In the U.S., Tax Day is just around the corner, and many taxpayers may soon find themselves facing a bill from the IRS. That is especially true this year, with many parents feeling the effects of an early child tax credit distribution throughout the 2021 tax year.
If you filed your taxes only to learn that you owe this year, you might be wondering how to best go about satisfying that debt. Can you use a credit card to pay your taxes? And even if you can, should you?
“To determine if using a credit facility to pay taxes makes sense, taxpayers need to look at the transaction in terms of a cost/benefit analysis,” says James Mohs, associate professor in the Accounting, Taxation and Law Department at the University of New Haven. “Simply stated, do the long-term benefits outweigh the costs?”
What are the benefits of paying your taxes with a credit card?
When determining the benefits of paying your taxes with a credit card you must first consider up-front credit card fees, rate of interest, and any related credit card perks, says Mohs. “If the summation of these items creates a positive benefit, then the taxpayer should consider using a credit card to pay the taxes.”
Some benefits of paying your taxes with a credit card include:
1) You can earn a credit card welcome bonus
If you recently applied for a new credit card (or are about to apply for one) that offers a large welcome bonus, paying your taxes with that card could help you to quickly meet the minimum spend threshold required to earn the bonus. Even if you have to pay a processing fee, the bonus (depending on its size) could far outweigh the cost of those fees.
2) It can earn you credit card rewards
If you have a credit card that earns rewards on all of your spending — versus just rewarding spending in certain categories — your tax bill could be a good way to net quite a few points, miles, or cash back rewards. Whether or not this makes sense, though, depends on both the processing fee and how much you’ll earn in the “other” category of spending. For example, if your card only offers 1% back, but the processing fee is 1.87%, your rewards won’t make up for the fees involved with paying your tax bill. However, if you will earn 2% cash back, you’ll still net more rewards than you’ll pay in fees.
3) You can have extra time to pay off your taxes
If your tax bill is higher than you expected or you simply can’t pay it all off at once, using a credit card can buy you a bit more time. This is especially true with a credit card featuring a introductory 0% APR credit card offer, which makes it possible to extend the amount of time that someone has to pay off their taxes interest free.
Just make sure to pay that credit card bill off before the introductory period expires. If you don’t, any remaining balance will jump up to the normal interest rate, and you risk a higher payment in the end with new finance charges.
4) It offers greater security and convenience
Paying with a credit card can sometimes just be the easiest and most convenient option. Plus, credit cards offer added security that cash, checks, or even bank wires do not.
If the processing fee is high, using a card to pay your taxes just for convenience’s sake probably isn’t the wisest choice. If the fee is only a few dollars, though, it may be worth it for some people. Also note that fees are charged whether you use a debit card or a credit card; so if you’re thinking about using a debit card, it might just make more sense to use your credit card and enjoy the added security it affords.
Does it cost to pay taxes with a credit card?
It’s important to note that while paying taxes with a credit card may be helpful or even necessary, it can also be costly. There are certain fees and expenses to watch out for, which could easily negate any benefits you might otherwise receive.
“If the costs outweigh the benefits, then it would not make sense to finance paying taxes with a credit card,” says Mohs. “If the up-front credit card fees, rate of interest, and lack of any offsetting related credit card perks are too costly, it would make sense to either use your current cash or look for other financing options.”
If paying your taxes with a credit card, you’ll want to consider the following:
The IRS will charge a fee. If you want to pay your IRS tax bill with a credit or debit card, there are three different payment services to choose from. Each one charges a fee for processing the payment, however, which can range from 1.87% to 1.98% of the total payment amount (a minimum of $2.50 to $2.69 per transaction).
So, if you’re using a credit card to pay your tax bill because you want to earn cash back rewards, you should ensure that you’re earning more than you’ll spend in fees.
If you carry the balance, you may incur finance charges. When paying with a credit card, you’ll need to either pay your statement balance in full by the next due date, or you risk incurring finance charges on any balance you carry over. This means that the tax bill you paid with your credit card could wind up costing you a lot more when interest fees are factored in — and that could also negate any benefits you might have earned by using your card.
The exception to this is if you use a card with an introductory 0% purchase offer. These cards allow you to make purchases within the first few months, then pay them down with no interest charges. As long as you pay off your taxes before that introductory period ends you can avoid paying interest on your tax payment.
Best credit card to pay taxes
In general, a credit card offering an intro 0% APR offer on new purchases is likely the best option for someone facing a hefty tax bill. Offers vary, but there are cards with promotional periods lasting as long as 21 months. This means you could have almost two years to pay off your taxes interest free, should you find yourself needing that much time. Balance transfer credit cards are also a good option to consider if you’ve already paid your taxes with another card, and need some extra time to pay off your balance interest free.
If you have the money to pay your taxes and are just looking for a way to earn rewards, make sure you’re using a credit card that earns more than the fee you’ll pay to use your card. Otherwise, it’s not worth it. The CardName, for example, earns 1% cash back on all purchases, and then another 1% when you pay off those purchases in full and on time. (Citi is a CardRatings advertiser.) This means you could earn up to 2% cash back on your tax bill if paying with this card. If the processing fee is less than 2%, you stand to profit.
Finally, if you recently applied for a credit card with a large welcome bonus offer, and you need some help meeting the spend threshold required to earn the bonus, it could make sense to use your credit card to pay your taxes. New CardName cardholders can earn 60,000 points once spending $4,000 in the first three months of card membership, for example. This bonus is worth $750 in travel through the portal, so it’s worth doing what you can, within reason, to earn this bonus. Even if that means spending $10 or $20 in fees, that’s a small price to pay.
To learn more about the best credit cards to pay taxes, see our full guide to credit cards and taxes.
Is paying taxes with a credit card worth it?
For the right person — and with the right credit card — it can indeed be beneficial to pay your taxes with a credit card. However, before deciding to go this route, it’s important to weigh the benefits and downsides carefully to make sure that using your card won’t cost you more than it’s worth.
Interest charges and processing fees can easily outweigh any earned rewards, for instance. If that balance is held for multiple months, any interest charges can greatly increase the actual cost of your tax bill (as well as cancel out any rewards earned).
Done correctly, though, using a credit card to satisfy your IRS debt can sometimes net you rewards, credit card bonuses, added security, or just a little extra time to pay off the debt. In some cases, you might be able to enjoy all four perks.