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We owe $25,000.00 in taxes and do not have it.
We paid off a most of last year's taxes by credit and paid them off this year. We have very little credit card debt. We do not have a monthly paycheck but are paid by the job. Our annual income is not preset. How do you recommend we pay this amount? Borrow from IRA,life insurance or take a loan? What order is advisable?
Any advice is appreciated.
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We do not have a monthly paycheck but are paid by the job. Our annual income is not preset.

So, you seem to be saying you are self-employed.

How do you recommend we pay this amount?

Well, if I could turn on the time machine, I would have recommended that you set aside 25% - 35% of your 2009 income to make estimated tax payments, and then you wouldn't have this issue. Since I can't turn on the time machine, I would highly recommend that you start doing that right now for your 2010 income, so that you don't run into this issue again.

Please note - if you haven't made estimated tax payments, not only do you owe taxes - you very likely owe penalties and interest. That's just throwing your money away.

If you can't afford to set aside your income in order to make estimated tax payments, then you are living above your means.

Borrow from IRA,life insurance or take a loan? What order is advisable?

Well, you can't borrow from an IRA, so that's out. Whether you should borrow from life insurance, credit cards, or take another type of loan depends on the terms. You also might want to look into a payment plan with the IRS, and see how the terms compare with your other options.

AJ
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OK, AJ, fess up. You were an IRS knuckledragging collection thug in a prior life. I couldn't have said it better myself.

Phil
Rule Your Retirement Home Fool
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Couple questions on your IRA. What's your age and is it a Roth or a traditional IRA?

If you are under 59.5 years old and it's a traditional IRA I would recommend against withdrawing money (again, you can't borrow money from an IRA, only withdraw). Not only will you owe income tax on the amount you withdraw, but there will be a 10% penalty for early withdrawal in addition. So if we assume a 30% tax rate, in order to come up with $25,000 to pay taxes from an early IRA withdrawal you would have to withdraw:

$25,000/[1- (30% income tax rate + 10% penalty)] = $41,667
$25,000/(1 - .6) = $41,667 withdrawal

In this case you'd owe $16,667 in taxes for the $25,000 IRA withdrawal, and if you didn't pay estimated taxes on this amount you may very likely end up with the same problem of underpaid taxes next year, but with no IRA to "save" you.


If you are over 59.5 years old, you can at least avoid the 10% penalty but will still have to pay income tax on the withdrawal:

$25,000/(1- 30% income tax rate) = $35,714
$25,000/(1 - .7) = $35,714 withdrawal


Now if you are over 59.5 years old and it's also a Roth IRA, you're in better shape since you can withdraw the money tax and penalty free (in most cases). In that case withdrawing $25,000 would yield you $25,000.


Mike
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All of the options you are listing involve a loan. It is just of what type.

You didn't say how this was split between state and federal.

The interest charged by the IRS is likely lower than your credit cards. Requesting a payment plan from them also means that you need to stay current with this years income tax.

States can be far more difficult. You may want to use a credit card to pay your state taxes.
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.. Any advice is appreciated.?...

The immediate problem is how to raise the money at the least possible cost. If you have a paid off car boat, or RV getting a car loan at a reasonable rate is one possible option that people sometimes over look.

It is hard to tell but getting term life insurance and cashing out the life insurance policy would be worth looking into.

We are about 10% of the way through 2010 so if your situation is the same this year then you should already have more than $2,500 saved to pay the $25,000 in taxes for 2010. Including this the big question is if you situation is better or worse than it was at this time last year. If things are worse than last year then it is time to stop the downward spiral by reducing your spending(even if painful) before all the interest and penalties make it uncontrollable.

Greg
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