State Versus Federal Taxes: Which to Pay First?

You’ve completed your tax return and are shocked to discover that you owe the IRS a hefty sum, and are trying to decide, state versus federal taxes, who do I pay first? Unfortunately, if you’re like many Colorado taxpayers, your federal obligations are accompanied by significant state taxes. Not sure which should be handled first? Keep reading to find out:

How Does the State of Colorado Penalize Late Payments?

Colorado is surprisingly forgiving with late filing. Those struggling to complete their returns can automatically qualify for extensions of up to six months. Unfortunately, this must be accompanied by prompt payment of at least 90 percent of the expected tax bill.

If you’re able to file on time but don’t have the funds to pay up, get ready for steep fees. First, the penalty: you can expect to pay 5 percent of the unpaid taxes, as well as an additional 0.5 percent for every month these remain unpaid.

For 2020, Colorado will also charge between 6 and 9 percent interest on late taxes. Interest levels vary from one year to the next, adding further complications to the already confusing prospect of paying state taxes after they’re due.

IRS penalties, although also steep, tend to be a bit more manageable. Late federal taxes incur interest of 0.5 percent on unpaid taxes for every month they remain an issue.

Is Help Available?

Both Colorado and the IRS offer payment plans and offer in compromise. Keep in mind, however, that the IRS is far more transparent about its installment agreement system. Another concern with Colorado installments? Interest will continue to accrue, which is a huge problem if you’re only able to make the minimum payment each month.

The Highland Tax Group can help you prioritize as you deal with multiple types of tax debt. Contact us today to learn more about our services.