If you owe taxes when you file your return, pause and breathe. Then, make a plan.
Key takeaways
- Owing taxes one year doesn’t mean you did anything wrong.
- If you owe more than expected, there are ways to handle it.
- Filing on time and setting up a payment plan can help you avoid additional penalties.
“You owe a couple thousand in taxes.”
My CPA — who had undoubtedly delivered that same news countless times in the past — sounded nervous on the other end of the call.
When I found out I owed money, my stomach dropped. This felt like a particularly harsh blow, given that I had always gotten money back in the past. However, after a few deep breaths and a helpful talk with the CPA, I figured out a plan that worked for me.
If you owe money in taxes, here’s how to get through it. The good news is that owing taxes doesn’t mean you’re out of options.
First: Figure out why you owe
If you owe money in taxes this year, that usually means something changed with your income or your tax forms. Figuring out what changes caused you to owe money can help you avoid a similar situation in the future. Here are some possible reasons:
- You earned money that you didn’t pay taxes on throughout the year.
- You got a raise but didn’t update your tax withholding.
- A new worker in the family (like a spouse who previously didn’t work and now does) pushed you into a higher tax rate that you didn’t account for.
- You claimed fewer deductions.
- You qualified for fewer credits.
- You had a change in filing status (for example, Married Filing Jointly vs. Married Filing Separately).
Next: Figure out a payment plan
Finding out you owe taxes can feel overwhelming. The good news is you have options.
1. Pay it off completely. If you have the money to do so (and it won’t completely drain your emergency savings), paying your tax debt in full right away is the best way to put the issue aside and move on.
2. Set up a payment plan. You’re not the first person to owe taxes, and there are payment plan options. If you can’t pay everything at once, the IRS offers payment plans — sometimes spreading payments out over several months or even years.
3. Settle your debt for less. In some cases, the IRS may allow you to settle your tax debt for less than the full amount.
4. Pause collections. If you truly can’t pay your taxes because doing so would keep you from paying other essential bills, the IRS may temporarily pause collections. Keep in mind that this isn’t a get-out-of-jail-free card — your debt will eventually come due.
Finally: Take action before the deadline
TurboTax professionals can walk you through the different options to help you figure out which one is best for your individual needs. One thing that’s true for everyone: if you owe more than you expected in taxes this year, don’t procrastinate.
File your return with TurboTax and set up an IRS payment plan to avoid additional penalties and fees.
