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What is Your Debt Personality?:

Tax Payments

Part 1

Please note that this section covers United States taxes only.


Sometimes the IRS asks for a little more than you were expecting, or you neglected to file your taxes in previous years and now find yourself drowning in owed taxes.  If you can’t afford to pay out your federal or state owed taxes by April 15th of a given year, you generally have three options:


  • You can pay by credit card, but this will carry the same risks to your credit score as any other charged purchase.  The IRS may also charge an additional fee for paying by credit card.
  • You can apply for a personal loan, this will be reported to the credit bureaus just like any other loan.  If you qualify, personal loans will generally have a lower interest rate than using a credit card.
  • You can pay by small installments, which will typically carry with them a fee or interest charge, but will not be reported to the credit bureau.  Out of these three options, we recommend this one in most circumstances.


Whatever you do, pay your taxes.  Non-payment will result in a tax lien, which will take a large, semi-permanent chunk straight out of your credit score.  Trust us, the consequences of non-payment are much worse than setting up a payment plan.  


The IRS has a negative rep, but they are always willing to accommodate financially struggling taxpayers as long you are upfront and willing to accept their terms.  Finding yourself in a situation where you are unable to pay your taxes is scary, but attempting to ignore the problem will only cause it to escalate in the future.


When you sign up for a tax payment agreement, it will be treated very similarly to any other kind of debt payment.  The IRS will determine a minimum monthly payment toward your tax debt, and if you do not meet these payments you will be at risk of defaulting.  Any future tax refunds will be applied directly to this debt until it is paid in full.  In many cases, the IRS will also waive fees or interest associated with this payment plan once you have paid your debt in full.


Tax Debt Checklist:

  • Know how you will be filing for the coming year based on your employment, marital status, etc., and know when you are expected to file (quarterly? yearly?)
  • Always file your taxes as early as possible.
  • If you are still unable to meet your owed tax payment, opt for the IRS’ payment plan before charging the amount or taking out a loan.
  • If you receive a refund, either allocate this money to debt repayment or include it in your structured budget.  If you treat it like an unexpected windfall it will quickly disappear.  

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