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Managing Tax Debt to Prepare for Mortgage


Buying a home involves a lot of big decisions, and the process can be complicated when you owe back taxes.  Having unpaid taxes won’t always keep you from being approved for a mortgage, but it does make things more difficult.

For best results, do your homework and take the proper steps to get your tax debt in order before you begin the often-complex mortgage application process.

Find Out What You Owe

You need to know exactly how big your tax debt is before you can make a plan to tackle the problem and start working on a solution. The Internal Revenue Service has tools available to help you view your tax account so you’ll know how much you owe. Avoiding the problem won’t make it go away.

If you know you’re going to owe taxes and can’t pay, be sure to file anyway because there are penalties for failure to file as well as for failure to pay. Don’t miss the deadline, as this will add to your fees. Request an extension if needed, but know that late-payment penalties will still apply.

Consider Your Options

If you need more than 120 days to pay your taxes in full, the IRS offers three options: installment agreements, delayed repayments, and “offer in compromise” (settling for less than what you owe). These plans have stipulations and drawbacks, including penalties and fees, so do your research before choosing.

These options are for individuals; find out what to do if your business owes back taxes. Tax debts can be paid with a credit card, but beware of cards with high interest rates as the IRS options are often lower.

Get Help From a Tax Professional

It’s not surprising that so many individuals and businesses owe back taxes when you consider how complex the United States tax code is. The statutes that make up Title 26 of the U.S. Code fill 2,652 pages — that doesn’t even count IRS regulations (about 9,000 more pages). A CPA or other tax professional can help you navigate these complex rules to find the best solution for your unique tax-debt issues.

Avoid Owing To Begin With

The easiest way to deal with tax debt is to make sure you won’t owe the IRS in the first place. Use a W-2 calculator to adjust your withholdings so you won’t end up with a bill at the end of the year. While getting a big refund check can be beneficial, some financial planning experts advise against withholding too much. Do your research and play with the calculator to find the best approach for your financial situation.

Like applying for a mortgage, taxes can be stressful and complicated. Unfortunately, taxes are unavoidable, so if you plan to buy a house and have tax debt, you need knowledge and a solid plan. Don’t be afraid to ask for help from a professional, and don’t avoid the problem or delay taking action. There are ways to solve your tax-debt problem.