While convenience and the rewards of using your credit card to make your tax payment are tempting, they are not free; taxpayers using a credit card to pay their taxes are assessed a fee of 2.49% of the payment amount. Just because the IRS allows you to use your credit card for your tax payments, and payment centers and credit issuers advertise doing so, this does not mean that paying with plastic is a good idea for consumers.
The estimated 2005 individual income tax paid per household was $8,045. Based on this figure, the average household paid $200 in extra fees by using a credit card to pay their taxes. Even though you may receive rewards for paying with a credit card, in many cases, such rewards are not enough to justify the cost of the fee.
You should pay in full any balance incurred by paying taxes with a credit card as soon as your statement arrives. Making a late payment or incurring the default interest rate on a larger balance like this can create a serious financial setback. 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 end up paying an extra $1,040 in interest, plus $200 in fees. If you only pay the minimum balance each month, it will take 264 months (22 years) to pay off your taxes and you end up paying $5,973 in interest.
The issuer may even treat the payment as a cash advance and charge you a higher fee and interest rate. Before calling the IRS payment center with your credit card in your hand, call the issuer and verify how rewards are applied to tax payments. Make sure that your tax payments are handled as a purchase and not as a cash advance.
Paying with a credit card is appealing because making a phone call and paying the amount you owe is easy. Credit cards also offer protection against error. If you are making your tax payment by credit card, call one of the IRS payment centers; do not forward your credit card number to the IRS and do not write your credit card number on the tax form.
You make your credit card payment to an IRS payment center, not to the IRS. The fee you pay goes to the payment center. The following are links to IRS payment centers:
Instead of using credit cards to pay taxes, households should use tax refunds to pay off credit cards or other debt. For households with ever-increasing balances, cash from refunds is a great source to reduce your debt and the amount you pay in interest each month. This is the best way to involve your credit card at tax time.
During tax season, credit card companies mail out cash advance checks and encourage cardholders to use the checks to cover taxes. The letter says something like, “Tax season is here. If you owe the IRS or your state, you don’t have to worry. If you find yourself a little short on funds, just write a check for any amount up to your available credit line. Or, if you’re entitled to a tax refund, there’s no need to wait weeks or months. Just write yourself a check now.”
You may write the checks for any amount, up to your available credit line. The fee for this is 3% for each advance, with a $10 minimum. They leave out an important detail—the interest rate for cash advances is currently 23.49%.
We don’t recommend using these checks for any reason, but if you do, call the credit card company first to see if you have sufficient credit available. Remember any outstanding transactions and finance charges that have not yet been posted, including the new finance charges from using the checks, when noting your sufficient credit. If you exceed your credit limit, you may be subject to charges related to going over your limit.
Many cardholders can now pay their rent or mortgage with their credit cards. The obvious benefit is rapid accumulation of a large number of reward points to use to get cash back or for travel.
Even though this sounds like a good idea, only people who pay off their credit card bill each month and have no debt problems should do this. If you carry even a small balance, this is not for you. There are many potential credit problems that can spring from this; the recent credit and mortgage crisis reminds us of the dangers of credit. If you need to use your credit card just to make a house or rent payment, then you are on the verge of significant debt problems.
If you do not have credit problems, paying your mortgage with a credit card is similar to getting an interest-free loan. If you pay with your credit card by the due date, then you have a few weeks before you have to pay off your credit card.