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Why you shouldn't pay your taxes with a debit card

(MoneyWatch) Whether you electronically file your tax returns, file paper returns or need to pay a tax bill for a prior year, the IRS will allow you to do so using a debit or credit card. But if you have the cash on hand in your bank account, why would you pay your taxes using a debit card?

Paying taxes by debit card is available through IRS approved providers such as Official Payments Corporation, ChoicePay and Pay1040. When you do this, you will also pay a debit card fee of at least $3 and an additional amount of approximately 2.35 percent or more of the amount debited.

But if you instead authorize the IRS to debit the amount owed directly from your checking or savings account the fee is zero.

So your choices are: Pay your tax owed using a debit card and pay fees or pay your taxes by having the IRS directly debit your bank account and pay no fee. You don't have to be a Nobel laureate to figure that one out.

But if you don't have the cash on hand to pay the tax you owe, the choice is different. Through the same providers mentioned above, you can charge your taxes on your credit card. The benefits are that this is safe, secure and convenient. You can also earn rewards offered by your credit card for things like airline travel or cash back.

But using this option is no free lunch. Paying your taxes with a credit card comes with hefty fees. If the amount of taxes you owe is $3,000 and you pay by credit card, the convenience fee for charging your federal taxes could be about $70. Charge $10,000 and the fee would be about $235. Charge $40,000 (the amount of charges that qualify for a free airline ticket on some airlines) and the fee is about $940. This fee would typically be more than the cost of buying that ticket outright, so the rewards are typically not worth the fees. Also, if you don't pay your credit card balance in full you could end up paying hundreds of dollars of interest at a rate that is higher than the IRS interest rate for installment payments.

For folks who owe tax and are short on cash, the better option is to request a payment plan with the IRS. The only exception is that if you expect to have the cash to pay the tax in a few weeks, then you might consider paying your taxes using the Credit Card Payment Option.

The bottom line: Making a partial payment of the tax you owe and filing an Installment Agreement Request is better than using a credit card.

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