How to Save Money When Paying Your Taxes

Whether you call it an installment agreement, payment agreement, payment option or a payment plan, the idea is the same — you make payments on the tax you owe. That sounds like a good deal, but you can save money by paying the full amount you owe as quickly as possible to minimize the interest and penalties you’ll be charged. For those who cannot resolve their tax debt immediately, however, an installment agreement can be a reasonable payment option. Installment agreements allow for the full payment of the tax debt in smaller, more manageable amounts.

To be eligible for an installment agreement, you must have filed all required tax returns and paid your estimated tax payments if required.

If you owe $10,000 in taxes and you are considering entering into an Installment Agreement for 36 months, your payments could be as high as $339 per month including interest at the current rate of 5% and failure to pay penalty up to 1% each month. In this situation, you could save $2,247 by paying all of the taxes now rather than entering into an Installment Agreement. An Installment Agreement would cost a total of $12,204 in payments plus a $43 processing fee.

Also, consider that the 5% interest rate is based on rates as of May 2004 which could increase, so the taxpayer could end up paying even more.

A Notice of Federal Tax Lien may also be filed against your property to secure the government’s interest against other creditors while the Installment Agreement is in effect.

A more favorable solution to resolve the debt would be to obtain a loan from a bank or other financial institution, or pay taxes using a charge card. As demonstrated in the chart below, borrowing $10,000 over 36 months at various interest rates would result in less costly payment amounts as compared to an Installment Agreement:

Interest Rate	Monthly Payment	Months	Total Paid to Lender	Savings to Taxpayer
7%	$308.77	36	$11,115.72	$1,131.28
9%	$318.00	36	$11,448.00	$ 799.00
11%	$327.39	36	$11,786.04	$ 460.96
13%	$336.94	36	$12,129.84	$ 117.16

A Notice of Federal Tax Lien would also be avoided, thereby maintaining the your credit standing. The $43 Installment Agreement fee would not apply