Yahoo Finance Should You Pay Your Taxes With a Credit Card?
When you receive your W-2s and start preparing your taxes, you can quickly determine if a tax refund isn't in your future. You may even discover that you owe the government a tax payment.
From mailing a check to electronic payments, there is a wide range of options for paying taxes. You may be surprised to learn that paying with a credit card has been an option since 1999.
While fees and potential interest charges generally make credit card payments one of the less attractive options, there are some instances when paying with a credit card can make sense.
[See: Answers to 7 Burning Tax Questions.]
When you shouldn't pay taxes with a credit card. There are two main reasons to avoid using a credit card to pay your taxes: Fees and interest charges. Because of the processing fee, paying your taxes with a credit card is one of the most expensive options. There are three service providers that can process IRS card payments: Pay1040.com, PayUSAtax.com and OfficialPayments.com. Fees range from 1.87 percent to 2 percent (if you use tax preparation software, the fees increase to 2.35 percent to 3.93 percent).
Credit card interest rates are higher than the interest you might pay for a personal loan or by taking advantage of IRS payment plans. If you are unable to pay off your credit card bill in full before incurring interest charges, you could end up paying 13 percent or 21 percent depending on your card's interest rate.
For example, if you owed the IRS $5,000 and elected to pay with your credit card, you could be charged a 1.87 percent fee of $93.50 and have a total of $5,093.50 on your card for both transactions. Even if your interest rate was a moderate 15 percent, carrying that balance for one month could push your debt to $5,857.53.
[See: 7 Most-Missed Tax Deductions and Credits.]
When paying with a credit card makes sense. While using a credit card for your IRS payment has risks, there are some instances when paying with a card is not only preferable, but advantageous.
Zero percent introductory APR offers. Many credit cards offer a zero percent introductory offer on purchases for new card holders. This can be from six to 21 months, depending on the card. Tax payments are handled as purchases by the service providers. Taking advantage of an introductory offer allows you to split up your payments over the course of the intro offer without paying interest. This can be a good option if you are certain you can pay off your debt before the intro period ends. An alternative is to use a payment plan or installment agreement through the IRS.
Welcome bonuses. Many issuers offer welcome bonuses to entice new card members. These can include enough airline miles for multiple flights, hotel points for free night stays or a cash back lump sum. To earn a bonus, you have to spend a minimum amount. Paying your taxes can be a quick and easy way to meet the spending requirement.
Earn credit card rewards. Many credit cards offer points or cash for every dollar you spend with the card. Cash back cards are easier to calculate since the lowest fee is 1.87 percent, so any cash back above that is a profit. For miles and points cards, the value is more complicated. If spending $5,000 would earn you 10,000 rewards points -- enough for an award flight or free hotel stay -- it may be worth it to you. Before deciding, review your cards and decide which one will give you the highest return.
[See: 12 Habits to Help You Take Control of Your Credit.]
High-spend bonuses. Some rewards cards offer significant bonuses for cardholders who reach certain spending thresholds. This can be as low as spending $20,000 in one year for upgraded status at a hotel, or as high as $40,000 in one year for bonus airline points. If you think your normal spending, plus your IRS payment, would earn you these free flights, stays or premium services, it may be something to consider.
Bottom line. Look at using your credit card to pay your IRS bill as a luxury rather than a necessity. Alternative options, such as paying by check or electronic direct pay, are free. Paying with a debit card has a flat fee that tops out at $3.95. Both options are less expensive than paying with credit cards and they won't impact your credit. Everyone's financial situation is different, and you should review your personal finances to see which option is best for your needs.
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