Avoid Paying Taxes With Credit Cards--Use Tax Refunds to Pay off Credit Cards Instead
It is a few short weeks until April 17 and the last minute rush to pay income taxes. In 2005, 1.5 million taxpayers paid their taxes with plastic and the number is expected to increase in 2006. While convenience and rewards are appealing, they are not free; taxpayers using a credit card will be assessed a fee of 2.49% of their payment.
"The IRS allows credit card payments and the payment centers and credit issuers advertise it, but that does not mean paying with plastic is a good idea for consumers." says Bill Hardekopf, CEO of LowCards.com. "Even with double reward points, the reward is usually not worth the money thrown away with the fee."
Extra Reward Points are not Worth The Fee
According to Rea Hederman, Senior Policy Analyst at the Heritage Foundation, the estimated 2005 individual income tax paid per household will be $8,045. "Based on this figure, the average household will pay $200 in extra fees if they use a credit card to pay their taxes. That $200 could almost buy a plane ticket," says Hardekopf.
A few cards offer double points for tax payments. Starwood Preferred Guest Card from American Express doubles Starpoints but the limit is 5,000 points per card. Pay with the American Express Delta SkyMiles card and receive 2 miles per $1 spent on federal taxes; the cap is 100,000 miles, depending on the card level. To receive the bonus offers from American Express, taxes must be paid by April 17, 2006. The United Mileage Plus SignatureVisa card from Chase is a better deal because it does not put a limit on rewards for paying taxes through December 2006.
"Even with double rewards, these cards aren't good choices for a credit card. They have high interest rates of over 17%. The airline cards also have high annual fees--the Gold Delta SkyMiles annual fee is $85, the United Visa annual fee is $60," says Hardekopf.
Any balance incurred by paying taxes with a credit card should be paid in full as soon as it arrives. A late payment or default interest rate on a larger balance like this could create a serious financial setback. "Do not pay your taxes with your credit card if you will carry a balance. If you charge the average tax of $8,045 to your credit card with a 13% APR and pay it off in one year, you will pay an extra $1,040 in interest, plus the $200 in fees," says Hardekopf. "If you only pay the minimum balance each month, it will take 264 months (22 years) to pay off your taxes. You will pay $5,973 in interest."
Verify Your Card Terms Before Charging Your Taxes
Don't assume that your card will double the rewards for tax payments because few actually do. The issuer may even treat the payment as a cash advance with a higher fee and interest rate. Before calling the IRS payment center with credit card in hand, call the issuer and verify how the rewards apply to tax payments and to make sure it is handled as a purchase, not a cash advance.
Paying with a credit card is appealing because it easy to make a phone call and pay the amount you owe with a credit card. Credit cards also offer protection against error. If making the payment by credit card, call one of the IRS payment centers; do not forward the credit card into the IRS and do not write the credit card number on the tax form.
Best Plan for Taxes and Credit Cards
Instead of using credit cards to pay taxes, households should use tax refunds to pay off credit cards or other debts. "For households with a balance that is creeping up, cash from refunds is a great chance to reduce your debt and the amount you are paying in interest each month," says Hardekopf. "That is the best way to involve your credit card at tax time."
"The IRS allows credit card payments and the payment centers and credit issuers advertise it, but that does not mean paying with plastic is a good idea for consumers." says Bill Hardekopf, CEO of LowCards.com. "Even with double reward points, the reward is usually not worth the money thrown away with the fee."
Extra Reward Points are not Worth The Fee
According to Rea Hederman, Senior Policy Analyst at the Heritage Foundation, the estimated 2005 individual income tax paid per household will be $8,045. "Based on this figure, the average household will pay $200 in extra fees if they use a credit card to pay their taxes. That $200 could almost buy a plane ticket," says Hardekopf.
A few cards offer double points for tax payments. Starwood Preferred Guest Card from American Express doubles Starpoints but the limit is 5,000 points per card. Pay with the American Express Delta SkyMiles card and receive 2 miles per $1 spent on federal taxes; the cap is 100,000 miles, depending on the card level. To receive the bonus offers from American Express, taxes must be paid by April 17, 2006. The United Mileage Plus SignatureVisa card from Chase is a better deal because it does not put a limit on rewards for paying taxes through December 2006.
"Even with double rewards, these cards aren't good choices for a credit card. They have high interest rates of over 17%. The airline cards also have high annual fees--the Gold Delta SkyMiles annual fee is $85, the United Visa annual fee is $60," says Hardekopf.
Any balance incurred by paying taxes with a credit card should be paid in full as soon as it arrives. A late payment or default interest rate on a larger balance like this could create a serious financial setback. "Do not pay your taxes with your credit card if you will carry a balance. If you charge the average tax of $8,045 to your credit card with a 13% APR and pay it off in one year, you will pay an extra $1,040 in interest, plus the $200 in fees," says Hardekopf. "If you only pay the minimum balance each month, it will take 264 months (22 years) to pay off your taxes. You will pay $5,973 in interest."
Verify Your Card Terms Before Charging Your Taxes
Don't assume that your card will double the rewards for tax payments because few actually do. The issuer may even treat the payment as a cash advance with a higher fee and interest rate. Before calling the IRS payment center with credit card in hand, call the issuer and verify how the rewards apply to tax payments and to make sure it is handled as a purchase, not a cash advance.
Paying with a credit card is appealing because it easy to make a phone call and pay the amount you owe with a credit card. Credit cards also offer protection against error. If making the payment by credit card, call one of the IRS payment centers; do not forward the credit card into the IRS and do not write the credit card number on the tax form.
Best Plan for Taxes and Credit Cards
Instead of using credit cards to pay taxes, households should use tax refunds to pay off credit cards or other debts. "For households with a balance that is creeping up, cash from refunds is a great chance to reduce your debt and the amount you are paying in interest each month," says Hardekopf. "That is the best way to involve your credit card at tax time."
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