As most people are well aware, the only two certainties in life are death and taxes, and the latter we must face every year. While most of us automatically have taxes taken from our paychecks and sent to the IRS, the way you have your withdrawals structured could leave you with more cash in hand throughout the year, but owing a significant amount to Uncle Sam when April 15th rolls around.
What can you do if you simply don’t have the money in your bank account to pay hundreds or thousands of dollars in taxes when you file your income tax returns? One option that many people turn to is paying with plastic.
In truth, you could enjoy some benefits when you pay with your credit card, but there are also some potential drawbacks you should be aware of so you can plan accordingly and come out ahead. Here’s what you should know before you pay your taxes with a credit card.
The absolute best reason to use a credit card to pay off your taxes is to buy yourself some time. What you don’t want to do is not pay, as this will result not only in penalties and interest charges, but eventually, liens, garnishing wages, and perhaps even jail time. Keep in mind there are many options available to you, including extensions and installment plans. If you just need more time to pay, though, using a credit card is one option.
One reason some people opt to pay their tax bill with a credit card (aside from not having enough cash in the coffers to pay the bill in full) is that they’re able to earn rewards in the process. Even if you have the money to pay your bill this instant, you might want to use a credit card for this purpose and pay it off immediately, gaining rewards points in the process.
Before you go this route, you need to crunch some numbers to make sure you’re really gaining the best advantage. Understanding fees, interest rates, and so on associated with this method of payment will help you to understand what you stand to gain or lose in the transaction, and whether or not it’s worthwhile to pay by credit card just for the rewards you’ll get in the process.
Using a 0% Card
Worried about the interest you’ll end up owing when you pay your taxes by credit card? You should be, especially if it will take you several months to pay off the balance. The good news is, you can essentially game the system by taking advantage of credit cards offering 0% incentives.
Even if your current credit card doesn’t offer 0% APR, you can get a new card that offers an introductory rate of 0% APR on purchases and/or balance transfers (say from a current card you use to pay your taxes with). There are, of course, caveats to contend with. If you plan to go this route, you should first make sure you can get approved for such credit card offers – you may need a top tier credit rating to qualify.
You also need to get a card with an introductory offer long enough to pay off your debt before you have to start paying interest. 0% APR offers can range from 6-18 months or more, so be selective. Don’t forget to read the fine print. Some cards offer 0% APR on balance transfers, but only for a set number of days or months after signing up, and they may charge a one-time fee. Comparison shopping will help you to find the best card for this strategy.
It is essential that you understand all of the pros and cons of paying your taxes with a credit card if you want to come out ahead in the equation. Unfortunately, you may not know that the IRS doesn’t accept credit card payments directly, which means you’ll have to pay through a third party, and they will charge you processing fees on top of whatever interest your credit card company charges.
Third-party services like Link2Gov Corp., Official Payments Corp., and WorldPay US will charge a “convenience fee” for being your middleman, which is generally around 2% of the amount being paid. You’ll also pay a fee if you’re using a credit card to pay through e-filing software. TurboTax, for example, charges 2.49% for credit card payments.
Like most organizations seeking payment, the IRS understands it can’t squeeze blood from a stone. For this reason, they’ll work with you to create a payment plan if you end up owing more than you can afford to pay in one lump sum. You’ll be able to pay down your bill in installments, generally with a small, one-time fee for setting up the plan (ranging from about $30-225).
You’ll also pay interest, but only at a rate of 3%, which is far less than most credit cards, as well as an additional monthly penalty of 0.25%. It’s important to consider all of your options before deciding on the payment method that’s right for you.