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  • Late Start Earner

How I used refunds to pay taxes

With the recent stock market crash, my initial idea of selling off vested restricted stock units (RSUs) for my tax bill seemed far less attractive. At the same time, I did not want to forgo my cash bonus just to pay for taxes and avoid an opportunity to buy-in on the lower stock market. Somewhat by accident, I ended up using a workaround that allowed me to use my state refunds to pay for the remainder of my federal tax bill by 1.) Filing taxes early, and 2.) Applying for an IRS Short-term payment plan.

2021 Tax Bill

Dumping several thousand a month into additional withholding towards the end of last year helped bring my tax bill down to $15K. Turbo Tax estimated that I'd receive about $13K in refunds from state taxes (due to remote working arrangements). I filed my federal and state taxes in mid-February, and instead of paying my federal taxes, I applied for a short-term payment plan with the IRS that allows 120 days to pay my tax bill penalty-free (see this article on Turbo Tax and this one on NerdWallet).

If you can pay off your balance within 120 days, it won't cost you anything to set up an installment plan.

Now, I thought I would simply peruse and 'check out' the process for signing up for a short-term payment plan with the IRS since I had never done it before. Well, the IRS had other ideas. Their website UI is so old that their "Continue" button acknowledging terms for the payment plan is, in fact, the same thing as signing up for the plan!

From Googling around on the internet, here is what I was able to surmise about the short-term payment plan:

  • Fee is $0 to sign up

  • Maximum tax bill allowed is $100,000 in combined tax, penalties, and interest

  • No interest or fees as long as you pay within 120 days

  • Interest and penalties accrue after tax day (e.g. April 18, 2022)

  • After 120 days, the interest rate itself can be anywhere from 0.25% to 25% (see here and IRS website here).

Since I planned from the outset to pay off my taxes by Tax Day, the interest rate was less of a concern.

Warning: In contrast to the 120d short-term payment plan, the "Long-term Installment Plan" option with the IRS is actually a bad deal (there are loads of fees and obnoxious interest rates tied to it). Avoid this!

Making Payments

It's easy to make payments online on this website:

I made an initial $2K payment to test it out, and it was easy to track and reference my history of previous payments on the website.

Each time a state refund was direct deposited into my account, I would turn around and use it to pay off my federal tax bill. Today was my final payment -- more than 3 weeks away from Tax Day!

President's Day Weekend

This process worked out so well that I would like to use every President's Day Weekend to file my taxes. It's late enough that all my paperwork would have arrived, but early enough to get exact numbers of taxes owed -- reducing uncertainty over my tax bill -- and formulate a plan for payment.

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