Your taxes must be filed by April 15 to avoid a penalty from the IRS. If you owe Uncle Sam and you don’t have the cash to pay your tax bill, you might consider paying by credit card. Is it a good idea to pay your income taxes with a credit card?
The cost of charging your taxes
If you choose to pay your taxes with a credit card, you’ll be charged a convenience fee. Convenience fees can be a percentage of your tax bill, 1.95% to 2.35%, or a flat fee up to $3.95. When you use your credit card at a store, the merchant pays the processing fee. But, the IRS has chosen not to pay the cost of convenient credit card payments, so credit card issuers pass that cost along to the cardholder who charges their tax bill.
Doing it for credit card rewards
Additional credit card rewards are rarely, if ever, an incentive to pay your taxes with a credit card. Your credit card would have to reward you at a rate that’s higher than the credit card convenience fee to make it worth your while. Otherwise, you’re paying more to receive the rewards than you’re actually receiving in rewards.
3 reasons you shouldn’t charge your taxes
You won’t be able to discharge an income tax credit card balance in bankruptcy because federal law doesn’t let you bankrupt income taxes. So, you’ll be stuck with the credit card balance whether you can pay it or not.
If you don’t pay off your balance in full at the end of the first month, you’ll be assessed a finance charge based on your interest rate and balance. You’ll continue to be charged interest each month you have a credit card balance. Credit card interest rates could mean you pay much more in interest than you would have if you’d chosen an IRS installment plan (more on that below).
Some credit card issuers might think you’re a credit risk if you have to charge your tax bill. If you don’t have the cash to pay your income tax, do you really have the cash to pay your credit card bill? Because of that, your card issuer may cut your credit limit or cancel your credit card.
Options for paying your tax bill
Instead of using a credit card, you can file an extension or pay your taxes late. If you pay late, the IRS charges a 1% charge each month you’re late. That means you’ll have a $5 late fee each month your $500 tax bill is late. You might choose to pay the fee if you can pay off your taxes within four months. Otherwise, contact the IRS about a repayment plan.
The IRS also guarantees a repayment plan as long as your tax is below $10,000, you’re not already on a repayment plan, and you can pay your tax bill within three years. There’s a one-time fee of $105 and you’ll pay interest each month. The IRS will reduce the fee to $52 if you agree to automatic debit and $43 if your income is below a certain amount.
The costs of charging taxes on a credit card are much higher than the benefits. Before putting my taxes on a credit card, I’d pursue payment arrangements with the IRS.