Should You Pay Down Your IRS Debt Or Your Credit Cards First?

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Many households deal with major debt, which usually comes from multiple sources. According to the snowball theory, it’s best to focus on — and conquer — the most problematic debt before moving on to other financial concerns.

Often, financial experts recommend resolving credit card debt first. After all, many credit cards carry notoriously high-interest rates, along with massive late fees.

Credit card debt is worth tackling, but IRS debt can also throw your financial plans for a loop. Priorities can vary based on the extent of your debt, your current interest rates, and a variety of other factors, as discussed below:

Interest Rates

When determining which form of debt to handle first, most people focus on interest rates. For tax debt, this typically amounts to five percent for underpayment. Meanwhile, credit card interest rates average 15.32 percent. For this reason, many people choose to focus on their credit cards first — especially if dealing with tens of thousands in debt.

Other Considerations

Interest rate may not be the only factor determining your payment approach. In addition to interest, the IRS may also assess a failure-to-pay penalty, which, depending on the extent of your tax debt, could total well over $50 per month. This can be dramatically reduced, however, if you arrange for an installment plan.

The consequences for non-payment should also be considered as you seek the appropriate plan. IRS penalties can prove surprisingly harsh — and we’re not just talking about interest and late fees. Depending on the severity of your situation, tax debt may be worth addressing first so as to avoid potential liens or levies.

Keep in mind that, while you may prefer to focus on one form of debt first, it’s possible to address multiple issues at once. An installment agreement, for example, can help you keep the IRS off your back while still maintaining a small monthly payment. Meanwhile, you can shift the majority of your focus to handling credit card debt.

If you’re struggling to develop a viable strategy for managing multiple forms of debt, don’t hesitate to seek help from the team at the Highland Tax Group. Contact us today to learn more about your options for dealing with the IRS.