Paying taxes with your credit card: good, bad, or "meh"?

Written by Jennifer Rose Hale
Posted On: March 7, 2011

You'd have to have an iron constitution, or nerves of steel, not to experience a quiver of anxiety when you sit down to do your taxes. Each year brings different rules, and each year your life changes. Will this be the year you owe the IRS hundreds of dollars?

What if you don't have the money to pay?

Credit card to the rescue! Just as it can get you through an emergency car repair, your credit card can put you back in the good graces of the tax man. But what are the pros and cons? Let's do a quick walk-through.

Paying taxes with a credit card

Your 1040 form, TurboTax, or perhaps an actual human tax preparer just delivered bad news. You owe $867, and that emergency fund you've been working on…well, it needs more work. Not filing is not an option; people go to jail for that.

But, wait! You see a little note (or that actual human being tells you) that credit cards are accepted. Great, right? Problem solved.

Credit cards to the rescue, for a price

Sure enough, the IRS allows you to pay your taxes with a major credit card. By putting your taxes on plastic, you can push back your payment to April 18, 2011, then stretch it out to the end of your billing cycle or pay in installments.

And suddenly you run into a big "but." Your credit card is coming to the rescue, but it's a mercenary rescue. You'll pay something like 2 to 3 percent of the amount of your tax bill as a convenience fee. For example, TurboTax charges a 2.35 percent convenience fee on your $867 payment, which will add about $20 to your bill.

Reap rewards with your payment

On the other hand, maybe you're 500 points away from an Amazon.com gift card or a free flight to San Diego. Like any other purchase, paying taxes with your rewards credit card can earn points, airline miles or whatever other goodies your card offers you. Using a reward card can take away the sting of that convenience fee.

So, where's the box on the 1040EZ? Whoa--that would be too easy. The IRS doesn't accept credit card payments directly. You have to go through a third party--a company authorized to accept payments on behalf of the IRS. The IRS website explains that its contracts with these providers are "non-monetary"; the companies don't get paid by the IRS. They get paid by you, via those $20 convenience fees.

How third-party payments work

The IRS website offers a list of providers that handle credit card payments. You either can use a provider that only accepts payments (you'll complete and file your taxes separately) or one that is integrated with an electronic-filing service such as TurboTax. You also can ask your tax professional, if you use one, about a credit card payment option.

Wonder how the IRS will know you paid if you charge your payment separately? You'll provide your Social Security number at the time of the transaction, and your payment will be matched up with the number on your submitted forms.

Don't forget credit card interest

When you use your credit card to pay your taxes, as with any other credit card purchase, you'll pay interest on the balance if you don't pay it off during the grace period. If you're living within your means and always keep your card paid off, the interest is not an issue. But if you've racked up debt already, think twice before adding to it with a tax payment you can't pay off right away.

The good, the bad, the "meh"

So, to sum up paying taxes with a credit card:

  1. I can get my taxes done now (Good)
  2. That convenience fee is a bummer but unavoidable (Meh)
  3. I can rack up a few more airline miles (Good)
  4. I have to go through a third-party provider (Meh)
  5. I can pay off my credit card by May 1 (Good) or I'll owe my credit card instead of the IRS (Meh)

Conclusion: Using your credit card to pay taxes can be a good thing, especially if you can earn rewards points and pay off your balance. But if you don't want to go through this again next year, talk to your employer or your tax adviser about changing your withholding so that you can make the choice next year to pay however you like. Then you can face next year's taxes with nerves of steel.

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2 Responses to "Paying taxes with your credit card: good, bad, or "meh"?"
  1. chasingcreditcards March 16, 2011 at 10:26 pm

    This is great advice. For me, I'll be willing to pay using credit cards as long as I'll pay it in full the next billing. That is if I don't have the money ti pay for my taxes with cash.

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  2. mike March 09, 2011 at 2:20 pm

    hey jen good article -- i was dealing with this issue last year. a couple of things people should keep in mind. 1. the IRS will generally grant you an extension of up to 120 days during which time interest accrues, but generally at a much lower rate than most credit cards (though it's a little hard to figure that out -- at least it was for me). 2. you can also set up a payment plan with the IRS. they have to approve the plan, but it can be spread out for up to 5 years! again, to me, it seemed that the rates were lower than what you would pay on your credit card. i believe as you pay it, the amount is credited toward the principal of what you owe, meaning that interest accrues more slowly as well. at the end of the day, i ended up paying some up front, then getting an extension, and then paying my balance at the end of the extension period. but if i had to choose between the credit card interest or the interest to the IRS, i think the IRS offers better value. the people who answer the phones at the IRS were surprisingly helpful with all of this.

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