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Do Not, Repeat Do Not, Pay Your Taxes With a Credit Card

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April 15th is nigh.

And since you’ve spent enough time on NerdWallet to be a de facto credit card nerd yourself, you might be thinking, “I know how to get anywhere from 2% to 5% cash back on credit card purchases, so if I pay my tax bill with my card, I can screw the IRS!  FTW!”

Hate to burst your bubble, especially since you seemed so excited for a moment there, but it doesn’t quite work that way.  You see, according to the IRS website you will be charged a fee of 1.95% to 2.35% to use a credit card payment service.  And the only way to get anywhere near that in rewards is to use a 2% rewards card like the Escape by Discover® Card, Schwab Bank Invest First, or Fidelity American Express.  Those juicy bonuses that other cards offer won’t be applied toward your tax payments, so that’s as high as you can go.  And even if you can eke out that 0.05% in rewards, it’s hardly worth it.  Plus there’s a small chance that your credit card company decides to charge it as a “cash advance” rather than a purchase, which would mean another layer of fees.

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Another option you might be considering is American Express rewards.  They announced in January that they’ve worked out a deal with pay1040 and Official Payments Corp, where cardholders can redeem their Membership Rewards toward their tax bills.  This seems convenient, especially if you have a bunch of unredeemed rewards, but don’t be tempted.  The exchange rate on these payments is “approximately 200 points per $1” according to Amex’s website.  Assuming you paid $1 for each of those points, that’s only a 0.5% redemption.  And you still have to pay the 1.95-2.35% convenience fee.  You’re much better off paying your taxes in cash and redeeming your Amex rewards for gift cards, usually at 100 points per $1, or 1% redemption.  Walletpop did a pretty revealing analysis back in January that’s worth a look.

Now, that still doesn’t answer the question of what you’re supposed to do when you just can’t pay.  The IRS got you good this year, and you can’t quite pony up the cash to keep Uncle Sam happy.  So then what do you do?  There are still a couple of options you should consider long before you result to your credit card.

First, think about whether or not you can come up with the money within 120 days.  If so, the IRS will let you off easy and just allow you to postpone your payment for 120 days.  You just need to call 800-829-1040, or fill out an Online Payment Agreement.  According to their site, if you owe less than $10,000 and you don’t have a history of non-payment, you’ll be automatically approved.

If 120 days isn’t enough, see if you can borrow money from friends, family, or a bank.  Or if that doesn’t do it for you, think about Peer-To-Peer Lending sites like LendingClub or Prosper.  This is probably the cheapest way to get your hands on some cash, because you don’t have to deal with any penalties or exorbitant interest rates.  Nor do you have to continue dealing with the IRS.

If you absolutely can’t get the cash, the IRS will allow you to set up a payment plan for your taxes.  You can use the OPA mentioned above if you owe less than $25,000, otherwise you have to submit another form – 9465.  In either case you’ll be charged a $105 convenience charge, or $52 if you set up an electronic debit plan, then you’ll be charged interest monthly.  The rate that the IRS charges is 4% right now and it resets quarterly (most likely going up from here), plus they tack on another 0.25-0.5% per month as a “late payment” charge.  All-in, this means you’d be charged more than if you borrowed the money elsewhere, but it’s still substantially less than you’d be charged by your credit card company (anywhere from 10% to 25%).

So no matter how you cut it, credit cards are not the way to go when paying your taxes.  Use them for anything and everything else, but then use cash when dealing with the IRS.

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