figuring out if you should Pay Your Taxes With A Credit CardTax season is in full swing, and just like every year, some people will be excited by refunds and some will be scared by a tax bill. If you’re already in debt, this could be a very daunting prospect. Now, you’re wondering how to pay for that bill and contemplating whether they should do so with a credit card.
It’s an option. While tax laws don’t allow the IRS to take payments directly, you can access third-party providers from the IRS site to make a payment. These third-party processors aren’t free; they charge from 1.87% to 1.99%. When you pay your taxes via a third party on the IRS.gov website, you’ll need your social security number or Employer Identification Number, credit card information, payment amount, and billing information.
You can also pay with a credit card through tax preparation software such as H&R Block and TurboTax, but the fee is usually around 2.49% or higher.
Should You Pay With A Credit Card?
As with any unexpected expenses, the impulse to pay with a credit card is strong. It’s so simple to do, provided you have a high enough limit to cover it. However, consider a few things first.
It may make sense to pay with a card if you have a good rewards program or a sign-up bonus on a new card. If the fee is 1.87% and you have a credit card that pays you 2% cash back, you’ll be coming out ahead if you use the card, but only if you pay it off within the month; otherwise, you’ll be charged interest.
Some credit cards offer huge sign-up bonuses that could earn you a lot more than the 1.87% fee. Others may offer 0% interest on balance transfers for 12 months, so you’ll only pay the 1.87% to 1.99% online payment fee plus a 3% balance transfer fee. However, this is only recommended if you pay off the balance during the introductory offer period because, after that, your regular interest will kick in. In addition, even a single late payment could cause you to lose that introductory interest rate and receive a higher rate that’ll cost a lot more money.
Some programs offer high travel rewards that could save more than the fees associated with paying by credit card, if you’re someone who travels frequently. However, there could be purchase restrictions, so it’s important to check with your card company to determine what benefit you may get by using it.
If you don’t have a rewards program that would help offset the cost of paying your taxes with a credit card, and you don’t have the ability to pay off the balance right away or before any introductory period is over, then there are other options.
Other Methods Of Paying Your Tax Bill
It’s important to remember that using a credit card is just one way to pay off your tax bill. If you currently have the money to pay, you can set up a free direct transfer from your bank, while if you use a debit card, you’re generally charged a flat fee of a few bucks or so.
If you don’t have the money, another option is to set up an installment plan with the IRS that’ll allow you to make monthly payments. IRS installment plans cost $149 if you apply online or $225 if you do it by mail. If you set up the monthly payment to automatically deduct from your bank account, those fees are reduced significantly, to $31 or $107, respectively. Those amounts are even less if you qualify for reduced fees by meeting the Dept. of Health and Human Services’ low-income guidelines. Keep in mind that interest on the IRS installment loan is whatever the current short-term rate is, plus 3%, and it’s determined each quarter, so it’ll likely go up over the life of the loan, which can be as long as 6 years.
Even though you’re making payments with an installment loan, your taxes are still considered late, so you’ll be charged a late fee of .25% each month until the debt is paid off. While you’re paying off your debt with the IRS, you won’t receive any subsequent refunds. Any earned refunds will automatically be put toward your owed debt.
An installment agreement with the IRS doesn’t go on your credit report, so you don’t have to worry about your debt amount on your report increasing, as would be the case if you put the tax payment on a credit card. This can affect your Debt-to-Income Ratio and negatively impact your ability to obtain new credit or get a good rate.
Choose the most beneficial payment method for your individual situation. However, the most important thing is to take your taxes owed to the IRS seriously; it can cost you a lot if you don’t. You’ll be charged late penalties, even if you pay a partial amount of your taxes due.
The penalty for filing late is usually 5% of the unpaid taxes that are owed. If you pay as much as you can with your return, you’ll owe less, and thus face a smaller penalty. It continues to accrue but cannot exceed 25% of your unpaid taxes. If you file but don’t pay, you’ll be penalized .5-1% of your unpaid taxes. If you don’t file and don’t pay, the most you’ll be charged in penalties is 5%.
Remember, if you don’t adjust your withholdings with your employer, you’ll be in the same boat next year when taxes are due. Furthermore, it’s important to consult with a tax professional before making a large financial decision. Figure out how you’re going to pay your taxes and you’ll be starting off 2020 on positive financial footing.