Drop the avocado toast. Many millennials can barely pay their tax bill.
Six out of 10 people in this age cohort don’t have $500 set aside to cover what they owe the IRS for tax year 2018, according to a recent survey from Varo, an online savings bank.
The company polled 1,200 U.S. consumers between the ages of 18 and 75 in December 2018.
Though the IRS is happy to give you more time to send in your tax return if you ask for a six-month extension, the taxman is less forgiving when it comes to paying what you owe.
You have until midnight on April 15 to pay anhy money owed for 2018, or else you risk penalties and interest.
“The best thing you can do is pay your taxes in full,” said Neal Stern, CPA and member of the American Institute of CPAs’ Financial Literacy Commission.
If you fail to pay the taxes in full by April 15, the IRS will charge you a penalty of 0.5 percent of the taxes owed each month, up to a maximum of 25 percent of the balance.
Failing to file a return comes with an even heftier penalty. In this case, the IRS will charge you 5 percent of the taxes owed for each month you’re late, up to a maximum of 25 percent.
“The worst option is failing to file your tax returns because you think you will not be able to pay them,” Stern said. In this case, it’s better to ask for an extension to submit your return.
What can you do if you can’t pay the tax bill by Tax Day?
The IRS offers several alternative payment plans. Short-term plans give you up to 120 days to pay off your taxes owed, and can be set up for free.
Long-term payment plans that go beyond 120 days generally require a set-up fee, which can range from $31 to $225, depending on how you apply for the plan and how you’ll be paying the bill.
Once you’ve filed your return, talk to your tax professional about the drivers behind that surprise tax bill.
The Tax Cuts and Jobs Act, the overhaul of the tax code that went into effect last year, raised the standard deduction to $12,000 for singles ($24,000 for married-filing-jointly), suspended personal exemptions and limited itemized deductions.
The new law also changed the withholding tables that your employer uses to ensure you have sufficient income tax taken from your pay.
Failure to withhold enough tax — say, in a situation where you have a side job along with your regular 9-to-5 — could result in a surprise tax bill for 2019.
Take steps to avoid the same outcome next spring.
“If your situation is going to be similar next year in terms of what you earn, then you want your withholding situation to be different,” Stern said.