Many people owe taxes to the Internal Revenue Service but cannot afford to pay the full amount upfront. They may request an installment agreement to make manageable monthly payments.
These agreements allow you to pay off your tax debt over time. However, it is important to accurately estimate your monthly ability to make payments. If you overestimate, you could end up in trouble again.
1. Calculate your monthly income
Include wages, salaries, self-employment income, rental income and any other sources of income you receive regularly. Use your net income, which is your income after taxes and deductions.
2. Deduct essential expenses
Next, deduct necessary monthly expenses from your net income. These expenses typically include rent or mortgage payments, utilities, groceries, transportation costs and health insurance premiums. Be realistic and only include necessary expenses.
3. Evaluate discretionary expenses
Evaluate your discretionary spending. Discretionary expenses are nonessential items or services that you can live without or reduce. Examples include dining out, entertainment, subscriptions and luxury purchases. Consider where you can cut back to allocate more funds toward your IRS installment agreement.
4. Review your assets and liabilities
Assets include cash, savings, investments and valuable possessions. Liabilities encompass debts such as credit card balances, loans and outstanding bills. Understanding your financial position can help you make informed decisions about your IRS installment agreement payments.
5. Calculate your disposable income
Once you account for all income, expenses, assets and liabilities, calculate your disposable income. Your disposable income is the amount of money you have left after covering necessary expenses and debt obligations. This figure represents the maximum amount you can afford to pay toward your IRS installment agreement each month.
However, you probably do not want to pay the maximum amount. Build in flexibility. Your financial situation may change over time. Factors such as fluctuations in income, unexpected expenses, or changes in living circumstances can impact your ability to make installment payments. Regularly reassess your finances and adjust your payment plan as needed.
With persistence and financial management, you should be able to fulfill your obligations to the IRS while maintaining financial stability.