It's time again to ante up to Ol' Uncle Sam.
Taxes are due again and while you hoped to get a refund this year, it looks you're going to have to pay again – Boo!
Last year you found out how easy it was to pay your federal taxes with a credit card, but now you're wondering whether it's a good idea to do it again….or not.
Let's look at some of the pros and cons of paying your tax bill with a credit card.
Swipe it! It's so easy to do, right?
You login, enter your 16 digit credit card and expiration date, then presto! Your tax bill is taken care of.
What about those that have to file a federal tax extension? It doesn't matter. You just have have to pay your estimated and you're in the clear. Can you swipe that with your card? You betcha!
Just because it's so easy, does it really mean you should? I guess it depends on who you ask.
If you do use a credit card to pay your tax, consider Chase Freedom® Visa – $200 Bonus Cash Back
Benefits of Paying Your Taxes With Your Credit Card
- Simple as Pie. We already addressed one benefit: It's easy. If you eFile and use service provider Official Payments Corporation or File Your Taxes, it's really as simple as paying for your groceries.
- Don't forget the points. Frequent flier miles, gift cards, free cash: we all have the perks that we get by using our cards. You pay everything else on your card, why not use your cash reward credit cards to pay your taxes (or even better a travel rewards credit card)?
- Time is on your side. Did April 17th come too soon again? If you don't have the cash to pay your taxes, you can always put in on your card and buy you some time.
Update: I recently just spoke to someone that tried to pay their taxes online, but had a field day trying to get registered. Maybe it's not as easy or convenient as they say.
More from GFC, Below
Disadvantages of Paying Your Taxes With Your Credit Card
- Convenience comes with a price. While yes it is convenient to use your credit card, as noted above. You do have to pay for that convenience. Below is a screen shot from the IRS web page showing that OfficialPayments.com charges a 2.35% while FileYourTaxes.com charges you 3.93%. 2-3% might not sound like a lot, but that adds up pretty quick especially if you happen to owe Uncle Sam a lot of money. Remember….this isn't even counting merchant fees or interest. This means that even if you are using the most generous airline miles credit cards, you are still paying an extra 0.85% for this convenience.
- You have to pay the credit card company interest. One of my pet peeves is having to pay any interest, especially to a credit card company. If you takes you a while to pay your bill, you've just became the credit card company's best friend. If you have to use a credit card to pay make sure your using a low-interest rate credit card like a card with 18 Month Promotional Balance Transfer. At least that way you get a low interest card and you get cash back!
- Bankruptcy not allowed. If times get tough and bankruptcy seems evident, remember that even if you do file for bankruptcy, you are still on the hook for your income tax. That doesn't matter if you use your credit card or not.
Other Tax Payment Options Other Than Your Card
If you know that you HAVE to put your tax bill on your credit card because you have no other funds, you still might have some other options. You could always approach your local bank and see if they have some sort of low interest loan you can take advantage of. You could always bite the bullet and talk a closer family member. If none of those ideas work, you can talk to the man himself-call the IRS directly.Payment Plan to the IRS Through Installments
If you call the IRS, you can talk to them about setting up an installment-payment plan. If so, this may be the best way to go. You have to have a tax bill less than $25,000 to even begin discussions. Initially, you'll be charged a $52 setup fee and then a monthly interest rate on the outstanding balance. Currently, that interest rate is 0.583% per month, which is around 7% annually. This rate is not locked until you pay it off. It's subject to change on a quarterly basis. Head to the IRS website and download IRS Form 9465 to get that ball rolling.
Here's some info from IRS.gov on the installment plan:
The IRS charges a user fee to set up your installment agreement. The user fee for new installment agreements entered into after January 1, 2007 is $105 and $52 for agreements where payments are deducted directly from your bank account. Taxpayers with income at or below established levels, based on the Department of Health and Human Services poverty guidelines, can apply and be qualified to pay a reduced user fee of $43 for establishing new agreements including agreements where payments are deducted directly from your bank account. Information about requesting the reduced user fee will be included in installment agreement acceptance letter sent to individuals.
Assessing the risks
If you are used to putting everything on your credit card, this might be a simple decision for you. As you see, there are other factors at play. Even if you do get points for using your card, they might be negated by the convenience fees that you have to pay.
Obviously, if your situation deems it a necessity to use your card, then you gotta do what you gotta do. It's better than filing late or incurring late payments on your card. Late payments will negatively affect your credit score and start a downward spiraling affect on all things credit.
If you are unsure about your credit report, you can always double check it at CreditReport.com.