There are a variety of options. Learn some of the pros and cons for each.
Last year, nearly one in three tax filers either unexpectedly owed money to the IRS on their taxes or owed more than they expected.1
If you’re dealing with a large tax bill, don’t panic. Here’s a breakdown of some common approaches to managing the payment:
Writing a check (or using IRS Direct Pay to transfer cash from your bank account) to the IRS may be the easiest way to pay your bill in full. Note that depending on the amount you owe, you risk draining cash reserves needed for emergencies or other uses.
Selling individual securities or funds from your portfolio can help you raise funds without depleting your cash savings. Still, you may face taxes on capital gains, a potential loss of future asset growth, or an asset allocation imbalance in your portfolio.
Paying with a credit card may allow you to earn card rewards (if applicable) based on the amount you owe. However, fees charged by the IRS to pay by credit card may often be higher than the value of any frequent flier miles, points or cash back gained.2
A loan from a bank usually carries lower interest rates than credit card debt. However, it may require a lengthy application process and extensive paperwork, and you may incur loan fees and higher interest charges than some other options.
Your retirement accounts could also be an option to help you pay your tax bill. Loan interest paid from a qualified retirement plan, such as a 401(k), is repaid to you through your retirement plan instead of the plan provider. Still, this is often not a popular option since you risk losing potential gains in the market and may have to pay the loan back in full if you leave your employer.
You can arrange with the IRS to make installment payments throughout the year rather than a one-time lump sum payment. This allows you to meet your obligation without depleting your cash savings all at once. Please note, the IRS charges accrued penalties and interest until the balance is paid in full and will charge additional fees if you take more than 180 days to pay the bill.3
If you qualify, a securities based loan provides a flexible line of credit, allowing you access to cash by pledging eligible securities while keeping your investment strategy intact. Borrowers may benefit from lower costs compared to other borrowing options, such as credit cards and personal loans. Also, the application process for these loans tends to be quick and requires relatively minimal paperwork, which can be a benefit if your tax bill is due in a short amount of time.
There are risks associated with a securities based loan, including the potential for having to repay your loan or replenish collateral if the value of the pledged securities drops.
Morgan Stanley clients should speak with their Morgan Stanley Financial Advisor, as well as their tax and legal advisors, about their options for paying their tax bill.
Footnotes:
1. Tax Season Wrap-up: 3 Key Insights, Civic Science, https://civicscience.com/tax-season-wrap-up-3-key-insights/
2 Pay your taxes by debit or credit card or digital wallet, IRS, https://www.irs.gov/payments/pay-taxes-by-credit-or-debit-card
3 Topic no. 202, Tax payment options, IRS, https://www.irs.gov/taxtopics/tc202
https://www.irs.gov/payments/online-payment-agreement-application
Disclosures:
Loan applications are typically subject to underwriting standards and independent approval. Rates and terms are subject to change without notice.
Educational materials are not considered a commitment to lend.
Educational materials should not be construed as tax or legal advice. Individuals should consult their personal tax advisor or attorney for matters involving taxation and tax planning and their attorney for matters involving personal trusts and estate planning.
Borrowing against securities may not be appropriate for everyone. You should be aware that there are risks associated with a securities based loan, including possible maintenance calls on short notice, and that market conditions can magnify any potential for loss.
The proceeds from a non-purpose securities based loan may not be used to purchase, trade or carry margin stock or securities or repay margin debt.
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