Q: Is it Wise to Make Your Tax Payment with a Credit Card?

April 15th (actually the 17th this year) is dreaded by millions of Americans. Taxpayers that expect to owe the IRS often wait "to the last minute" to file their tax return. In an effort to make the payment process more convenient, the IRS introduced a credit card payment option last year. This option was an instant hit, according to Libby Wells of Bankrate.com, and resulted in filers charging $147 million on American Express, Discover Card, and Mastercard. This year the IRS is even allowing extension payments, partial payments, and estimated tax payments. While the program has generated much interest, there are some points that cardholders should consider before jumping on the tax payment bandwagon... :)

* Whether you pay over the phone (1-888-2PAY-TAX) or electronically, utilizing Intuit's TurboTax or MacInTax's electronic filing software, you can expect to pay a fairly hefty convenience fee for either option. The phone option will result in a fee of from 2.5% to 3.0% based on the amount of tax due. The electronic option will result in a convenience fee of 1.75%. For example, a 3.0% fee for a $2,000 tax payment translates into a fee of $60.

* Many cardholders have viewed the credit card payment option as a clever way to earn frequent flier miles or cash incentives. Official Payments Corporation, the developers of 1-888-2PAY-TAX, proclaim that cardholders can "make their tax payments work for them". While you can earn miles and cash rebates by charging your tax payment (the payment shows up as a purchase on your card, instead of a cash advance), the penalty for doing so usually outweighs any rewards. Carefully compare the reward that you can earn by charging your payment to the convenience fee that will be levied. 

* If you anticipate having difficulty making your payment, consider the installment payment plan option offered by the IRS. This option, while not available to everyone, allows taxpayers to "spread their tax payments out over a desired period of time", typically five years or less. While there is a $43 set up fee, the interest rate is initially only 8%. You can learn more about this payment option by clicking here.

* Despite potential pitfalls, charging your tax payment is an attractive option for some taxpayers. The two main attractions are flexibility and convenience. The ability to charge estimated taxes, partial payments, and extension payments is a prime example of the growing flexibility and of the program. Moreover, not all taxpayers qualify for the installment payment option.

* There are many guidelines and restrictions governing credit card payments and cardholders should be cognizant of this. We suggest that cardholders interested in charging their tax payment review the program in detail by visiting the IRS online. Goodluck!