Unexpected tax bill? Avoid compromising your long-term plan

Surprised in spring by a tax bill you didn’t anticipate? Consider strategies for settling up without disrupting your longer-term financial progress.

Filing season is underway, and many working Americans are already receiving their refunds – but what happens if you were expecting to break even or receive a refund and are facing a bill instead?

First, stay calm and investigate by discussing with your accountant. Have you included every deduction? Has anything changed since filing last year? Second, start to think strategically about how to pay what you owe, particularly if your money is invested, earmarked for retirement or stashed away in an emergency fund. Lastly, put plans in place now to include tax-mitigating strategies into your financial plan for next year.

Actions to take

Explore a securities-based line of credit. With a securities-based line of credit¹ (SBL), you can pay the taxes you owe without touching the investments you own. With an SBL, you won’t have to sell any of your holdings and will avoid disruption to your investment strategies as well as capital gains. An SBL can also help you leverage non-retirement assets by pledging your portfolio as collateral. SBL balances are paid at your discretion, with only a minimum monthly interest payment required – making it a flexible way to access liquidity without liquidating assets.

Consider tapping into your home equity. A home equity loan² may be a more cost-effective way to pay instead of selling securities that are part of your long-term investment plan. These types of loans can offer quick liquidity and flexibility to help you meet your tax obligation, at competitive interest rates. And you may be able to avoid capital gains taxes that could result from selling appreciated investments.

Carefully select investments that could be sold for additional liquidity.In some cases, selling securities to capture capital losses or rebalance a portfolio is a good idea. Talk to your advisor about securities that could be harvested for capital losses or ones that you can sell to help bring your portfolio back into alignment with your long-term goals. Another possible benefit? Unused realized capital losses may be available to offset future tax bills. Remember, rebalancing may result in tax consequences.

If possible, avoid…

An unfavorable offer in compromise.The IRS may negotiate an offer in compromise (OIC) to help you settle your bill for less than you owe. However, be aware that there are associated costs, including a filing fee.

Paying with a high-interest-rate credit card.This kind of debt can negatively impact your credit score and quickly rack up fees, making it harder to pay down the principal. Even though the IRS also charges interest, it’s far lower than most credit card companies.

Taking money from your retirement accounts.It’s not a great idea to undermine a long-term plan by withdrawing funds early. You’ll be faced with penalties, as well as additional taxes on the amount you take out, which could mean you won’t have as much to pay your tax bill as you thought. And you’ll have even less for retirement.

Plan ahead

If you do end up owing taxes, talk to your tax and financial advisors about other ways you can pay the bill without disrupting your investment plan or depleting savings. If you anticipate owing taxes again, you may also want to discuss your withholding amount as well as investment and tax-saving strategies to reduce your liability next year and beyond.

Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.

1 A Securities-Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect SOFR rates (or any successor rate thereto) that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, Member FDIC.

2 Raymond James Associates, Inc., and Raymond James financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs. The proceeds from a home equity loan cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate or Raymond James. The line of credit can be suspended, reduced or terminated in the event of fraud, failure to repay, adverse collateral conditions, or other violation of credit terms. Property insurance is required. Flood insurance is required if property is in a designated flood zone of ‘A’ or ‘V.’ Products, terms and conditions subject to change. Subject to standard credit criteria.