You’ve probably wondered if the IRS allows you to pay your federal tax bill with a credit card, which sounds like an attractive option if you can’t come up with the money immediately or you want to earn rewards points.

But just because you can pay taxes with a credit card doesn’t mean you should. Your credit card tax payment will be subject to processing fees and interest, which can make your tax bill more expensive.

How Can You Pay Your Taxes With a Credit Card?

If you decide that paying your taxes with a credit card is the right move for you, the process is fairly simple. Once you determine the amount you owe, visit the IRS payment page, go to the “Pay by Debit Card, Credit Card or Digital Wallet” section and select “Pay now by card or Digital Wallet.” Select a preferred processor and choose “Make a Payment.”

Other steps include specifying the type of taxes you’re paying; entering your taxpayer information, payment amount and credit card number; and submitting the payment, says Josh Zimmelman, owner and founder of New York-based Westwood Tax & Consulting.

You also have the option to pay federal taxes with a credit card when you e-file via online tax preparation software, including TurboTax and H&R Block, but you might get hit with even higher rates than with IRS payment processors. For example, you’ll pay a 2.49% processing fee (minimum $2.59) with H&R Block.

You don’t have to pay the higher fee, however. Even if you file with a tax service, you can make payments with one of the three approved credit card processors. Each processor also has phone numbers you can call to pay by credit card:

There’s one guideline to keep in mind as you consider paying your taxes with a credit card: The IRS limits the number of payments you can make per tax form in a calendar year. In most instances, that’s two credit card payments per year.

Is It Worth Paying Taxes With a Credit Card?

Despite the cost, there are some benefits to charging your federal tax payment to a credit card. These include:

  • Earning rewards. If you have a credit card that offers generous rewards, you might want to pay your tax bill with the card to rack up points and then pay the balance immediately. Just be sure you’re earning rewards at a higher rate than the processing fee. Processing fees have come down a bit in recent years, while rewards have grown, meaning it is possible for the rewards to outweigh the fee with certain cards.
  • Reaching a spending bonus. Similarly, if your credit card offers a rewards bonus for meeting a certain spending threshold, your tax bill could be a large enough expense to get you there. This can be especially helpful for meeting the high spending minimums for some lucrative travel rewards cards. Again, you need to pay the balance in a timely manner to avoid accruing interest and canceling out the value of the bonus. Also, if you have a couple of cards with spending minimums you’re trying to meet, you could split your payment between both cards.
  • Buying more time. Paying taxes with a credit card is often driven more by the need for financing than rewards potential. “We’ve had several clients over the years with tax bills that they could not pay,” Zimmelman says. “We recommended that they apply for a new credit card with an introductory 0% interest charge for 12 months. The only extra cost is the merchant processing fee.” He adds that compared with the interest and penalties associated with an IRS installment plan, “this was a huge savings.” The key, though, is to pay off the balance before the introductory annual percentage rate period is up.

On the other hand, there are potential downsides to paying your taxes with a credit card, including:

  • When fees outweigh rewards. To earn a benefit from paying with a credit card, you’ll want your rewards to be worth more than the fee. For example, if you charge $1,000 to your rewards credit card that pays 1% cash back, but you also pay a processing fee of 1.99%, you’ll end up losing about $10.
  • Higher credit utilization. One major factor affecting your credit score is your credit utilization ratio. This is how much of your total available credit you’re actually using. For example, if you had $5,000 in available credit and carried a balance of $2,000, your credit utilization would be 40%. If your utilization rate is too high, your credit score can take a hit. Experts recommend keeping it to less than 30%, but the lower, the better. By charging a large tax bill to your card, you could put yourself in danger of pushing your utilization too high, so be sure you have plenty of available credit before you pay taxes with a credit card. High credit utilization could be even more of an issue now because of the latest FICO scoring model, so it’s a good idea to keep balances under control.
  • Interest charges. If you’re unable to pay off your credit card balance right away, you’ll pay interest on the tax-related charges, and you will continue to accrue as long as you carry a balance. Considering that the average minimum credit card interest rate hovers at more than 15%, that’s a hefty fee to incur for charging your IRS bill, and it’s much higher than what the IRS charges for an installment plan.

Are Credit Cards the Cheapest Way to Pay Your Tax Bill?

If you’re faced with the choice between paying by credit card and not paying at all, charging may be a good idea. Tricia Rosen, founder and principal of fee-only financial planning firm Access Financial Planning in Massachusetts, says the penalties and late fees assessed by the IRS for not paying “can be pretty onerous and accrue quickly.”

But Rosen says if you have the cash available to pay your tax bill, it generally doesn’t make sense to use a credit card because of the potential interest charges.

Let’s say you have a $1,000 tax bill you can’t pay right away and need six months to pay it off. At 15% APR, you’ll pay $44 in interest over six months, plus a $20 processing fee to make the transaction, for a total of $64 in interest and fees. If you earn $10 cash back (at a rate of 1% cash back), you’ll effectively pay $54 to finance your $1,000 tax bill over six months.

An installment plan with the IRS is likely to be less expensive. If you can pay off your tax bill within 180 days, it costs $0 to set up an installment plan, though you will be subject to interest on the balance. And unlike paying with a credit card, as long as you make your payments on time, an IRS payment plan doesn’t hurt your credit score.

But no matter what, make sure you file your taxes on time, even if you don’t have enough money to pay right away, so you can avoid a filing penalty as well, Zimmelman says. “An extension only gives you extra time to file without penalty, but not extra time to pay.”

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *