The federal government gave a special “payday” loan to people who are currently facing tax bills. Can it be worth it?
The program, which has been compared to a version of the popular pawn-shop loan, will offer some limited relief to U.S. taxpayers who face tax bills. The Federal Reserve announced on Monday that it would offer $6,000 loans for 12 months. “These loans will not be charged to a consumer’s credit card or bank account. Instead, they will be used to pay income tax debts,” the Fed said in a press release.
In exchange for the low-cost loan, tax filers will have to pay back the loan’s principal, interest and penalty. They will also have to pay a 25 percent surcharge in addition to whatever penalties and interest they might already owe the IRS.
How does it work?
Federal Reserve officials said that $6,000 could not be a windfall for consumers; it is just a short-term solution to a significant problem. They believe that taxpayers, particularly those who owe large tax bills, would be better served by using their refunds to pay off the debt.
The loans will be available to U.S. taxpayers facing the following penalties and interest charges:
The loans will only be available for up to 2 months, and in this time period, some of the loans will likely be forgiven. The loans are being designed to take advantage of the current economic situation.
But some experts think that there are better ways to help those in the business of paying off their taxes. For example, the credit-based personal income-tax system is a more effective way to collect taxes than criminal penalties, according to National Public Radio. Other critics say that people who are currently facing large penalties and interest charges would be better served by simply paying those back rather than borrowing from the Federal Reserve.
As of Wednesday morning, the Federal Reserve Bank of New York reported that more than 14,000 people have already submitted applications. Of those, some 2,700 are expected to qualify.
Should people apply?
Although the loans are meant to address some immediate needs, they are not the only solution to those who need to pay back taxes and avoid fines. For example, the American Taxpayers Alliance suggests that people who owe back taxes could consider using their tax refunds to pay their debts back to the IRS.
Another alternative might be to file for an extension, which can be done up to six months after a tax return is due. A taxpayer who is not sure what to do could simply apply to the IRS for a delay of a payment.
It is also important to note that taxpayers who owe $6,000 or less can apply to a tax credit available through the IRS. This credit can be used for any expenses that the IRS considers legitimate.
The IRS told the Huffington Post that anyone who decides to borrow from the Federal Reserve can avoid the 3 percent interest rate charge for the full repayment term. If the borrower repays the loan on time, the 3 percent interest rate is waived.
However, if the borrower defaults on the loan or misses a scheduled repayment, a full charge of 3 percent interest is applied. This additional charge is higher than any interest that is owed on a federal student loan.
It’s time to look at tax-advantaged savings and college savings accounts.
New college graduates face another hurdle to pay for their education: paying for tuition and other college expenses. It’s no secret that parents have to pay for students’ educations. But an increasing number of graduates are actually incurring the costs of their education themselves, which can put them into a bind when they start looking for a job or start making money.
That’s where 529 college savings plans come into play. By saving money in a 529 plan, you’ll make those savings tax-deductible, and once the child reaches college age, it’ll be tax-free too.
Most states have their own 529 plans, but if you don’t live in one of those states, there are many tax-advantaged plans to choose from. If you don’t choose one of the well-known plans, there are many low-cost options out there.
Don’t forget about retirement accounts.
Retirement accounts are another crucial way to fund college education. After your child turns 21 and begins earning an income, you’ll want to consider saving in a 401(k) or an IRA.
Even if you have more than $1,000 in savings, these accounts will be contributing to your child’s college education. The longer your child works, the more you’ll be contributing, but every dollar you save will count.
As a working parent, it can be tough to save money, so it’s a good idea to supplement those retirement accounts with money saved in a 529 plan. Saving extra money will also give your family more room to splurge and make it easier for your child to pay for college.
For more details about customized tax relief plans, please call (888)489-4889.