Could it be Smart to Pay Your Taxes with a Credit Card?

July 11, 2012 | By: TaxCure Staff

pay taxes with credit cardWhen it comes to paying your taxes, you have a few options. The IRS accepts checks of course, and even offers a payment plan for those who are having difficulties paying what they owe. It’s also possible to pay your tax bill with a credit card.

Should You Pay Taxes with a Credit Card?

One of the questions many have is whether or not it makes sense to pay their taxes with a credit card. While it can seem easy to provide your credit card, you should realize that the only time it makes sense to use your credit card is when you can earn rewards for doing so.

The advantage of paying your taxes with your rewards credit card is that it is an easy way to boost your points. Whether you are earning airline miles or using a cashback card, your tax bill often represents a significant “purchase.” With those kinds of rewards, it makes sense to maximize them. However, make sure you consider the “convenience fee” charged by some of the providers. In some instances, the convenience fee can outweigh the benefits of gaining points or rewards.

Before you take the plunge, though, it’s important to understand that this is most effective only if you plan to pay off the balance immediately. You should have the amount you owe in taxes already available to you in your bank account. You can pay your taxes with your credit card, reap the rewards, and then pay off the balance immediately so that you avoid the interest.

Downsides to Paying Taxes with a Credit Card

The biggest downside to paying taxes with your credit card is likely to be the interest you pay or the convenience fee (rates on some service providers). If you carry a balance, you will be subject to interest charges. The larger your tax bill, the larger the interest. Unless your credit card has an introductory deal that allows you to avoid paying interest for a set period of time, the interest you pay is likely to offset any benefit you receive from your rewards card. Consider: Your 1% cashback can’t compete with a 15.99% APR.

Paying with a credit card can be tempting because it gives you the chance to discharge your tax obligation now, and then pay it back over time. However, if you carry a balance, and only pay the minimum, you could spend years repaying the taxes, and end paying much, much more than you originally borrowed using your card.

Instead, if you can’t pay your taxes, consider a payment plan from the IRS. The IRS offers payment plans that can help you pay off your taxes. You pay for a set period, and the interest rate is usually less than what you would spend on a credit card. Almost anyone with a tax obligation of less than $25,000 can qualify for a payment plan. It is a much better option than using your credit card. If you owe money, and can’t pay all at once, your first option should be to apply for the IRS payment plan.

Bottom Line

If you plan and have the money you need already set aside for taxes, it can make sense to use your rewards credit card to pay your taxes. You receive the benefit, but you don’t have to pay the interest. If you are not prepared in this way, you are better off checking with the IRS and applying to participate in its payment plan.