Can You Pay Your Taxes With a Credit Card?
Once a year, almost all working Americans have to pay due diligence to Uncle Sam. Once your taxes are prepared and you have the total, you may be tempted to slip the balance onto one of your credit cards. While the IRS and national tax preparers allow you to pay taxes by credit card, there are quite a few drawbacks to paying taxes using credit instead of writing a check or signing up for an installment agreement. Make sure you understand how the interest, fees and rewards work to make the right decision when it comes tax time.
Benefits of Paying Federal Taxes With a Credit Card
The most straightforward benefit of paying your taxes is that it takes only a few seconds and you have your card approval within minutes. That goes a long way towards peace of mind, especially if you’re worried about IRS collections. If you’re very careful and pay off your balance before it accrues any, or much, interest, you might even come out ahead of what you might pay with an installment agreement.
You May Earn Rewards
One of the biggest perks to paying off taxes with a credit card is that you might earn rewards in the form of cash back, travel points or other incentives. If you’re close to a rewards level and only need the few points that the payment will get you, it might be a smart move. Pay close attention to the value of your rewards versus the convenience fees charged for paying with plastic, however.
Interest May be Cheaper
If you simply don’t have the cash on hand and aren’t willing or able to pay the fees upfront for an installment plan, using your credit card may be a much better deal than borrowing from other sources. Charges for payroll loans and other short-term financing arrangements can amount to much more than what you might pay in principal and interest on your card.
Gain Time With a Zero-Percent Balance Transfer Promotion
If your card has an interest-fee promotional period, you may even avoid any additional charges. Moving your balance to a card that allows balance transfers with a zero-percent deferred interest plan may be a smart choice if your credit score is good and you are relatively sure you can pay the balance before the deferment period expires.
Downsides of Paying Federal Taxes With a Credit Card
One of the most obvious downsides to paying with a card is the upfront processing fees you have to pay for the convenience of using plastic. Since the U.S. government can’t cover the credit card fees for your transaction, most tax preparers charge upwards of 2 percent, with set minimums, for credit payments or a flat rate of $2 to $4 for debit charges. That also means that your processing fee may be $100 on a $5,000 tax bill on a credit card, but only $4 if you choose debit. Some providers also allow direct debit, a form of electronic funds transfer that has few, if any, additional transaction fees.
IRS Installment Agreements Cost More Using a Credit Card
Note that these credit and debit card fees must be paid on each and every installment if you pay using plastic, raising the cost of IRS installment agreements if you plan to go that route. The federal government does not allow chargebacks, and if there are any federal tax liens on your property, they will not be released until the IRS completes the transaction and notifies the relevant parties. Any overpayments are refunded, however, after the return is processed and any amounts due are settled.
Credit Card Interest Can Dramatically Raise the Total Cost
Failing to pay off your balance before you begin to earn interest on the taxes can have dramatic results. A $5,000 tax bill left on a card with a 16 percent APR, while paying only a $25 minimum monthly payment, will take 218 months to pay off, and you’d end up paying more than twice the amount due when you add in the $5,765.86 in interest payments. Remember, too, that if a deferred interest promotion expires with any balance left from the tax payment, you’re responsible for all of the deferred interest from day one. This can spike your balance far beyond the maximum limit on the card.
Risks to Credit
Another far less obvious downside is the potential harm to your credit score. If you choose to use credit over debit or another payment method, you could see your card utilization spike. Putting a $5,000 balance on a card with a $6,000 limit ties up over 80 percent of your available credit on at least that one card, reducing your VantageScore or FICO credit rating based on the other credit you have currently available.
Should You Pay Taxes With a Credit Card?
The determination if you should pay your taxes with a credit card comes down heavily to your current financial situation. The first question to ask would be if you can pay off the balance on your card in a reasonable amount of time. The interest fees you pay are a key way that credit-card companies make money, and you could be paying off that debt for a very long time if you can’t take care of it shortly due to daily compound interest.
If you can make the payment soon, consider the savings you might get waiting until you can use a debit or direct-debit payment option. These flat- or no-fee payment options can save you from hefty upfront costs.If full payment isn’t an option, consider if you wouldn’t be better served by making an installment arrangement with the IRS. While there are upfront and additional costs involved, they are often less than you’d pay in interest to a credit card company or third-party lender.
Once you’ve made your arrangement or payment, consider updating IRS Form W-4 with your employer. Having them withhold an amount closer to your actual taxes due can save you time and frustration when tax season comes around next year.
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This post was updated February 5, 2018. It was originally published February 6, 2018.