In this years bankrate.com annual tax study, 19% of Americans are concerned about making their payment on April 15th. Considering only 13.9% even expect to owe money on tax day, that's a startling number.
Rich or poor, shelling out large sums of money to pay your taxes can be quite an interruption. If money is invested, it can really hurt your investments to liquidate them at the wrong time. If you don't have assets to fall back on, it could be even more difficult to cover your tax burden. Below are a number of feasible strategies for the illiquid folks at tax time.
1. Utilize a portfolio credit line.
A credit line is a simple way to borrow against your portfolio, without having to liquidate your assets. Most banks and money management firms offer this option at low rates (approximate rates at the moment are between 1% - 3%), with flexible payback options. This way, you can wait for the right timing to sell your securities, and then pay back the line when you are ready.
2. Utilize a HELOC
HELOC stands for a home equity line of credit. A home equity line of credit is simply a loan that uses your home as collateral. HELOC's can be very inexpensive right now, but do carry some risk. If you fail to pay back a HELOC, your home would be at risk. Furthermore, HELOC's can take quite a bit of time to set up, so it makes sense to get the process started a few months before you will need the cash.
3. Borrow against your 401K
While it is not recommended to liquidate your 401k until age 59 1/2, there is an option to borrow against your 401k without penalty. It is best to work this out a few weeks before your taxes are due, because the processing may take some time.
4. Pay your taxes on a Credit Card
The IRS charges a service charge between 1.87% and 2.25%, but it may be worth it for the credit card points you rack up. Interest rates on credit cards may vary, and are often high, so beware when carrying a balance. It is only economical to use this strategy if you are planning on paying it off within a few months, or if you are using it as a way to build credit or get credit card points.
5. Set up an installment agreement with the IRS.
You can apply for an installment agreement by filling out a form 9465 (if you owe under $50K), or a Form 433-F (if you owe over $50,000). You can set it up to have payments automatically debited from a checking account each month, or you can choose to mail a check or have a portion of your paycheck garnished.
6. Apply for an extension
The IRS offers 120-day payment extensions. You will have to pay a late fee and a 3.5% interest on your outstanding balance.
7. Wait until you get your bill.
Only do this if you need just 2-3 weeks after April 15th to pay. The IRS currently charges a 3.5% penalty for late payments and a monthly late fee of .5% of what you owe.
Being invested while simultaneously maintaining liquidity can be quite the challenge. Make sure to prepare carefully for your annual tax bill, and take advantage of the numerous tools at your disposal.
Disclaimers:
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