Should I Pay My Taxes with a Credit Card?

Should I Pay My Taxes with a Credit Card?

April 4, 2020         Written By Tracy Farnsworth

Yearly income taxes are due each year on April 15th or the closest business day that follows that date. If April 15th falls on a Saturday, the next business day would be Monday the 17th. If Monday was a holiday, tax day would take place on Tuesday the 18th. There can be exceptions to this rule. For example, the 2020 COVID-19 pandemic moved tax day to July 15th.

When you owe taxes, it can be hard to decide the best way to pay it. You want to appease the IRS and pay taxes ASAP. The IRS recommends using their online tax payment system, but is that best? Using a credit card is quick and easy, but it is not always the smartest way to pay the taxes you owe.

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Before you charge the taxes you owe on your credit card, carefully weigh the pros and cons. Take time to research other options that are available to you. Once you have done your research, you will have a better idea of the best way to pay your income taxes that saves you the most money and meets your financial limitations.

The Pros of Paying Taxes With a Credit Card

Why should you pay taxes with your credit card? There are several reasons this can be the best decision.

1. Ease Anxiety

With a credit card, you can pay what you owe at once. You do not have to worry about owing the IRS or incurring late payment penalties. Charge your taxes to your credit card and make payments to your credit card company until you have paid off your charges. It reduces the anxiety most people experience when they realize they owe money to the government.

2. Earn Cash Back or Reward Points

Depending on the credit card, paying your taxes can give you rewards points or some cash back. When you apply for a credit card, some cards give you a percentage back each month or year for qualifying purchases. Others give you points you can use towards travel, gift certificates, and merchandise. You need to check with your credit card company as some have blocks on these payments to prevent them from counting towards your cash back or rewards.

3. Get a Lower Interest Rate

If you qualify for a low-interest credit card, you could apply for that card, charge your income taxes, and consolidate the debt from your other credit card with a higher interest rate. By merging all of your debt onto one card, you make one payment instead of two or more. You do not have to remember to pay the IRS and pay your credit card company. More importantly, you save money with a lower interest rate. If you qualify for a 0% APR and can pay the amount back before the 0% APR promotion expires, you will save a lot of money.

How much would you save? It depends on the APR. If you owed the IRS $1,000 and made monthly payments of $30, it would take you 56 months to pay it off, and you would pay around $665 in interest. If you moved that debt to a credit card with 15% interest, you would pay off the debt a year earlier and save $363 in interest. Consolidating debt onto a low-interest credit card is a smart move.

4. Take a Longer Amount of Time

If you work with the IRS on a repayment plan, you may find the plan that is arranged is not advantageous. You worry about the “what if’s” and how you manage to keep up the payments if your financial situation changes. If you lost your job, faced reduced hours, or had a home emergency like a septic failure, what would you do?

Many installment plans with the IRS allow you to split the amount you owe plus fees and interest over 72 months. A credit card can be advantageous if six years is not enough.

The Cons of Paying Taxes With a Credit Card

While there are advantages to paying your taxes with a credit card, there are also cons. You may find that these points far outweigh any benefits.

1. Interest and Fees Are Expensive

Credit card interest rates vary. While a low-interest credit card can make sense, you must have a good credit score to get approved for a low APR. If you do not and have an APR that is 20% or lower, you may end up paying far more in interest than you should. You also need to be aware that you pay more if you use a credit card. You could pay an extra 2% when you pay your taxes using a credit card. If you owe $1,000, you pay an extra $20. Instead of paying the IRS $1,000, you’ll have to pay $1,020. That money does not go to the IRS. It is a fee that goes to the credit card payment processor.

2. Your Credit Score Will Take a Hit

When you charge money onto your credit card, you have used up some of your available credit. If you have credit lines totaling $5,000 and already owe $1,000 on your cards, you have used up 20% of your available debt. Charge $1,000 to pay your taxes and you owe $2,000. That increases your credit utilization to 40%. That’s over the recommended 30% max utilization to see your credit score improve. Creditors like to see that you only use a small amount of your available credit, it shows that you can be responsible. Your credit score will drop until you have paid off the money you owe and get the credit utilization percentage back down.

 If you owe the IRS money through installment payments, that does not impact your credit score. If you want to improve your credit score, charging taxes onto your credit card is not going to help.

3. You Run the Risk of Defaulting

Taking on a sudden rush of additional debt will increase your credit card payment. If you find you cannot afford to make the new minimum payment, you could default. It is going to show up on your credit report as a late payment. If that owed debt is sent to a debt collector, your credit report is going to show the defaulted unsecured loan. Your credit score drops, and you also have debt collectors hounding you for payment.

How Do You Make the Payment With a Credit Card?

Go to IRS.gov/payments and choose to use a credit card. You have three choices for payment processors. Pick the one that is ideal for your needs. Each processor requires you to pay a fee for using a credit card. Major credit cards like American Express, Discover, Mastercard, and Visa are accepted. If you are self-employed, those fees are tax-deductible. Select the type of payment you are making (installment, payoff, etc.) and fill out the rest of the information that verifies your identity and proves contact information. Once the payment is made, you will get an email receipt.

Be aware that there is a limit on how many credit card transactions you can make each year. If you file a 1040, you are limited to two payments per year. Installment payments increase to two per month. Make sure your credit limit has enough available credit to process the transaction to avoid making too many transactions.

Alternative Methods for Paying Taxes

What if you do not want to use your credit card? What else can you use to pay your taxes? There are several options.

Check/Money Order: If you have the money, you can send the IRS a check or money order. If you only have part of what you owe, it may be better to pay as much as you can with a check and charge the balance onto a credit card or set up an installment payment plan with the IRS.

Debit Card: Use a debit card the same way you would make a credit card payment. There is a fee to pay by debit card. That fee also goes to the payment processor and never to the IRS.

Installment Plan: This is the best option if you do not have the funds needed to pay your tax bill. Contact the IRS and ask about setting up an installment arrangement. The agent you speak to will work out a payment plan that allows you to make monthly payments that pay off the amount you owe, any fees, and any interest.

IRS Direct Pay: Pay directly from your bank account using a bank transfer. Direct Pay is only available from midnight to 11:45 p.m. Monday to Saturday and 7 a.m. to 11:45 p.m. on Sunday. If the system is down, you will see a message alerting you to the outage. You can only make two Direct Pay transactions every 24 hours.

Low-Interest Loan: Is your credit score decent? A low-interest loan from your bank or credit union may work to your advantage. You will have to make payments to your bank, but you will be improving your credit score as you pay off the debt. Each on-time payment helps improve your credit history.

Same-Day Wire: Send money directly from your bank to the IRS using Same-Day Wire. Your bank must participate in wire transfers. Call your bank or credit union first to see if it is an option. If it is, print out the Same-Day Wire form on the IRS website and bring it to your bank/credit union.

If you find out you owe the IRS money when you do your tax return, do not panic. Charging your taxes on a credit card should not be your immediate reaction. You are not the first and the IRS will work with you to find a suitable arrangement if you need help.

The information contained within this article was accurate as of April 4, 2020. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

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tracy

About Tracy Farnsworth

Tracy Farnsworth went straight from a business track in high school to a full-time job in mortgage banking in Burlington, Vermont. After having children, she built a freelance career in content writing and took online classes as time allowed. She completed Social Media Marketing and Digital Marketing certificate programs with Ireland's online Shaw Academy and completed several courses in SEO and analytics. In her free time, she's the “mom” to a very clingy rat terrier, and the pair walk at least a mile every day. She's also a novice baker who is trying to master the art of sourdough bread.