So my brother who is usually bad with his finances just got a $17k bonus (after tax).
He currently owes about $14k on various credit cards (around 25-30% APR).
He also currently has an IRS payment plan that he pays $500/mo on and has about $15k remaining. I’m not 100% sure how the interest works on this, but I imagine it compounds?
Is he better off paying the CC debt with this money or paying off the IRS plan?
Can anyone advise how the interest works on the IRS payment plan? If it matters…hes paying tax owed on his 2023 and 2024 returns as he didnt pay enough on his 1099 side hustle wages.
Brother got a $17k bonus…CC debt or IRS payment plan?
byu/MJustin80 inpersonalfinance
Posted by MJustin80
28 Comments
I can guarantee you the credit card interest is higher than the IRS. Pay the cards off first.
Credit card. There is no way the IRS interest rate in that high.
It about more than interest, one must also consider usage.
Will paying off his CC lead to him immediately maxing on his CCs in a few weeks?
If so, pay the IRS off.
I don’t see a budget does he have at least $1000 for emergancies?
I’d pay tax debt before anything else. IRS is an awful institution to owe money to, regardless of interest rate.
Pay the CC. Keep the 3000 for emergency funds. Pay the cc payments on to irs in top of normal
Payment.
Not advice, just some considerations.
Pros of paying down the card:
-Likely much higher interest than the IRS, and revolving credit.
-If he cuts up his cards, he can lift a big weight off his back
-Paying lump sum to the IRS probably won’t save him much if anything, since he’s already on a plan.
Cons of paying down the card:
-I can’t give advice on it, but if his situation is really bad, or he runs into an emergency, there are potential bankrupcty considerations to map out. IRS usually gets all of what they’re owed, regardless.
Is he withholding correct amount for 2025???
Pay the IRS. You don’t want to be owing them money. They can do more than the average company can when it comes to taking what’s owed.
Pay the IRS. If he’s bad with money, paying off CC’s could have him racking up that debt again since he’s bad with money
Can he restrain himself from buying more stuff on credit? If not, pay the IRS. If he pays off the cards, he might wind up buying more stuff. IRS should be a one and done situation.
But if he had learned to be disciplined about credit card spending, he can probably go ahead and pay off the cards, save some each month, then use the extra money to pay the IRS down faster. Given the amount he’s paying to service his debt, in a year or two, he should find himself in a manageable situation, with more to save and a bit of extra room for spending.
Irs interest compounds but it’s only 7 percent . CC debt has to be at least 3x that
Pay the credit cards in full. Now there won’t be monthly payments, so going forward that money can be allocated toward paying the IRS off faster. Or, take what was once paying the credit cards monthly and put it in savings for an emergency fund.
Pay the credit cards, put them on ice, then get that IRS plan
Credit card first. It will make paying the IRS easier.
People don’t go to prison if they’re already on a payment plan.
pay off the credit cards, then use that money to pay off the IRS faster.
May depend somewhat on whether he has the causes of those two debts under control. If the tax screwup was a one-time thing that is under control now and you don’t forsee any issues with continuing to make the IRS payments then he should probably pay off the credit card (which is also probably the higher interested debt). In that scenarios it is important to also make sure the the source of the problem is fixed: if poor impulse control will lead to future overspending then he needs to cancel the cards after they get paid off, or take measures to make sure that they can’t be used irresponsibly in the future.
If you think that he might be cruising towards other future difficulties with the IRS then maybe a case could be made for clearing that debt ASAP because the IRS has the power to make his life more difficult if a future mistake might compound his tax problems (even if it might not be the financially optimal choice).
IRS rate is currently 7%.
Paying off the high interest credit card debt is usually preferred. However, it does no good to pay off the credit card debt if he goes and runs up more debt again.
Paying off the cards frees up additional money to apply to the IRS debt each month.
He also needs to make sure he is not accumulating additional IRS debt.
Pay off credit cards & take the freed up money to send extra amounts to the IRS, but you would want to set aside some for emergency savings.
IRS. They are more dangerous than the mafia.
+1 for pay off cc debt then increase the monthly irs payments with the cash that would’ve gone to the cc minimums
If it were me I’d pay off the IRS immediately
I would pay off the cc and put the rest in an hysa for an emergency fund
At 25% interest on $14k your brother is paying nearly $300 a month just on interest. Paying that off will make it so much easier to deal with the tax debt.
Does he intend to fully pay both debts and then stay out of debt trouble? If so, keep the IRS payment plan and pay off the credit card debt. This way he can begin restoring his credit while continuing to resolve his IRS issue. If he doesn’t have a stable income or is likely to get in over head again, pay the IRS debt and see what you can work out with the credit card companies (payment plan, partial forgiveness, etc.). These will kill his credit and ruin those relationships, but I would much rather be square with the IRS if I could only choose one.
He should pay the IRS. There is no financial relief from the government. There could be for the credit cards.
Math on this says pay the CC first. I’d rather owe a CC company than the IRS though if I’m bad with money.
Credit card pay off will benefit credit rating