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Every year, millions of Americans file their taxes. Although some are pleasantly surprised by the final numbers, many find they need to cough up some extra dough to federal, state, or local tax collectors.
If you owe a considerable amount or simply don’t have access to the funds in time to file, you might be tempted to pay taxes by credit card and transfer your government debt to a private creditor.
Read on to find out if paying taxes with a credit card is your best option.
Can you Pay Taxes With a Credit Card?
Yes, you can pay taxes with a credit card. If you want to pay federal taxes with a credit card, the IRS does make that option available. In general, credit card payments can be made via internet or mobile devices as well as over the phone.
Though the IRS does require millions of Americans to pay taxes come April, they do not offer an exclusive payment processing option. Instead, whether you’re e-filing, paper filing, or following up on a bill or notice, you will need to head over to the IRS website and select an approved payment processor.
Currently, the IRS works with three payment processors, and each processor sets their own transaction fees. Here’s a quick breakdown:
- Official Payments (OfficialPayments.com/fed): 1.99 percent fee with a minimum fee of $2.50
- Worldpay US, Inc. (PayUSAtax.com): 1.97 percent fee with a minimum fee of $2.69
- Link2Gov Corporation (Pay1040.com): 1.87 percent fee with a minimum fee of $2.59
Can You Deduct Credit Card Interest From Taxes?
In some cases, interest, like that paid on a mortgage, businesses expenses, and outstanding student loans, is tax-deductible. Unfortunately, credit card interest, which is considered to be personal interest, is not tax-deductible, though it once was.
Up until 1986, taxpayers were able to deduct personal interest, including interest on credit cards, auto loans, and even late federal, state, or local income payments. However, the Tax Reform Act of 1986 changed that, largely because if the interest on credit card debt was high enough it could lower an individual’s tax liability.
Risks of Paying Taxes With a Credit Card
It may be tempting to pay the IRS with a credit card, but is the risk worth the reward? Though each situation is unique, here are a few risks to consider before your charge your taxes away.
As pointed out above, paying with a credit card will inevitably add more onto your tax bill. If it’s a relatively small debt, that might not be a big deal. However, the higher the debt, the higher the processing fee.
Increasing Your Debt
It’s one thing to take advantage of an offer, like 0% APR for 18 months, to pay your tax debt, but if you’re paying the average APR and can only make minimum payments, then the debt can quickly get out of hand.
Lowering Your Credit Score
A new credit card or a large charge can easily bring your credit score down, signaling to potential lenders that you may be a riskier investment than you once were. This is particularly true of using a credit card as a long-term solution as opposed to simply providing a buffer for a few weeks. A drop in your credit score can make it difficult to purchase a home or car, among other things.
Benefits of Paying Taxes With a Credit Card
There are certainly some risks associated with paying taxes with a credit card, but that doesn’t mean there aren’t some benefits.
Buying Some Time
The IRS does offer installment plans and extensions, but some people choose to seek extra time from a credit card.
If you have a credit card – or are opening one – that has a promotional period with an APR of 0%, you gain more time without incurring those fees tacked on by IRS processors.
In many cases, these promotions are interest-free for 12 to 18 months and sometimes longer. Of course, to really take advantage of that offer, you’d need to pay off your debt before the promo ends.
If you’re opening a new card and paying your taxes with it, you might be able to get a sizable cash-back reward (think $200 or more) depending on the promotion. That can help offset what you owe.
Additionally, since many cards offer cash-back and travel credit card points outside of promotional periods, you might be able to get a little something back (even if it’s just the processing fee and some miles) by paying with a rewards-friendly credit card.
Is It Worth It?
Should you pay taxes with a credit card? That depends. If you can take advantage of the perks above, then paying by card might be at the very least inconsequential, though hopefully it will earn you some extra time and extra cash. This is particularly true if you are eligible for a new credit card with a generous cash-back promotion and a 0% APR.
However, if your current APR is fairly high, and you don’t see yourself paying the bill off over a relatively short span of time, charging your taxes can end up costing you a lot more than it’s worth.
Alternatives to Paying With a Credit Card
Paying by check is a fairly easy process and allows you to pay without incurring any additional fees. Simply fill out the check as usual, making it payable to the U.S. Treasury, and send it in an envelope with the payment voucher.
The IRS will not accept cash payments by mail, so if you choose to pay with cash, you must go to an IRS-approved retail partner or local IRS office. Taxpayers must confirm their information with OfficialPayments.com, then they can locate a retail partner using PayNearMe. Setting up this option will take some time, so don’t wait until the last minute.
Similar to credit card payments, debit card payments must be made through one of the approved processors above. However, while credit card fees are based on a percentage of the total, debit card fees are flat fees, currently ranging from $2.58 to $3.95.
Whether you just need some extra time, or you would like to take advantage of rewards programs, paying your taxes with a credit card might be a good fit. However, be sure to weight the pros and cons, and if possible, avoid paying taxes on credit cards with high APRs.
Author: Jeff Gitlen
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