan or HELOC, you could lose your home. It also takes more time to get money with home equity financing, because the underwriting process includes more steps, like a home appraisal.
» MORE: Compare home equity loans
Family loan
If you have a trusted family member who can afford to help you out, consider asking for a family loan. This borrowing method may feel informal and it can be awkward to ask loved ones for money, but this can be a quick, low-cost way to get the funds you need to cover a tax bill.
Requirements for a family loan
A family loan doesn’t have the strict requirements that a formal lender may have. This makes family loans ideal for people who may not have a good credit score or meet other requirements from a financial institution.
Even though a family loan is more informal, it’s a good idea to draw up a loan agreement so both parties are clear on how the money will be repaid.
Benefits and downsides of a family loan
A family loan can come with little to no interest, making it a cheap way to borrow money. It can also be a quick way to borrow if your loved one has an easily accessible source of cash.
The big risk in using a family loan is damaging your relationship with your loved one if you aren’t able to pay back the money. Make sure you have a plan for making payments and discuss in advance what would happen if you aren’t able to pay.
» MORE: The best ways to borrow money
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