Author Topic: Which debt to tackle first: car or taxes?  (Read 4947 times)

whateverdude

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Which debt to tackle first: car or taxes?
« on: September 06, 2016, 03:55:31 PM »
$13k left on a car loan (face punch, bought a new Subaru two years ago.  Still holds a lot of value and is worth more than what's left on the loan). 

Several years delinquent on taxes (more face punches).

What should I tackle first?  Have $40k in savings.  Does it make more sense to pay off the car loan, sell the car, buy a cheaper car (need for work, job requires travel to different client sites on a weekly basis, although for the next few months I'm working at a single client and don't need the car to get there)?

Or instead of that, should I continue to make monthly payments on the car ($390/month), and throw as much money as I can at the tax debt?

Thanks.

Cassie

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Re: Which debt to tackle first: car or taxes?
« Reply #1 on: September 06, 2016, 03:58:18 PM »
With your savings can you just pay both off and then continue to save each month?

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #2 on: September 06, 2016, 04:06:50 PM »
I need to contact the IRS and see how bad I've f'ed myself.  I actually hadn't even thought that I might be able to pay off both, but this is a real possibility.  Thanks for replying.

Catbert

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Re: Which debt to tackle first: car or taxes?
« Reply #3 on: September 06, 2016, 04:07:49 PM »
Have you already reach agreement on all your delinquent taxes?  Not sure I'm using the right term, but I mean do you already have a payment plan set up with the IRS and whatever other entities are involved?  If so, and the interest rates are low, then I'd pay-off and sell your car and buy cheaper for cash.

If you haven't sort out your delinquent taxes then I'd deal with those first.  And ensure that you have the $$ to say current.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #4 on: September 06, 2016, 04:11:29 PM »
I need to contact the IRS and set that up.

Thanks, seems like that's the definite first step and will determine what follows.

Cassie

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Re: Which debt to tackle first: car or taxes?
« Reply #5 on: September 06, 2016, 04:22:31 PM »
Since you already took much of the appreciation on the car I would not sell it.  Just drive it until it is dead.  YOu will get your $ worth that way. Even though many on this site recommend buying old cars we did this when young and did not have much $. Now we buy cars that are 2-4 yo and then drive until they are done. 

Jack

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Re: Which debt to tackle first: car or taxes?
« Reply #6 on: September 06, 2016, 04:27:31 PM »
What does "$40k in savings" mean? Do you have cash sitting in a bank account, or are you talking about your 401k, or something else?

I disagree with Cassie; a two-year-old Subaru has a lot of depreciation left in it and IMO it's worth trading down to an older/cheaper car.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #7 on: September 06, 2016, 04:32:34 PM »
Since you already took much of the appreciation on the car I would not sell it.  Just drive it until it is dead.  YOu will get your $ worth that way. Even though many on this site recommend buying old cars we did this when young and did not have much $. Now we buy cars that are 2-4 yo and then drive until they are done.

Actually it hasn't depreciated that much.  It was a 2014 Crosstrek XV Premium, manual transmission.  Put down $500 at the time and borrowed ~$22.1k at 1.49%.  Set up auto-payments and now, a few months shy of 2 years later, I owe $13k on the loan and the KBB for it with the current mileage is over $18k.

cchrissyy

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Re: Which debt to tackle first: car or taxes?
« Reply #8 on: September 06, 2016, 04:52:11 PM »
I don't think you can answer this without knowing exactly how much back taxes you owe, and what the interest is on them. 
But I'd bet it's smarter to pay the taxes than the car at 1.49%

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #9 on: September 06, 2016, 05:44:24 PM »
What does "$40k in savings" mean? Do you have cash sitting in a bank account, or are you talking about your 401k, or something else?

I disagree with Cassie; a two-year-old Subaru has a lot of depreciation left in it and IMO it's worth trading down to an older/cheaper car.

Cash sitting in a bank account.

Agreed - the Subie has a lot of depreciation left so I'm highly inclined to sell it.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #10 on: September 06, 2016, 05:46:04 PM »
I don't think you can answer this without knowing exactly how much back taxes you owe, and what the interest is on them. 
But I'd bet it's smarter to pay the taxes than the car at 1.49%

Yeah, you're right.  I should figure that out first before doing anything with the car, since the interest is likely higher, and the amount is likely higher, than 1.49% on $13k.

Jack

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Re: Which debt to tackle first: car or taxes?
« Reply #11 on: September 07, 2016, 10:13:35 AM »
Cash sitting in a bank account.

Agreed - the Subie has a lot of depreciation left so I'm highly inclined to sell it.

Okay, in that case just pay off the whole tax debt immediately in a lump sum.

(I'm not very familiar with how tax debt works; for all I know it's possible to negotiate a discounted settlement or something. However, I'm not inclined to suggest you do that since I'm also a taxpayer!)

Selling the Subaru and replacing it with a cheaper car is the best option, but if you decide to keep it then do not pre-pay the 1.49% loan. Instead, invest the $13K in something reasonable, like a stock index fund (in your retirement accounts if you aren't already planning to max them out this year, or in a taxable account otherwise).

(In fact, take everything left from the $40k after you've paid your debts and sorted out your car situation, and invest it.)

dougules

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Re: Which debt to tackle first: car or taxes?
« Reply #12 on: September 07, 2016, 11:31:21 AM »
Honestly, I personally would want to get out of owing the IRS as soon as I could.  The worst that Subaru could do is just repossess the car. 

Tiger Stache

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Re: Which debt to tackle first: car or taxes?
« Reply #13 on: September 07, 2016, 11:49:14 AM »
the IRS could come arrest you. the bank could just take your car. sounds like an easy choice to me.

Axecleaver

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Re: Which debt to tackle first: car or taxes?
« Reply #14 on: September 07, 2016, 12:50:30 PM »
Get your tax situation figured out ASAP.

Interest on tax debt is the federal short term interest rate, plus 3%. At the moment, that's at 0.61%. But your tax debt has been accruing interest for several years, and it compounds monthly. The rate changes quarterly. So the interest on the interest has been adding up for years.

Penalties are where they really get you. Did you fail to file or just fail to pay? Failure to file is 5% of outstanding balance per month, up to 25%. Failure to pay penalty is 0.5% per month. That's added to the taxes you owe, and is exclusive of the interest on your tax debt.

This link will explain the details, and give you links to get back on track. Just count your blessings that they haven't garnished your wages yet or seized your property.

https://www.irs.gov/uac/newsroom/eight-facts-on-late-filing-and-late-payment-penalties

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #15 on: September 07, 2016, 01:01:30 PM »
Cash sitting in a bank account.

Agreed - the Subie has a lot of depreciation left so I'm highly inclined to sell it.

Okay, in that case just pay off the whole tax debt immediately in a lump sum.

(I'm not very familiar with how tax debt works; for all I know it's possible to negotiate a discounted settlement or something. However, I'm not inclined to suggest you do that since I'm also a taxpayer!)

Selling the Subaru and replacing it with a cheaper car is the best option, but if you decide to keep it then do not pre-pay the 1.49% loan. Instead, invest the $13K in something reasonable, like a stock index fund (in your retirement accounts if you aren't already planning to max them out this year, or in a taxable account otherwise).

(In fact, take everything left from the $40k after you've paid your debts and sorted out your car situation, and invest it.)

Hm I hadn't even considered that.  I'm more inclined to sell and replace with something cheaper and that gets better fuel efficiency - but that's an option to consider if I decide not to sell.  I'll probably wait on the car matter for a few more months and settle tax debt first, plus I'll eventually need to get myself and my dog back from the west to east coast after my work stint wraps up so it may be easier to deal with the car matter in the state where I'll be registering it.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #16 on: September 07, 2016, 01:02:16 PM »
Honestly, I personally would want to get out of owing the IRS as soon as I could.  The worst that Subaru could do is just repossess the car. 
the IRS could come arrest you. the bank could just take your car. sounds like an easy choice to me.

True & true.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #17 on: September 07, 2016, 01:07:41 PM »
Get your tax situation figured out ASAP.

Interest on tax debt is the federal short term interest rate, plus 3%. At the moment, that's at 0.61%. But your tax debt has been accruing interest for several years, and it compounds monthly. The rate changes quarterly. So the interest on the interest has been adding up for years.

Penalties are where they really get you. Did you fail to file or just fail to pay? Failure to file is 5% of outstanding balance per month, up to 25%. Failure to pay penalty is 0.5% per month. That's added to the taxes you owe, and is exclusive of the interest on your tax debt.

This link will explain the details, and give you links to get back on track. Just count your blessings that they haven't garnished your wages yet or seized your property.

https://www.irs.gov/uac/newsroom/eight-facts-on-late-filing-and-late-payment-penalties

Failed to both file and pay.  Thanks for the link, and the advice.  Yes I'm lucky it's not snowballed in to a worse situation..

Spitfire

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Re: Which debt to tackle first: car or taxes?
« Reply #18 on: September 07, 2016, 03:04:50 PM »
The IRS will only settle your debt for less if you can prove that you are unable to pay within a reasonable time frame. If you have 40k in the bank and make a good income you probably won't qualify. They may work with you on interest and penalties though (especially penalties).

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #19 on: September 07, 2016, 03:10:34 PM »
The IRS will only settle your debt for less if you can prove that you are unable to pay within a reasonable time frame. If you have 40k in the bank and make a good income you probably won't qualify. They may work with you on interest and penalties though (especially penalties).

Do you think it's better to contact them directly or work through an accountant?

jwright

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Re: Which debt to tackle first: car or taxes?
« Reply #20 on: September 07, 2016, 04:02:33 PM »
How many years did you not file?  There is a first time offender clause that let's you out of penalties and interest (still have to pay the tax) if you have never been late before.  You can just call the 800 number yourself and sit on hold for an hour, then have the rep look up your case and determine if you qualify. 

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #21 on: September 07, 2016, 04:58:25 PM »
Good call.  2010 was the last year I filed.

Tester

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Re: Which debt to tackle first: car or taxes?
« Reply #22 on: September 07, 2016, 05:13:09 PM »
I would say stop posting here and call IRS :).
Then post what you find - even if it is bad at least it is a bad you know and you can make a plan.
Until then it does not make any sense to talk about the car.
Keep it - and save all the money you can to pay IRs.
After you finish with IRS you can think about the car.

If you owe more than 40K to IRS, then look into selling the car, getting something cheap and using the difference to pay more to IRS.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #23 on: September 07, 2016, 05:45:21 PM »
I would say stop posting here and call IRS :).
Then post what you find - even if it is bad at least it is a bad you know and you can make a plan.
Until then it does not make any sense to talk about the car.
Keep it - and save all the money you can to pay IRs.
After you finish with IRS you can think about the car.

If you owe more than 40K to IRS, then look into selling the car, getting something cheap and using the difference to pay more to IRS.

Been trying, and waiting on hold! Now they're closed, but am attempting to set up an online account and see what progress I can make there.

Good advice, thank you.

jwright

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Re: Which debt to tackle first: car or taxes?
« Reply #24 on: September 08, 2016, 07:35:28 AM »
Good call.  2010 was the last year I filed.

Have you filed anything yet?  Do you even know if you owe?  If you were due a refund, there will be no tax due and no penalty. 

There's no point of calling the IRS if you haven't completed the returns, they don't know what you status is any more than you do.  The notice they send out estimates what you would owe based on what information you have and doesn't include deductions or any extra information.

Go to an accountant.  Prepare tax returns for 2011-2015.  File them to stop the bleeding on any failure to file penalties.  Then total what you owe.

From there, you may be eligible to enter into a payment plan, or an offer in compromise depending on your situation.  If it is under $50K, you will automatically be eligible for payment plan.  Offer in compromise is much more difficult.  Then you can decide how to use the savings you have.

TheAnonOne

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Re: Which debt to tackle first: car or taxes?
« Reply #25 on: September 08, 2016, 09:12:20 AM »
Good call.  2010 was the last year I filed.

How is this even possible? Have they not been nagging you for 6 YEARS?

slugline

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Re: Which debt to tackle first: car or taxes?
« Reply #26 on: September 08, 2016, 12:27:24 PM »
Good call.  2010 was the last year I filed.

How is this even possible? Have they not been nagging you for 6 YEARS?

I've been seeing news reports that suggest that the IRS is understaffed. Unless whateverdude is a "big fish" target, I believe it's quite possible. Then again, it could be one of those ticking-timebomb situations that could blow up at any time if ignored.

whateverdude

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Re: Which debt to tackle first: car or taxes?
« Reply #27 on: September 08, 2016, 12:48:11 PM »
Good call.  2010 was the last year I filed.

How is this even possible? Have they not been nagging you for 6 YEARS?

I've been seeing news reports that suggest that the IRS is understaffed. Unless whateverdude is a "big fish" target, I believe it's quite possible. Then again, it could be one of those ticking-timebomb situations that could blow up at any time if ignored.

I've received one or two postcards from them, but nothing major.  I'm definitely small fish, and mentally that's partially how/why I think I've been able to avoid dealing with everything.  Either way, jwright's advice seems spot on to go through an accountant and file for 2011 - 2015.  Part of that time I was full-time employed, and the other I was a freelance contractor.

Good call.  2010 was the last year I filed.

Have you filed anything yet?  Do you even know if you owe?  If you were due a refund, there will be no tax due and no penalty. 

There's no point of calling the IRS if you haven't completed the returns, they don't know what you status is any more than you do.  The notice they send out estimates what you would owe based on what information you have and doesn't include deductions or any extra information.

Go to an accountant.  Prepare tax returns for 2011-2015.  File them to stop the bleeding on any failure to file penalties.  Then total what you owe.

From there, you may be eligible to enter into a payment plan, or an offer in compromise depending on your situation.  If it is under $50K, you will automatically be eligible for payment plan.  Offer in compromise is much more difficult.  Then you can decide how to use the savings you have.