How to pay for tax bills you weren’t expecting

For many, the beginning of the year often brings a little monetary bonus in the form of tax returns. The average U.S. tax return was about $3,3138 in 2024. But for some, tax season can result in an unexpected financial burden after receiving the news that you owe federal or state taxes.

If you’ve ever been surprised by a tax bill, you’re not alone. According to the U.S. Internal Revenue Service (IRS), Americans owed over $104.1 billion in unpaid assessments in 2024. With tax season in full swing, here are a few actionable steps to pay your tax bill on time and prevent this panic in the future.

What you’ll learn:

• Avoid additional IRS penalties
• Set up a payment plan with the IRS
• Utilize your emergency savings
• Apply for a personal loan
• Pay your tax bill with your home equity line of credit (HELOC)
• How to prepare for tax bills in the future
• Start an emergency savings account

Avoid additional IRS penalties

First and foremost, take a few deep breaths. You have a few options that you might not know about! You may think, “I’ll just wait ‘til next year, and they can deduct my bill from my refund,” but this can be a slippery slope of added interest and IRS penalties that can spiral out of control.

There are two types of penalty that are best to try to avoid:

Failure-to-pay penalty: This penalty occurs when you file a return, but don’t finish the payment by the due date. You will be responsible for .5%-1% of your tax for each month (or part of a month), up to 25%. If you file your return and request an installment agreement, the rate will decrease to .25% for the duration of the installment.

Failure-to-file penalty: This penalty occurs when you owe taxes and don’t file on time. The penalty is usually 5% of your tax for each month you owe (or part of a month), up to 25%. If you are 60 days late on filing your taxes, you will also be responsible for a late filing fee – usually between $510 or 100% of the tax owed.

To learn more about tax penalties, click here.

Set up a payment plan with the IRS

If your bill isn’t too high and you have expendable income—or you have monthly savings you can temporarily reallocate—a “Short Term Payment Plan” might be a great option. This payment plan with the IRS is free to set up and gives you 180 days to pay your bill in full. Although this plan doesn’t include a setup fee, you will be charged penalties and interest until the bill is completely paid down with monthly scheduled payments.

Another option is creating an “Installment Agreement,” also known as a long-term payment plan, with the IRS. This option might be best for those who owe a substantial amount, as this agreement consists of monthly payments for extended periods.

If you agree to make payments through automatic withdrawals and apply online, the setup fee is only $31. If you opt to pay each month with non-automatic debit transactions and apply online, the setup fee is $130. Keep in mind that penalties and interest will accrue in both types of installment agreements.

These terms may change. Visit the IRS website for the most up-to-date information on payment plans.

Utilize your emergency savings

Don’t be afraid to consider using your emergency savings account funds if you have them! While emptying your stash to pay your tax bill can feel scary, this is exactly what the account is for. You’ll feel better knowing you aren’t paying interest on an unexpected bill, and you can start rebuilding your savings immediately.

Even if you don’t have the entire tax bill saved up, paying what you can to the IRS right away may avoid paying more interest and fees than you need to.

Apply for a personal loan

If you want to get this added financial stress out of the way as soon as possible, an unsecured personal loan is something to consider and may provide you with lower payments over a more extended period as opposed the installment period and penalty interest charged by the IRS.

This option might be best for those strapped for cash who can’t quickly make larger payments to eliminate tax debt. Lenders can work with you to help ensure your personal loan payment fits your budget. For example, an Alliant Personal Loan can be paid back over five years.

Pay your tax bill with your home equity line of credit (HELOC)

Do you have available funds on your home equity line of credit? This might be the perfect time to use it! Many HELOCs have a very low interest rate, some even lower than the IRS rates. Your HELOC funds can be used for virtually anything, including paying your taxes.

Simply withdraw from your HELOC and transfer the money to your checking account. You can then pay off your tax bill on the IRS website and make monthly payments on your HELOC when your repayment period begins.

How to prepare for tax bills in the future

Once you’re hit with an unexpected IRS bill, you’ll never want to be underprepared for tax season again. If you’ve never received an invoice from the IRS, start saving now so you’re ready—should that day ever come.

Start an emergency savings account

Setting aside money every month is one of the best thing you can do to plan for the unknown. Depositing just $50 a paycheck into a high-rate savings account is a great place to start! If you can devote even more to savings but don’t know where to start, check out these quick and easy budgets that prioritize saving for your goals and emergencies.

Putting “bonus money” to work can also boost your emergency savings quickly. When you receive your annual merit bonus, immediately put it in savings! Another idea for those who are paid biweekly: Send your “extra” third paycheck you receive twice a year to savings. Those big chunks of cash can help you feel accomplished and keep your savings momentum going.