Paying Taxes by Credit Card Probably Isn’t a Good Idea

Fees will eat up your rewards, and the interest on your card is probably much higher than what the IRS charges.
Claire TsosieApr 5, 2017

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A big tax bill is like hay fever. You don’t want it, you try to avoid it — and then April rolls around and it hits you hard. Now you have to figure out how to take care of it. Taxes have to be paid, and putting them on your credit card might seem a good option. Maybe you need more time to come up with the money, or you're imagining the rewards you could rack up by putting a big expense on your card.

However, except in a few specific circumstances, paying taxes with plastic probably isn’t a good idea, and here’s why.

When you buy something with a credit card, the merchant pays processing fees to the financial institutions that handle the transaction. But when you put a tax payment on a credit card, the IRS doesn’t pay those processing fees. You do.

To pay federal taxes with a credit card, you have to use one of the IRS’ third-party credit card processors, which charge fees of 1.87% to 2% of the amount you put on the card. If you use software such as TurboTax to file returns and pay taxes online, the fees may be higher.

These fees could eat up any credit card rewards you earn on the payment. Most cards offer only a 1% to 1.5% rewards rate for this type of transaction.

The exceptions: In some cases, to offset the fee. If you put your tax payment on a card with a 2% rewards rate or higher and then pay it off in full on your next statement, your rewards might exceed the fees (barely). Or if your tax payment is enough to net you a big sign-up bonus or qualify you for valuable perks on your card, then it may be worth eating the processing fee.

“Depending on the interest rates on your credit card, you could end up paying a lot,” says Trish Evenstad, president of the Wisconsin Society of Enrolled Agents, a group of tax experts. Her advice to people who can’t pay in full: “Pay as much as you can by the ... due date. Then you can set up an installment agreement with the IRS to pay the remaining balance.”

For 2017, for qualified taxpayers to set up an installment agreement online and pay via direct debit from a checking account, according to the IRS website. That’s in addition to 4% annual interest on unpaid federal taxes and a penalty of 0.25% of the outstanding balance for each month the agreement is in effect. That works out to an annual percentage rate of about 7%.

It’s a much better deal than 13.61%, the average APR for all U.S. credit card accounts that were assessed interest in the last quarter of 2016, according to the Federal Reserve.

The exception: Paying with a could be more cost-effective than setting up an installment agreement, if you can pay off your balance before the promotional period ends.

Charging a big tax bill on your card could put you within spitting distance of your credit limit, making it easy to max out the account and incur penalties. Your credit score 

“I’d look at ‘What is my financial situation?’” says Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. “If I need to have my credit card available for emergencies to pay for expenses because I might not have a rainy-day fund set aside, [I’m] better off not adding that credit card debt.”

The exception: If your card has a limit well in excess of your tax bill, charging it might not hamper your purchasing power or hurt your credit score much.

If you have the money to pay your tax bill, pay by check or direct debit to avoid fees. If you need more time, an installment arrangement with the IRS likely is your best option. Here’s what to do:

This article was written by NerdWallet and was originally published by The Associated Press.

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