Are you thinking of paying taxes with a credit card?
The thought of clearing a debt with the IRS in one fell swoop is certainly appealing, and if your credit rating is not in good standing in order to obtain a bank loan, that credit card can sure look good.
But is using a credit card to pay taxes a wise decision?
Before we explore the pros and cons of paying taxes with a credit card, let’s examine paying taxes through an installment agreement with the IRS.
First things first, contacting the IRS and working out an installment agreement is one possible option to manage your debt. Complete the IRS Installment Agreement Request Form 9465. If you owe $25,000 or less this process can be completed online. The IRS may allow you up to 60 months to pay your tax debt. Within 30 days, the IRS should let you know if your request has been approved and what you will be required to pay.
Installment plans come with a price tag.
There is set-up fee in which you will be charged interest (the Federal Short-Term Rate plus 3 percent) and penalties of .5 percent on the unpaid balance each month or part of a month until it’s all paid. The monthly cost of this arrangement could be looking scary.
So – what about paying taxes with a credit card?
Pros of Paying Taxes with a Credit Card
The first benefit that comes to mind is all the possible rewards. If you have a rewards card then taking advantage of your credit card to build those rewards can look very appealing. Don’t go visioning yourself flying off to some exotic destination on all those air miles just yet; be sure you know exactly what your credit card offers. Is the reward worth putting a large debt onto your credit card?
You can deduct your convenience fee as an itemized business or personal deduction. Although this may not seem like much, depending on your personal situation, every little bit adds up.
Convenience – sending an electronic payment by credit card is simply convenient. The IRS accepts credit cards and the system they use is protected by anti-fraud measures.
Cons of Paying Taxes with a Credit Card
First of all, you need to be fully aware of the credit card you have before you can determine if this is going to be a good or bad thing for you. Remember, if your credit card comes with a very high-interest rate then your tax bill will end up costing you a fortune. Be sure you use a low-interest credit card.
Paying taxes with a credit card is good so long as you are financially disciplined. Paying only the minimum monthly payment on your credit card statement can potentially end up costing you hundreds or possibly thousands of dollars more than the tax debt itself.
Your credit score may take a nose dive if you pay the IRS with a credit card. Financial experts say that consumers should try to keep the balance on their credit card accounts no higher than 35 percent of their credit limit. For example, if you have $10,000 credit limit on your card, try to keep the balance no higher than $3500. The higher you go over that limit, the lower your credit rating sinks.
Here is one last point to keep in mind.
While the IRS will accept credit card payments for taxes owed, the actual payment is often made to one of several ‘third-party service providers’ contracted by the IRS. These service providers charge a fee, sometimes up to 2.50 percent for processing the transaction.
Bottom line, paying your taxes is a must and choosing the right way to make good on that debt must not be a hasty decision. Explore all possible options and if you have no choice but to use a credit card, be sure your use a card in which you can get some form of reward out of it.
And remember; pay as much as you can every month on your credit card (preferably the whole thing), not just the minimum.