Beyond the cold weather and snowstorms many Americans are facing this winter, a lot of us are also staring down a large tax payment. And when it comes time to pay what we owe, we actually have several choices when it comes to the method of payment. Unfortunately, many of us choose a form of payment that costs more than we thought it would.
The cost of paying your taxes with a credit card
The Internal Revenue Service authorizes several companies to accept credit card payments on its behalf. While this can seem like an easy way to make a payment, these companies charge significant fees. The fee for credit card acceptance starts at 1.87 percent of the amount paid, and can be as high as 2.35 percent. So someone who chooses to pay a $4,000 tax bill with a credit card will incur between $74 and $94 in fees.
These same companies will also accept debit cards at a much lower cost, between $2.49 and $3.50 per transaction. So in most cases, taxpayers who are looking for the convenience of an instant, online transaction will be better off using a debit card than a credit card. Further, credit card users who do not pay their balances in full each month will incur interest charges on their tax payment, adding considerably to their total tax bill.
When a tax payment credit card can make sense
Despite these fees, there are a few situations where the fees charged for credit card payments can be justified. For example, there are credit cards that offer rewards worth as much or more than the fees charged. Say a credit card offers a 2 percent reward and you are paying a 1.87 percent fee to use the card to pay your taxes -- you'd receive a net reward of 0.13 percent.
Depending on how much you owe, the cash-back rewards could work in your favor. Still, remember that the fees you pay to use your card will largely offset your reward.
In addition to earning rewards worth slightly more than the fees, credit card users who avoid interest charges by paying their balances in full can also obtain a few extra weeks of interest-free financing by paying taxes with a credit card. For example, if a payment is made on April 15, and the credit card statement closes on May 5, then the payment will be due on May 26 if the card has the minimum 21-day grace period required by law. In fact, many cards offer a 25-day grace period.
It's also important to consider that some credit cards come with 0 percent APR promotional financing that can last from six months to as long as 18 months. If you have a credit card that has one of these offers, using it to make your tax payment can be a great way to receive an interest-free loan, although you will still pay transaction fees to the IRS.
Other ways to save when paying taxes with plastic
- Choose the right card. If you are using a credit card to make a tax payment, be sure to use the right card. The cost of credit card payment can vary based on the card used, with cards that are part of the Visa and MasterCard payment networks being the least expensive, and American Express cards being the most.
- Know your statement period. If you are making a credit card payment to have a little extra time to come up with the money, but you are still planning on avoiding interest charges by paying your statement balance in full, then you should be sure to wait until your statement cycle closes. Doing so will give you an additional month of interest-free financing on your charges.
- Consider IRS financing. If you know that you will incur interest on the tax payment charged to your credit card, then you should consult your tax adviser about setting up a payment plan with the IRS instead. In many cases, the IRS will offer a lower interest rate than your credit card.
If you're using a credit card to pay your taxes because you just don't have the cash right now, a personal loan could also be of use and generally these loans come with interest rates lower than credit cards. Keep in mind you need good credit to be qualified for a personal loan at the best interest rates, so be sure to check your credit scores before you apply. (You can see two of your credit scores for free every month on Credit.com.)
- The best credit cards in America
- How to get a credit card with bad credit
- How do unpaid taxes affect your credit?
Note: It's important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
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