If you're paying income tax to the IRS this year, you have several ways to pony up, including cash, personal check and your favorite credit card. While there are positives to paying taxes with plastic, the experts we talked with say there are at least as many negatives.
Rewards points and convenience are two reasons for paying with a rewards credit card. But doing so will also generate service charges, and may incite the temptation to celebrate the payment of taxes by running up debt and the burden of additional interest. Here's a look at each of these pros and cons.
Convenience. One of the most obvious benefits of paying by credit card is convenience, says New York City attorney Barbara Weltman, a nationally recognized expert on tax and small business and author of dozens of top-selling business books.
"The payment method can be used for both paper and e-filed returns," Weltman says. "And a confirmation number tells you that the payment has been accepted by the Treasury." In addition, you don't have to worry about the IRS having your credit card information because they never see it, according to Weltman.
This is a particularly tempting way to go if you've already walked through the process of filing your taxes via one of the many online tax services available these days. Consumers are so accustomed to shopping and paying for things online that pulling out a credit card -- or just using the credit card already saved in your mobile wallet or computer system -- just seems like one less thing to think about.
Rack up rewards. Earning points with a rewards credit card can be another benefit. "But if points are your objective, you have to be disciplined enough to pay off your balances, so the benefits you're getting in points are not offset by paying interest," says Deborah Owens of Laurel, Maryland, author of "A Purse of Your Own."
This could be a particularly good strategy if you're in the midst of attempting to meet a spending threshold in order to earn a hefty signup or welcome bonus on a new card. Suddenly, putting a $1,000 tax bill on your credit card could push you over the hump to earn 50,000 points on your rewards credit card.
Avoid IRS interest and fees. Consider that by paying taxes with a zero-interest credit card, or any credit card that you pay off by the next due date, you avoid the interest and possible fees of an IRS installment plan, Owens says.
Here's the thing: If you need 120 days or more in order to pay off your tax debt, you're going to be charged a fee just for the opportunity to set up a payment plan when you do it through the IRS. That fee ranges from $31 if you're willing to conduct your plan setup online and agree to automatic withdrawals of your payments to $225 if you want to apply by phone, mail or in-person and choose to make your payments manually.
And we haven't even talked about the penalties you'll pay for being late or the interest you'll be charged.
Say you owe the IRS $10,000. Owens says you could enter into an installment agreement with the IRS, with three years being the maximum period over which you could extend that payment plan. You'll end up paying about $300 a month over that time in principal, but you will also pay interest. The interest rate changes each quarter; for January through March 2019, it stands at 6 percent. That's not nearly as attractive as the zero interest you'd pay on a card like the Citi® Diamond Preferred® Card, , which offers you an introductory 12 months of no interest on purchases from date of account opening and 21 months on balance transfers from date of first transfer (and made within four months. Balance transfer fee applies with this offer 5% of each balance transfer; $5 minimum.). After the intro periods, the APR goes to 13.74% - 23.74% Variable). (Citi is a CardRatings advertiser)
Of course, that 0 percent interest rate is only introductory, but if your credit is good, you can try to move the balance from one zero-percent card to another. It’s important to keep in mind that many cards charge a balance transfer fee, so be sure to factor that into your cost analysis. Better yet, make a plan to pay off your balance entirely before the zero interest period ends.
"You must know yourself," Owens says. "You probably will want to establish your own payment installment plan, so you know you're totally paid off when that introductory zero-percent interest rate expires."
Convenience fees. While it's true the IRS doesn't charge anything for accepting credit card payments, the agency does make you choose a processor to process your payment and those authorized providers do charge fees. That could negate any benefit you get by paying with zero-APR credit cards and earning rewards points. It's this point that is stressed by Matt Bell, personal finance author and speaker.
"The way I lean on this is if you look at the service fees they charge for doing this, it doesn't make a lot of sense," Bell says. "If you are trying to rack up credit card rewards points, depending on the size of the amount owed in taxes, they (may) be offset by the fees you'll pay. And in some cases, it's more than a wash. You'll pay more in fees than those points will be worth to you."
If you can't afford to pay your full tax bill and your only choice is borrowing money, be sure you fully understand any and all fees you'll pay. "You'll have to compare the fees you'll pay by carrying the balance forward on your card with the cost of taking part in an IRS installment plan," Bell says.
Spouse may not agree. Paying taxes by credit card can be problematic for couples, say Colorado Springs-based Scott and Bethany Palmer, also known as "The Money Couple."
If one is a risk taker and the other a security seeker, the former may want to pay with credit cards, but the latter won't, Bethany Palmer says.
Whatever choice they reach, they must forge an agreement. The security seeker may give in to the risk taker, agreeing to pay with a card if they can agree the amount will be paid off by a certain date, Scott Palmer says.
Kicking the can down the road. It's cliche, but it's true. Paying your tax debt on a credit card is essentially clearing up one debt by creating another. And it's important to note that credit card interest is NOT something you want to be paying; it's much higher than what the IRS will charge you through an installment plan.
Your goal should be to pay off your debt as quickly as possible, whether tax debt or credit card debt, and to do it paying the least amount of interest possible. If you have solid credit and the responsibility to make consistent credit card payments that will pay off your debt in a set amount of time, a 0 percent interest credit card could save you some serious money. Just remember that debt to the government and debt to a credit card company have something important in common: They're both debt.