Should you pay your taxes with a credit card?

Because the IRS charges taxpayers a hefty fee to use plastic, it’s usually not a good deal. If you don’t have the cash, other options could cost you less.

 By Jason Steele, Credit.com.

While the majority of Americans will get a tax refund this year, a sizable number of us will have to scrounge up money to pay Uncle Sam what we owe.

And while some are vaguely aware that there are ways to pay taxes with their credit cards, few really understand the benefits and drawbacks of these options.

Here are the basics.

How to pay taxes with a credit card

The IRS is happy to receive payment in the form of a check, but the agency does not directly accept credit cards. Instead, the IRS has authorized a handful of private companies to accept payment on its behalf. And while this service is convenient, it comes at a cost.

Authorized processors charge a fee of between 1.88% and 2.35% of the amount remitted to the IRS. In addition, some state and local governments will also accept taxes paid with a credit card.

To choose an authorized payment processor, visit the IRS credit card payment site.

Credit card vs. debit card

Taxpayers can also use their debit cards to remit payment to the IRS through the same authorized payment processors. And rather than being charged a percentage of their payment, payments using a debit card only incur a flat fee of about $2 to $3 per payment.

Therefore, taxpayers who are using a payment processor for convenience alone will want to use a debit card instead of a credit card, so long as the payment is above approximately $100.

When it makes sense to use a credit card

With a credit card fee of at least 1.88%, most taxpayers will save money by simply mailing a check to the IRS. But there are some rare situations where payments using a credit card can make sense. First, those who have a card with a 0% APR promotional financing offer can avoid interest for as long as 18 months. This may be the best option for cardholders who are unable to pay their tax bills immediately.

Also, there are very few credit cards that offer rewards greater than the fees the processors charge, but they do exist. For example, the Capital One Venture Rewards card offers double miles for each dollar spent, and each mile is worth one cent as a statement credit towards any travel-related expense. So by paying a 1.88% credit card fee, cardholders still earn a small 0.12% reward on their tax bill. For example, a $2,000 tax payment would result in a net gain of $2.40 in rewards.

Finally, paying taxes with a credit card can be an easy way to meet the minimum spending requirements necessary to receive a credit card’s sign-up bonus. For instance, new applicants for the Starwood Preferred Guest card from American Express earn 10,000 points after their first purchase and another 15,000 points after spending $5,000 within six months. If cardholders are unable to spend $5,000 in that time, incurring the credit card fee to pay taxes might be worthwhile as the additional 15,000 points can be worth hundreds of dollars in rewards. Even then, these strategies only makes sense when cardholders avoid interest by paying their statement balances in full.

Why it’s a bad idea to use a credit card

Unless cardholders are using a 0% APR promotional financing offer, it makes no sense to use a credit card as a means of financing a tax payment. This is because the IRS offers its own financing options with lower interest rates. For instance, the current rate is 3%, although it can be adjusted each quarter. This is far below the standard interest rates of any credit card, especially when the credit card processing fee is considered. And while these installment plans do have a setup fees, they still offer more savings for most cardholders compared to credit card fees and interest.

By understanding the process of paying taxes with a credit card, taxpayers can make the best decision when it comes time to fulfill this essential obligation.

Reprinted from MSN Money
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About melvynburrow

Attorney and CPA services.
This entry was posted in Credit, Credit Cards, Taxes and tagged , , . Bookmark the permalink.

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