Ask any financial expert whether you should pay your tax bill with a credit card, and the answer is almost universally the same: Don’t do it. Credit cards charge far more interest on outstanding balances than the IRS does. There’s also a fee to pay your taxes with a credit card, which usually wipes out the value of any points or miles you might get.
But if you insist on paying your tax bill with a credit card, tax pros say either of these tactics might work — if handled carefully.
1. Get a card with a 0% introductory offer
How it works: You use a card with a 0% introductory interest rate to pay your tax bill on time, then you pay off the balance before the 0% offer ends. Many cards offer a year or more interest-free.
Pros: The IRS gets its money on time and you score an interest-free loan, avoiding the IRS’ interest rate of 5% and a late-payment penalty of 0.5% for each month or partial month your tax bill would have otherwise been overdue.
Cons: There’s a fee to pay your tax bill with a credit card, typically around 2%. Plus, cardholders need to be sure they can pay off the card before the 0% promotional period ends, warns Leslie Thompson, a certified public accountant and chartered financial analyst at Spectrum Management Group in Indianapolis.
“If they don't end up paying it off by the end of whatever that period is … then it's a really high interest rate,” she says. “So someone's going to want to make sure that they have the means and discipline to be able to pay that off within whatever time constraint.”
2. Get a card that gives you cash back
How it works: You use a card with cash-back rewards to pay your tax bill. You pay a fee to pay your taxes with a credit card, but then you get cash back, which cancels out or offsets the fee.
Pros: You get reimbursed for some or all of the cost of paying taxes with a credit card, and you probably get a few extra weeks to pay the bill before incurring interest. Cash-back rates vary among cards, but many are around 1.5%, which would offset most of the payment fee. Some cards pay 2% cash back or more, which may be enough to offset the fee entirely.
Cons: “I think it's really only an option, or a good option, for anybody who’s going to pay that credit card balance when the next bill arrives,” cautions Neil Johnson, a partner at the Dolins Group accounting firm in Northbrook, Illinois. Carry a balance past the end of the cycle, and you risk incurring the wrath of high interest rates. Also, read the fine print before signing up: The card might limit how much cash you can get back and on what purchases.
But really, don’t do it
If you need more time to pay your tax bill, a credit card should still be low on your list of options, warns Mike Repak, a vice president and senior estate planner at financial services firm Janney Montgomery Scott.
Borrowing from family or even temporarily scaling back 401(k) contributions (if your employer isn’t matching them) may be better than resorting to a credit card, Repak says. And don’t forget: The IRS offers payment plans and installment agreements.
“They do charge interest, but I think it's well within the interest rate that's typically charged by a credit card company,” he says.
No matter which avenue you take, be sure you pay the IRS what you owe.
“They are not good creditors to horse around with,” Repak says. “Not that the credit companies are, but the IRS … they have ways of getting your attention.”