There are pros and cons to paying your tax bill with plastic, and extra fees you may not know about.
This post comes from Bill Hardekopf at partner site LowCards.com.
April 15 is less than two months away, and many of us are already trying to figure out how to pay our taxes. Using a credit card to pay taxes may seem like an easy way to appease the IRS, but this may not be the most financially prudent thing to do.
Before you pay taxes with a credit card, you need to know the pros and cons, and what other options might be available.
Pros of paying taxes with a credit card
If you pay your taxes with a credit card, you will not have to worry about being in debt to the IRS or incurring a late-payment penalty. You would just have to make payments on your credit card until the balance is gone.
In rare cases, you may be able to earn some rewards points for paying taxes with a credit card, depending on how your rewards program is set up. Many credit card companies have blocks on these payments to prevent them from counting toward your rewards, so check with your issuer.
If you are trying to consolidate your debts onto a single account, this may give you an opportunity to do so. Use a low-interest credit card to pay off all of the debts you have, and then you can focus on making one payment each month.
Cons of paying taxes with a credit card
When you charge your taxes to your credit card, you have to consider the interest rate on your card. This is usually much higher than what you would have with a payment plan through the IRS. If you have a new card with 0 percent interest, note when that introductory rate expires. You will need to make sure to pay off your debt before then.
Know that there are fees for paying taxes with a credit card. Typically, charging taxes with your credit card will cost an additional 2 to 4 percent of your tax bill. That means you’d be paying an extra $20 to $40 on a tax bill of $1,000. These fees do not go to the IRS. They go to the payment processor. They’re basically money out of your pocket.
Having a high credit card balance could impact your credit score; having a high tax debt with the IRS will not. Your debt utilization ratio on your credit card — the amount of debt divided by your available credit — will increase when you charge your taxes, and that could negatively affect your credit score if that credit card debt remains high for an extended period of time.
How to pay taxes with a credit card
If you are going to pay taxes with a credit card, you will need to do so online. There are six websites approved by the IRS to process these payments, as listed on the IRS website. Each one charges a different fee, and they accept different types of cards for payment.
Go to the website and complete the information that comes up in the prompts. You will have to select the type of payment you are making (installment, payoff, etc.), and provide information that verifies your identity. Once you pay, you will be sent an email with a receipt for the payment you made.
Other tax payment alternatives
If you do not want to pay your taxes with a credit card, consider setting up an installment plan with the IRS. This will give you time to pay off your debts. Call the IRS to speak to a representative about your options. He or she will work something out with you to suit your budget and your bill.
You could also make tax payments with a debit card, rather than a credit card. You will not have a chance to earn rewards that way, but you will pay much less in processing fees. Most websites charge a flat fee of $2 to $4 for debit card transactions, which could save a lot of money in interest penalties in the long run.
You may be able to take out a low-interest loan to pay off your tax debt. Then, you would be making payments to a bank, not the IRS. Note that this may have a negative impact on your credit score at first, but it might actually help your score over time.
Consider all of your options before paying your taxes with a credit card. A smarter solution may be out there for you.
More on LowCards.com:
- Some Credit Card Rewards May Be Taxable
- Best Uses For Your Tax Refund
- Forgiven Credit Card Debt May Be Taxable