Debt Management

How to handle a surprise tax bill

Changes in deductions, withholdings and income might result in unexpected tax liability; here are your payment options


This tax season might come with a surprising tax bill if you didn’t update your withholdings last year – or your deductions or income changed. From charging a credit card to tapping into home equity, these are your payment options.

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Tax season is stressful enough without having to worry about getting hit with a tax bill when you’re not expecting one. According to a 2018 report from the Government Accountability Office, 21 percent of taxpayers – which works out to about 30 million Americans – may owe Uncle Sam this year.

The reason? They didn’t update their W-4s at work after the 2017 Tax Cuts and Jobs Act took effect.

“The tax withholding tables were adjusted under the new tax act, but not everyone adjusted their withholding appropriately,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, New York.

They saw the benefits of the tax act during the year through larger monthly paychecks, says Zimmelman, “but weren’t holding enough during the year so they’re coming out short now that tax season is here.”

As the April filing deadline draws closer, here’s what you need to know about managing an unanticipated tax liability.

See related: These are the best credit cards to pay your taxes

What can lead to a surprise tax bill

Not withholding enough isn’t the only reason you may find yourself owing taxes.

“Another reason for a smaller refund or owing taxes this year is the loss of certain tax deductions,” says Charles Corsello, president and co-founder of Connecticut-based

Tax reform capped deductions for state and local taxes at $10,000, which hurts taxpayers in high-taxed states, says Corsello. There are also new limits on the mortgage interest deduction, while deductions for moving expenses and certain work-related expenses were eliminated.

Deductions reduce your taxable income for the year. If you normally itemized deductions, those changes could have a big impact on your tax filing.

Other tax bill triggers include:

  • Incorrectly reporting.
  • Incorrectly claiming a dependent.
  • Underpaying estimated taxes.
  • Making a taxable withdrawal from a retirement account.
  • Overlooking key deductions or tax credits you’re eligible for.
  • Math errors resulting from incorrectly entered information.
  • Major life changes, such as getting married or divorced, which mean claiming a different filing status.
  • Selling your home at a substantial profit or receiving an inheritance.
  • Canceled debt reported on Form 1099-C.

How to deal with an unexpected tax bill

Getting a tax bill may not be a big deal when you have cash in emergency savings to pay it. Unfortunately, only 40 percent of Americans could afford to cover a $1,000 emergency in cash, according to a January 2019 Bankrate survey.

So, how do you pay when you don’t have savings? Your options include:

  • Using a credit card to pay.
  • Taking out a personal loan.
  • Tapping your home equity and/or retirement savings.
  • Borrowing from friends and family.
  • Setting up an installment agreement with the IRS.

Each one has pros and cons.

Paying taxes with a credit card

A credit card may be the simplest solution for paying outstanding taxes. It’s the option Ashley Patrick, money coach and owner of personal finance blog Budgets Made Easy, and her husband chose when they had a surprise tax bill last year.

“We took out a 401(k) loan and my husband lost his job shortly after,” says Patrick. “We owed over $6,500 to the IRS because the loan counted as a taxable withdrawal.”

They chose to pay the bill with a card that offered a 0 percent introductory APR for 18 months to avoid owing the IRS even more money in interest and penalties.

“A 0-percent credit card is great as long as you can pay it off before interest accrues,” says Patrick. But, she cautions, first factor in the IRS processing fee.

As of 2019, IRS card processing fees range from 1.87 percent to 1.99 percent. On a $5,000 tax bill, that’s $93.50 to $99.50. Even if you’re earning rewards on what you charge, the fee could outweigh their value.

When looking for a 0-percent APR promotion, consider these card options:

Paying taxes with a personal loan

If you’d rather avoid the credit card processing fee and write a check to the IRS, you could apply for a personal loan instead.

Zimmelman says this generally makes sense when the interest rate and fees on the loan are less than what you’d pay with a credit card or in penalties to the IRS.

As an added benefit, paying the loan on time could potentially improve your credit score.

Your ability to qualify for a personal loan at a low interest rate hinges largely on your credit score.

  • Compare loans from banks and online lenders to see how APR ranges compare.
  • Consider getting a free rate quote but check first to make sure that it doesn’t require a hard pull of your credit, which could ding your score.
  • Pay attention to any fees associated with a personal loan. If the lender adds on an origination fee to get the loan or a prepayment penalty when you pay it off early, that could make it a more expensive way to handle a tax bill.

Think twice about tapping home equity or retirement plans

You could use home equity or your retirement plan to pay taxes if you have either, but tread carefully.

Corsello says the biggest pro of a home equity loan is potentially getting a lower interest rate than you would with a credit card or personal loan.

Home equity loan rates are typically fixed so if you lock in a low rate, you wouldn’t have to worry about it increasing if rates rise.

On the downside, “no tax deduction is allowed for the interest as the loan wouldn’t be used to buy, build or substantially improve your home,” he says. And most importantly, “if you default on a home equity loan, the bank could foreclose on your home.”

In other words, you’re taking more of a risk than you would with an unsecured personal loan or credit card.

Taking money from a retirement account takes your home out of the equation. But there are risks here as well.

“If you pull from a traditional IRA or 401(k) before you’re 59 and a half years old, you’ll incur a 10 percent early withdrawal penalty and owe income taxes on the withdrawal,” says Corsello.

Not to mention, taking money from retirement early shrinks your nest egg. You can make new contributions, but the money you withdrew won’t have an opportunity to grow through the power of compound interest over time.

Zimmelman says a 401(k) loan may be better than a straight withdrawal, since they can carry low interest rates and you’re essentially paying the money back to yourself.

But, as Patrick’s story illustrates, 401(k) loans can add to your financial troubles if you separate from your job.

If you can’t repay the loan in full, “then the outstanding balance becomes a withdrawal and is subject to taxation and penalties,” says Zimmelman.

Get help from friends and family

The advantage of asking friends and family for money to pay your taxes is that they may not charge you any interest. Or, they may charge a much lower rate than you’d pay with a loan or credit card.

But borrowing from people you’re close to can get tricky, says Corsello. “You can potentially ruin relationships with family and friends if you don’t pay time, or just for asking.”

If you’re considering this option:

  • Work out a loan repayment agreement in writing.
  • Spell out when payments are due, how much and what you’ll pay in interest, if anything.
  • Consider giving the person lending you the money something to hold as collateral in the meantime to show that you’re committed to paying back the loan.

Apply for an installment agreement with the IRS

The IRS offers a payment plan option for taxpayers who can’t pay their bill in full. Corsello says this is useful if you’ve exhausted every other way to pay.

There are both short- and long-term installment agreement options:

  • Long-term plans lasting longer than 120 days require a setup fee, which ranges from $21 to $225.
  • The fee you pay depends on whether you set up your plan online, by mail, by phone or in person and whether you pay through direct debit withdrawals or another method.

As of 2019, a reduced failure-to-pay penalty of 0.25 percent applies to installment agreements, plus interest of 6 percent.

If you can’t pay your tax bill on time this year, be sure to at least file your return by the April deadline.

“The failure to file penalty accrues at 5 percent per month on the unpaid balance,” says Corsello. “The cost of not filing is much higher than the cost of not paying.”

The Bank of America content in this article was updated on Dec. 2, 2019.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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