As the old saying goes, there are no sure things in life, except death and taxes. If you are self-employed, or your tax liability exceeds your paycheck’s withholdings for any reason, then you will have to make a tax payment to the IRS, and possibly your state and local governments as well.
There are three ways that you can make this payment; with a check, a debit card, or a credit card. For many taxpayers, it’s tempting to use a credit card. But before you do, you need to consider all of the advantages and disadvantages of it.
The Advantages of Using a Credit Card to Make Tax Payments
There can be several benefits to using your credit card to make tax payments. First, it’s incredibly quick and convenient to pay a tax bill with a credit card. You simply choose one of the three companies authorized by the IRS to accept tax payments. Then you designate the IRS form that your tax payment will apply to, input your credit card information, and instantly receive a receipt. This receipt can be vital if you need to prove that you paid your taxes for the purpose of applying for a loan. And when you pay by credit card, you don’t have to supply postage or worry about your payment getting lost in the mail, or misrouted within the IRS.
In addition, your credit card can offer financing for your tax debt. A tax payment is treated just like any other purchase, and you will normally incur interest charges at the standard rate. However, there are credit cards that can offer 0% APR promotional financing on new purchases for as little as six months, or for as long as 21 months. A competitive offer from a major credit card issuer will give you interest free financing for 12 to 18 months. When you are able to utilize one of these interest free promotional financing offers, you can finance your tax liabilities at no cost. Just keep in mind that when the promotional financing period expires, the remaining balance will start incurring interest charges at the standard rate.
And even when your credit card doesn’t have a promotional financing offer, you can still receive up to 55 days of interest free financing by utilizing your credit card’s grace period. You can do this by avoiding interest charges when you pay your card’s statement balance in full before the due date. And if you pay your taxes at the beginning of your statement period, you will have as much as 30 days before your statement closes. Then you will have 21-25 days between your statement closing and when your payment is due. So long as your pay each month’s entire statement balance, interest charges will be waived with nearly all credit cards.
Finally, your credit credit card may offer valuable rewards in the form of points, miles, or cash back. In addition, there are credit cards that offer a valuable benefit or a lump sum reward when a specific annual spending threshold is reached.
However, you have to keep in mind that there is a fee charged by the companies that are authorized to accept credit cards on behalf of the IRS. Most state and city governments also charge a fee to pay a tax bill with a credit card. But when the value of the rewards offered exceeds the cost of the fees charged, you can come out slightly ahead while enjoying the convenience of paying with a credit card, and possibly some interest free financing.
The Disadvantages of Paying your Taxes with a Credit Card
Despite all of the potential benefits of using a credit card to pay your taxes, you have to consider several possible drawbacks. The first downside are the fees imposed by the payment processors. Currently, these fees range from 1.87% to 2.25%, depending on which credit card processor your choose. Thankfully, these processing fees may be tax deductible, minimizing your net cost. You should consult your accountant or tax advisor to learn if your credit card processing fees are a tax deductible expense.
The next issue you must face is the interest charges that you may pay. About half of all American credit card users will carry a balance on one or more of their cards throughout the year, and credit card interest rates are much higher than other kinds of loans. This is because credit cards ar unsecured debt, unlike a home loan or a car loan. And unlike a home mortgage or a student loan, credit card interest charges are never tax deductible.
The national average interest rate for credit cards is about 15%, and the most competitive, low interest rate cards may offer rates in the 8% – 10% range for the most qualified cardholders. On the other hand, the IRS will finance your tax bill using a payment plan at a rate of just 6% per year. Clearly, taxpayers would be better off using the IRS’s installment agreement than paying interest charges at the standard rate. Nevertheless, you should consult your accountant or tax advisor to learn what kind of installment plan you may qualify for.
Finally, you have to compare the advantages of using a debit card verses a credit card. There is a processing fee for using a debit card, but it’s a small, flat fee of between $2.50 and $3.95 depending on the payment process you choose and the size of the payment. And by paying with a debit card, you will still receive all of the security and convenience of using a credit card, along with an instant receipt for your payment.
Bottom Line
Deciding how to pay your tax bill is not as simple of a decision as it might seem. Using a credit card can offer you valuable rewards, and interest free financing, but if you will pay processing fees and possibly interest charges, which can be very costly. By understanding the advantages and drawbacks of using your credit card to pay your taxes, you can make the right decision for your unique situation.
Have you every paid your taxes with a credit card? Tell us about your experience below!
