You Can Pay Your Taxes With a Credit Card — Here’s Why You Shouldn’t
You can pay your taxes with a credit or debit card.
You will be charged a credit card processing fee to make a credit card payment.
Paying over time can be less expensive with an IRS payment plan.
You completed your tax return like a responsible adult. Then the unthinkable happens: You owe money to the IRS. You use your credit card for just about everything, but can you pay taxes with a credit card?
The short answer is yes, you can; the IRS accepts credit cards for tax payments. The longer answer is that you might want to think carefully before using a credit card for a tax payment.
Related: This Is Where Your Tax Dollars Actually Go
Making Tax Payments With Credit Card To Earn Points: Beware the Fees
If you’re in the habit of using your credit card so you can collect the rewards points or miles, you might be tempted to use your credit card to pay your tax bill so you can get the points. But the IRS uses a payment processor to charge your credit card, and that processor charges a fee of 1.87% to 1.99%, with a minimum fee of about $2.50, to process your payment. So unless you’re getting more than 2% cash back, or two miles per dollar spent, using your credit card to pay your taxes will cost you money.
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Making Tax Payments With Credit Card Because You Don’t Have the Money: Consider the Interest
If you’re thinking of using your credit card to make your tax payment because you don’t have enough money to pay it off all at once, you’ll need to do some math. You can set up a payment plan with the IRS to pay off your tax bill over time. If you can pay within 120 days, there is no cost to set up the plan. You will be charged a penalty on the unpaid balance. The penalty for failing to pay is 0.25% per month if you have a payment plan, so if you pay within 120 days, you’ll pay 1%. The interest rate charged by the IRS is currently 6%. If you’re paying interest on your credit card, it’s likely a lot more than that.
Find Out: What To Do When You Can’t Pay Your Tax Bill
When Using a Credit Card To Pay Taxes Could Make Sense
There are two situations in which it might be smart to use your credit card to pay your taxes. Some credit cards offer a cash-back bonus for charging a certain amount within the first three months — $150 if you spend $1,000, for example. In this situation, using your credit card to pay your taxes makes sense if you would not otherwise spend enough to qualify for the cash back bonus.
The other, similar situation involves an introductory interest rate. Some credit cards offer a 0% interest rate for the first year or so. If you have a card on which you are charged no interest, and you cannot pay your tax balance in full in cash, putting it on a credit card will be less expensive than setting up a payment plan with the IRS. Just be sure you can pay it off before your credit card interest rate goes up.
Read: The Major Tax Changes for 2021 You Need To Know About
Paying your taxes with a credit card might seem like a good idea, but make sure you understand the costs involved in your particular situation.
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This article originally appeared on GOBankingRates.com: You Can Pay Your Taxes With a Credit Card — Here’s Why You Shouldn’t
