A Guide to Paying Your Taxes With a Credit Card

Bradley Robbins  | 

Once a year, almost all working Americans have to pay income taxes. Once your taxes are prepared and you have calculated the total amount due, you may want to make a payment with 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 doing so instead of writing a check or signing up for an installment agreement. Furthermore, many states will allow you to pay state taxes with a credit card — it’s vital to visit your state’s tax commission website to determine if this is an option.

This guide will help you understand the benefits and drawbacks of paying off your taxes with a credit card, then provide some advice on determining whether this is the right course of action for you.

Pros and Cons of Paying Taxes With a Credit Card

Before reaching for your credit card, it’s important that you determine the financial consequences of paying off your taxes with it. Understand that your specific financial circumstances will determine whether this route is beneficial. For instance, how much will you need to pay? How long will it be before you’ll be able to pay your card off? Review the pros and cons below with these questions in mind.

Pros

There are a few benefits to using a credit card to pay off your taxes. These include:

1. Paying Off Taxes With a Credit Card Is Easy

The most straightforward benefit of paying your taxes with a credit card is that it takes only a few seconds and you can have your payment approved 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.

2. 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 cashback, 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.

3. You Can Gain Time With a 0% 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 0% 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.

4. More Flexible Payment Terms

If you anticipate changes to your income or expenses, it can help to have more flexible payment terms for paying taxes. IRS repayment plans generally offer less flexibility than what you can get through your credit card, unless you remain in contact with the IRS as your circumstances change.

If you pay off your taxes with a credit card, you can pay off the balance as quickly or slowly as needed, depending on your financial situation — assuming, of course, that your card’s terms don’t make the minimum monthly payment higher than the repayment plan would.

Cons

There are also several major downsides to paying federal taxes with a credit card. These include:

1. Processing Fees

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.  Indeed, there is a fee of 1.87% to 1.96% of the total amount for using a credit card, depending on which payment processor you use.

While this may seem like a small price to pay, it can add up. Your processing fee may be $100 on a $5,000 tax bill on a credit card, but only a few dollars if you choose debit. Some providers also allow direct debit — a form of electronic funds transfer that has few, if any, additional transaction fees.

2. IRS Installment Agreements Cost More When You Use 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.

3. Credit Card Interest Can Dramatically Raise the Total Cost

IRS interest rates vary from 2.5% to 7%, depending on your circumstances. This is less than half of the interest rate of the average credit card, which is 15%. Over time, this substantially higher rate can add up to excessive interest fees.

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 15% APR, while paying only a $100 minimum monthly payment, will take over six-and-a-half years to pay off, and you’d end up paying much more than that when you add in the $2,896 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.

4. Risks to Your Credit Score

Another 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% of your available credit on 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?

Determining whether you should pay your taxes with a credit card comes down heavily to your current financial situation. The first point to consider is whether 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 quickly due to 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 — and potentially lead to a decent tax refund.


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