Owe Taxes This Year? Budgeting Ideas to Pay Off Your Bill

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If you owe taxes this year, or are not sure yet whether you do, you may be trying to figure out how to pay your tax bill. This post walks through a few things to consider, including how to get a better sense of what you may owe, what payment options exist, and where to look for support.

Filing Still Matters

Filing your return helps you understand exactly how much you owe.

If you think you might owe taxes, it’s important to file your tax return on time or request an extension to file if you need more time. An extension does not give you more time to pay taxes owed, but it does help you avoid penalty fees that add up the longer you wait to file.

For example, let’s imagine someone owes $1,000 in taxes.

Scenario 1: No extension and no payment by April 15.

Estimated tax owed: $1,000
Payment made by April 15: $0

Interest applies to the full $1,000 balance. In addition, the IRS applies a late filing penalty of up to 5% of the unpaid taxes per month, up to a maximum of 25%.

Scenario 2: Extension requested, but no payment by April 15

Estimated tax owed: $1,000
Payment made by April 15: $0

Interest still applies to the full $1,000 balance, but requesting an extension avoids the late filing penalty.

Scenario 3: Extension requested and partial payment made by April 15

Estimated tax owed: $1,000
Payment made by April 15: $200
Remaining balance: $1,000 − $200 = $800

Requesting an extension avoids the late filing penalty. Interest applies to the $800 remaining balance, instead of the full $1,000.

You can learn more here:

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Budgeting Ideas If You Owe Taxes

If you’re trying to figure out how to cover a tax bill, it may help to step back and look at your overall budget. You may choose to:

Set up a payment plan to make payments over time
Temporarily adjust spending in other categories while paying down the balance
Use part of a savings fund to cover the bill or make payments
Set aside a portion of upcoming income

Paying what you can, even if it is not the full amount, helps reduce the amount of interest and penalties that build over time. If you’re looking for tools to start or edit your budget, you can explore this resource from MyMoneyPath: Create and Follow a Budget.

Need Help Paying?

The IRS and California Franchise Tax Board (FTB) offer options that may help make a tax bill more manageable. One option is setting up a payment plan to pay over time. In some cases, programs like an Offer in Compromise may allow someone to settle tax debt for less than the full amount owed. However, eligibility for these programs depends on IRS or FTB rules and financial circumstances, and approval is not guaranteed.

If you are trying to understand what options may apply to your situation, it may help to speak with a Low Income Taxpayer Clinic (LITC). LITCs assist eligible individuals with understanding and resolving tax issues with the IRS. They can assist with:

IRS notices or disputes
Payment issues
Collection matters
Options such as payment plans or an Offer in Compromise

LITCs are independent organizations, and services are free or low cost for people who qualify.

How Can I Estimate Taxes Before Filing?

One of the biggest challenges for many people is not knowing whether they will owe taxes until they actually file. One option is to use free tax software to begin filling out your return. Most software programs will show an estimate of your balance before you officially submit your return.

Another option is to look at last year’s tax return. If your income and situation have not changed significantly, last year’s return may provide a starting point for estimating what you might owe. While this method may not be exact, it can help you get a general idea of what to expect.

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Looking Ahead to Next Year

If you owed taxes this year, it might also be helpful to reflect on what may have changed.

For example:

Did you have income that didn’t have taxes withheld?
Did your job or income change during the year?
Did you earn freelance, contract, or gig income?

Owing taxes can happen for many reasons. Some people have income from gig work or self-employment where taxes were not withheld. Others may have had multiple jobs during the year, changes in income, or tax credits that worked differently than expected.

Understanding what happened can help you decide whether you want to adjust things going forward. For example, you may want to consider setting aside money for taxes next year, making quarterly estimated tax payments if you are self-employed, or reviewing your tax withholding. Learn more about what factors affect whether you receive a refund or not.