Don't Use a Credit Card to Pay Taxes...with One Exception
Don't Use a Credit Card to Pay Taxes...with One Exception
April 15 is only two months away. Soon credit card issuers will be promoting credit cards as the way to pay your taxes. In almost every instance, you should avoid paying your taxes with your credit card. However, the Citi CashReturns credit card does provide an interesting exception to the rule this year.
The convenience of paying with a credit card isn't free. The IRS uses third-party service providers to process credit card payments. They charge a fee that is typically 2.49%. If you pay the IRS $10,000 through one of these providers, your fee to use a credit card will be at least $249.
"If you carry a balance, don't forget to include interest payments in your calculations. If you pay only the minimum payment each month, it will be very expensive to pay your taxes with a credit card," saysBill Hardekopf, CEO of LowCards.com. For example, if you use your credit card to pay $10,249 (the total of your IRS payment and yourfee) and your interest rate is 14%, and you pay just the minimum each month, then you will pay an additional $8,760 in interest payments and it will take you 296 months (almost 25 years) to pay it off.
Even if you receive rewards for your payment, the rewards are not worth the fee. Rewards are typically 1% of the purchase amount, well below the 2.49% fee.
American Express even suggests that you use Membership Rewards to pay the convenience fee. "This is a terrible idea for cardholders. It will take 49,800 reward points to pay for the $249 fee. That is almost two airline tickets," says Hardekopf.
The exception to the rule this year is the Citi CashReturns credit card. It currently offers 5% cash back for three months and there is no limit to the cash you can earn. This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe.
If your tax bill is $10,249, you will receive $512.45 cash back. After the $249 fee, you will make $263.45.
"This is the only instance we have found where someone might want to use a credit card to pay taxes," says Hardekopf. "If you owe a sizable amount in taxes, you can make a little extra cash. It is a good idea to apply now and start paying as soon as possible to take advantage of your three-month window. The clock starts when you apply for the card and Citi could end this offer or change the terms at any time."
If you do make your payment with a credit card, do it correctly. The IRS has contracts with two companies to accept credit card charges:Official Payments Corporation and LINK2GOV. You may pay by phone oronline. Do not forward your credit card information into the IRS anddo not write the credit card number on the form. If you receive a tax rebate, be financially prudent and use it to pay down your credit card debt.
April 15 is only two months away. Soon credit card issuers will be promoting credit cards as the way to pay your taxes. In almost every instance, you should avoid paying your taxes with your credit card. However, the Citi CashReturns credit card does provide an interesting exception to the rule this year.
The convenience of paying with a credit card isn't free. The IRS uses third-party service providers to process credit card payments. They charge a fee that is typically 2.49%. If you pay the IRS $10,000 through one of these providers, your fee to use a credit card will be at least $249.
"If you carry a balance, don't forget to include interest payments in your calculations. If you pay only the minimum payment each month, it will be very expensive to pay your taxes with a credit card," saysBill Hardekopf, CEO of LowCards.com. For example, if you use your credit card to pay $10,249 (the total of your IRS payment and yourfee) and your interest rate is 14%, and you pay just the minimum each month, then you will pay an additional $8,760 in interest payments and it will take you 296 months (almost 25 years) to pay it off.
Even if you receive rewards for your payment, the rewards are not worth the fee. Rewards are typically 1% of the purchase amount, well below the 2.49% fee.
American Express even suggests that you use Membership Rewards to pay the convenience fee. "This is a terrible idea for cardholders. It will take 49,800 reward points to pay for the $249 fee. That is almost two airline tickets," says Hardekopf.
The exception to the rule this year is the Citi CashReturns credit card. It currently offers 5% cash back for three months and there is no limit to the cash you can earn. This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe.
If your tax bill is $10,249, you will receive $512.45 cash back. After the $249 fee, you will make $263.45.
"This is the only instance we have found where someone might want to use a credit card to pay taxes," says Hardekopf. "If you owe a sizable amount in taxes, you can make a little extra cash. It is a good idea to apply now and start paying as soon as possible to take advantage of your three-month window. The clock starts when you apply for the card and Citi could end this offer or change the terms at any time."
If you do make your payment with a credit card, do it correctly. The IRS has contracts with two companies to accept credit card charges:Official Payments Corporation and LINK2GOV. You may pay by phone oronline. Do not forward your credit card information into the IRS anddo not write the credit card number on the form. If you receive a tax rebate, be financially prudent and use it to pay down your credit card debt.
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