Paying Taxes With Credit or Equity
By Sharon Secor
We all dread April 15, and nobody likes to owe the Internal Revenue Service, because we all know how ruthless they can be when it comes time to collect. If, however, you're having a cash flow problem, there’s no need to worry. You do have options. Before choosing one, though, it is important to review your options carefully and to understand how much each will cost you in the end.
In recent years, it has become popular to use a credit card to pay the IRS when immediate cash is in short supply. In certain, rather limited, circumstances this option can be a good move. It is useful primarily if the cash flow issue really is a short-term matter. That is because, depending on the interest rate associated with the card, if the debt is going to be carried over a long period of time, the interest rates may end up being greater than the potential IRS late fees and other penalties. There is also a courtesy fee charged for using a credit card in lieu of cash to pay the IRS. Paying the IRS with a credit card in times of cash flow problems should, in general, only be done if the debt can be cleared up quickly or if that is the last possible option.
A home equity line of credit (HELOC) or loan may be the better option if you're considering a credit based solution to help you pay the IRS. A home equity line is a credit line, which can be used as needed, based on the equity of your home, or the difference between what its fair market value and what you still owe on the house. A home equity loan is a loan based on that amount. In most cases, the interest rates will be lower than credit cards, particularly is you are careful to select a reputable creditor or lender. There are certain process fees and application fees involved in both, which should be factored in with the interest to determine how much it will cost you to pay the IRS using your home equity.
Sitting down with a calculator and paper is the way to choose between using home equity or a credit card to pay the IRS. you'll need to determine – realistically – how fast you can pay off the debt, tally up the interest rates for each option and the associated fees. With this information, you'll be able to make the best choice for your situation and get the IRS paid off.
If you are short on cash, the IRS does offer other payment options and payment plans.