Don’t Pay Your Taxes With a Credit Card

If you owe the IRS money this tax season and don’t have it available, avoid using your credit card or opening a credit card account for this purpose. It’s not financially productive and can lead to a substantial amount of further debt.

Credit card issuers and even the IRS tout the convenience of using a credit card and exploit the “rewards card” benefit, as if paying off the debt will give you enough points to deliver you to a tropical vacation. But they don’t inform you of the additional costs. With a little more investigation on the subject you’ll find that credit card payments to the IRS are processed by third-party providers – and like everything else in the credit card world this processing isn’t free. There is a fee that averages around 2.35% but can be much higher.

So if you’re tax bill is $5,000 and they charge you just over the average, say 2.40%, that’s an additional $120, which is incorporated into your credit card balance.  And if you can’t pay that balance off within the month or, at the very least, a short period of time, you’ll be at the mercy of the overwhelming interest rates. These rates will keep compounding, and even if you have rewards points their benefits will be diminished by the amount you keep paying out month after month.

So what can you do? There are a few options that appear to be better than using a credit card. First check out what the IRS offers; which are installment plans. There are a few of them; but they are essentially a payment plan with the IRS that allows you a certain period of time to pay off your taxes.

For example, if you owe the IRS $25,000 or less in combined tax, penalties, and interest you may qualify for the Online Payment Agreement (OPA). A fill-in Request for Installment Agreement Form 9465 (PDF), is available online that can be mailed to your address. Other options include a Partial Payment Plan. If you qualify and if for some reason you can’t pay off the full amount of debt, you make regular monthly payments to the IRS, but these payments don’t add up to the full amount owed. After the terms of the installment agreement are met, the rest of the debt is forgiven. The IRS does charge fees so be prepared for that.

One word of caution, you may want to hire a tax pro to assist you with all the forms you must fill out when working with the IRS. It can get complicated and if you don’t have the expertise it’s wise to hire someone who does.

Other options include asking your bank or credit union for a personal loan. The interest rates charged on these loans are usually less then what the credit card companies charge and if the fees add up to be less than what the IRS charges this may be the route for you.

Regardless of what option you choose, it’s probably not a good idea to use a credit card, unless you fully investigate your choices and find a card that will benefit your personal situation. Do your homework and make the selection – time is running out.