Photo (cc) by 401(K) 2012
It’s tax time, and everyone’s talking about how to spend their refunds.
Last month, Money Talks News founder and CPA Stacy Johnson offered 7 Smart Uses for Your Tax Refund. And just this week, a survey by Taxsoftware.com found that most Americans are ignoring Stacy’s advice: “Fewer people plan to spend their refunds on savings or investments this year than in 2011 (27 percent vs. 66 percent) or to pay off debts (29 percent vs. 59 percent).”
But what about paying your taxes? That’s what I’m facing this year.
While you can spend a refund on anything, you only have three ways to pay the piper: Cut the IRS a check, set up a payment plan with them, or charge your tax bill to your credit card.
But to pay with a credit card, you have to go through the official IRS list of approved tax payment vendors – and it’s not free. Here are the pros and cons, and then I’ll explain how I’m conning the pros…
- “Convenience fees.” When you buy something with a credit card, the merchant pays the bank a processing charge. But Uncle Sam is not just another merchant – and he ain’t gonna pay. You are. The IRS’s approved vendors will charge you 1.89 to 2.35 percent, depending on which company and what type of card you use. Sadly, the fees you pay will always outstrip any cash-back plan your card offers.
- Credit card interest rates. The only thing worse than paying an exorbitant fee to take care of your taxes is paying interest on your credit card because you paid your taxes that way.
- Adding to your debt. If you’ve already spent the money you owe the IRS, and you have to take out a loan to meet your tax bill, charging it to your credit card is not a solution. For your current debt problems, check out 5 Tips to Find the Right Debt Relief Agency. For next year, speak with a tax professional to assure that you or your employer are withholding the right amount.
Clearly, taxpayers can get into serious trouble when charging tax payments to their credit card. But not always. Here’s when it can make sense…
- Fast and simple. When you charge an IRS payment to your credit card, the payment is processed online immediately, and you receive a receipt confirming your payment. This eliminates any risk of your payment getting lost in the mail. If you don’t have reliable mail service or are living out of the country – or if you simply think the “convenience” is worth the “fee” – these online payments might make sense. But consider the less expensive options of paying with debit cards or direct bank drafts first.
- Receive interest-free float. Those who pay their credit card balances in full and on time are essentially borrowing money from their bank interest-free from the time the payment is made until their next statement is due. If you’d rather pay your tax bill in May than in April, the additional fees might be worth it to you.
- Take advantage of a zero-percent introductory financing offer. Offers of zero-percent promotional financing on new purchases can last up to 18 months. While this is far better than one month of free interest, you need to be extremely cautious that you’re not just incurring debt that you’ll have a hard time paying off when the promotion ends.
- Earn credit card rewards. Many credit card users earn cash back, frequent flier miles, or other valuable loyalty points. Like I mentioned earlier, the cash back will never exceed the fees paid – but it is possible to earn miles or points that are worth more than your fee. For example, I often redeem credit card reward points for business-class international flights or luxury hotels. When I do so, the awards can be worth 5 percent – significantly more than the fees.
- Meet credit card reward goals. To receive most credit card sign-up bonuses, you’re required to charge a minimum amount within a certain time. In other instances, you’ll receive an extra award when you reach a spending threshold each year. For example, Chase offers 50,000 Ultimate Rewards points when cardholders spend $3,000 within three months. If paying your taxes with your credit card will allow you to earn the 50,000 points – worth $625 toward airfare – it’s easily worth the processing fees.
In the past, I wasn’t willing to pay taxes with a credit card because none of the rewards made it worth paying the fees. But this year is different.
I’ve recently received an American Express card that offers me 75,000 Membership Rewards points – but only when I reach a minimum level of spending that’s just outside my reach. By charging my taxes to this card, I’ll receive a sign-up bonus that justifies the fees I will have to pay – those points are worth a minimum of $750 in cash back or 75,000 miles in one of many airlines. That’s more than some taxpayers’ refunds – and it’s not my money Uncle Sam has been holding onto, either.
Who knew paying taxes could be so profitable?
To learn more about your taxes, check out our Tax Hacks 2012 series…