With tax filing season out of the way, paying off those tax bills that weren’t paid by the tax deadline is the next major concern for people. While there are a few options for payment agreements if you can’t afford to write a check for the full amount immediately, there’s also the option of paying your tax bill with a credit card. It can be less confusing than navigating IRS payment plans, and if your credit card has a nice rewards program, then it’s something to think about.
Depending on how much you owe in taxes and what terms your credit card offers, it may or may not be worth putting your tax bill on your credit card. Here are some of the pros and cons of using a credit card to pay your taxes and why you would or wouldn’t want to pursue this option.
Legally, the IRS cannot directly accept credit card payments so they use three different approved payment processors for taking credit and debit card payments. At the time of writing, the processor with the most favorable rate is pay1040.com. Their minimum processing fee is $2.59, otherwise charging 1.87% of your balance. So, if you owe $2,000 in taxes, then you’d be charged a total of $2,037.40.
Keep in mind that this processing fee is steeper the bigger your outstanding balance is, and you need to pay it on top of whatever you’ll owe in interest. If you go on a payment plan and pay by direct debit or check, you’ll only pay the IRS interest rate and any applicable penalties with no processing fees.
The interest rate varies by the credit card that you have, but the average rate is 15.07%. According to the IRS, for individuals, the rate for overpayments and underpayments will be 6% per year, compounded daily, up from 5% for the quarter that began on July 1.
If you anticipate paying your balance off over time, you will definitely pay a lot more interest with a credit card even if it’s less confusing to calculate than the IRS interest rates, which change more often. However, if you open a new credit card intended for balance transfer if your credit’s good, then you can get a few months to a whole year to pay off your balance at a 0% interest rate which both buys time and saves money. But if you’re late on the payments eventually and/or your credit isn’t that great, this isn’t a likely option.
Credit card rewards, like cash rebates and frequent flier miles, are what often make the extra fees and interest tempting to put your tax balance on your credit card: Why not get a free vacation for paying your taxes?
But financial experts estimate that most credit card rewards only net you about 1% back of what you purchase. It’s worth sitting down and doing the math on how much the IRS interest rates and forgoing processing fees would save you so you can take that vacation out of pocket instead. Unless you plan on paying off your entire balance immediately and the reward offered is worth what you’ll pay in fees, reward programs aren’t likely to completely defray the costs of using a credit card for your taxes.
Ultimately, if you need extra time to pay your taxes, you are better off with an IRS installment or short-term payment agreement since owing money on these plans does not appear on your credit report. However, carrying a balance will appear once you shift the responsibility from the IRS to your credit card company.
In addition to impacting your available credit, it also affects your credit utilization score based on how much of your available credit is being used.
If you’re looking for housing, more credit, or other situations that warrant your credit report being pulled, then you’ll want to avoid paying your taxes with a credit card.
Ultimately, it’s up to you to weigh the risks and benefits of using a credit card to pay your taxes. If you’re taking a longer-term approach, an installment agreement is likely to cost you less both upfront and in the long run.