7 Practical Strategies for Handling Unexpected Tax Bills

Paying taxes is something most people would rather avoid, but it’s especially difficult when you receive a costly, unexpected tax bill. That surprise can leave you scrambling to decide what to do and how to pay.

However, you may be able to use the resources you currently have to pay this unexpected tax bill and avoid wasting money. Here’s a look at seven strategies to consider when facing this situation.

As a first step, you may want to review your return to ensure you didn’t make a mistake. Errors are common when entering numbers into tax software, so reviewing everything line by line can be especially helpful — or even having a professional do so. 

You may also want to compare last year’s return to this year’s return.

Consider maxing out your retirement accounts, which will help reduce your debt. You can start an IRA until your filing deadline, and the deduction you receive will reduce the amount owed.

Even if you have already filed your return without maxing out your retirement accounts, you can still amend the return if you make timely contributions.

It may also be very helpful to go back and review your deductions and credits. It can be rather easy to forget something and pay more than you need to with your tax bills. 

You might find something you missed, such as energy-efficient upgrades, business costs, or child credits.

You could also look into any credits for large expenses you had throughout the year that may come with tax incentives. Medical expenses, alimony payments, or business use of your home or car are among the many things that can ultimately reduce your tax liability.

You may be tempted to not file because you can’t pay. This could turn out to be a huge and costly mistake, and you may face separate and larger penalties if you don’t file.

You could be penalized for needing to file later, or the IRS may think you’re trying to evade your taxes. You’ll probably find filing and figuring out your options easier and less expensive.

It may be best to ask for a payment plan. Late payment penalties are based on your outstanding balance, not the original bill. That means you can try to pay some of what you owe and ask for a payment plan.

Options include short-term and regular payment plans and an offer in compromise. This compromise means agreeing to pay less than the total amount owed. This may not be an option for everyone.

You could try to use the resources you have on hand to pay your unexpected tax bill, which might mean tapping into your emergency fund or savings account. You might have enough in the fund to cover your tax bill and then work to replenish it quickly.

You may also want to examine your investments — it might be possible to sell a losing investment to help with your taxes. Lastly, you could consider taking out a loan, but remember that this could hurt your future finances.

If you were looking for a sign your finances may need help, perhaps the unexpected tax bill is it. After all, if you can’t afford to pay the tax bill, it may mean your finances aren’t in great shape.

But rather than throw your hands up in despair, let this be a sign to create a detailed financial plan. You can add budgeting, tax planning, and goal setting into your overall plan — all of which could help keep you out of trouble in the future.

It can be a painful surprise to receive an unexpected tax bill. However, you may be able to prepare yourself financially and handle this surprise in numerous ways. You could review for mistakes, use your resources to pay, or request a payment plan.

When it comes to planning for your future and avoiding higher-than-expected tax bills, it may be helpful to seek the advice of a financial advisor.