Debt Consolidation and Credit Card Counseling

Credit card payment for taxes has extra fees and interest could cost you dearly

The annual ritual of filling out the 1040 form and paying income taxes is not something that Americans relish. It’s a chore, and it’s a chore that everyone hates. We particularly hate it if it turns out that we actually owe money. It’s bad enough having to do the paperwork or to pay someone to do it for you, but it’s even worse if you have to shell out for taxes. Unlike other creditors, the Internal Revenue Service wants their money right away. Well, at least no later than April 15.

But what if you cannot pay it in full? Sometimes, tax bills can be unexpectedly large, and it’s quite possible that you just might not have the available cash to write a check to the IRS. Then what? The IRS will accept charge cards for payment, and more than one million people paid their taxes that way last year. Should you do that if necessary?

If there’s no other way around it, you can pay that way, but there are some good reasons why you probably shouldn’t. The first one is the added charge. There is a 2.49% service charge for paying by credit card and unlike department stores, the IRS will not pay this fee. You have to pay it. So if you owe $1000, you will have an additional charge of $24.90 added to your bill. Worse, if you cannot pay your bill in full when your credit card statement comes, then you will have to pay interest on top of that. If you didn’t have the cash to pay the taxes, you probably won’t have the cash to pay the credit card bill. That means that you will have to pay interest. Why would anyone want to pay interest on their taxes, especially at the rates charged by the credit card companies?

The IRS will allow taxes to be paid on an installment plan. It’s not their first choice; they would much rather have the money up front. But the interest rates they charge are much more reasonable than those charged by card issuers, so if you find yourself in that situation, you might consider discussing that with your tax preparer. Alternatively, you might consider another source of borrowed money, such as a home equity loan.

What about bonus miles for using your account? Many people have accounts that given them frequent flier miles or some other sort of bonus for using the card. Would that justify using plastic to pay the taxes? Not really, the 2.49% service charge more than outweighs the benefit of any bonus you might receive for using your account to pay taxes. The value of the bonus is much less than that.

The bottom line is this: If you owe money to the Internal Revenue Service, try to find some way to pay them other than by using a Visa or Mastercard. It’s much, much cheaper.

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