If you have an overdue tax bill, you may want to consider using your credit card to pay it off. With a credit card, you can receive incentives or take advantage of an interest-rate deal.
While paying your taxes using a credit card may be a simple process, the costs you'll incur may outweigh any incentives you'll receive. We'll go over your alternatives and help you determine if paying your taxes with a credit card is the best option for you.
Not being Able to Make a Full Tax Payment
Not everyone has the financial means to pay their tax burden at the time they file their taxes. If you don't have enough money to pay your taxes right away, you have a few options.
Pay late: The federal monthly late fee is 0.5% of the outstanding debt, up to a maximum of 25%. Furthermore, interest will be added to the total amount owed.The interest rate is 3% above the federal short-term rate. If you additionally fail to submit on time, you may be charged a late fee of up to 5% of your outstanding total for each month you do not pay.
Pay using an instalment plan: You can pay your taxes in monthly instalments through an instalment agreement with the Internal Revenue Service (IRS). A one-time startup cost of up to $225 is required, as well as monthly interest. Your fees and interest rate will be determined by how you sign up (online, by phone, by mail, or in person) and the payment method you select. Taxpayers who qualify as "low-income" may be exempt from paying the setup charge.
Pay via credit card: You can charge your tax bill to your credit card just like any other expense. Your credit card deal would impose the minimum payment and interest rate. Explained Advantages
Flexibility in repayment: Paying with credit card allows you to pay off your tax balance over time according to the terms of your credit card. It can be less distressing and daunting to owe your credit card company than to owe the IRS.
Earning incentives: You can use any rewards or welcome bonuses that your credit card provides. A cash-back credit card with a flat-rate rewards system would be preferable than one with additional returns on certain spending categories. For example, if you paid a $5,000 tax payment using a card that offered a 1.5% rewards rate, you would receive $75 in cash back.
More time to pay: Using a credit card lets you to pay your tax payment after the April 15 deadline without having to fill out any paperwork or reply to any IRS communication. This choice outperforms the IRS installment-agreement option, which allows you to pay over a period of up to six years but needs additional papers and other qualifying conditions.
Can avoid paying interest: You may be able to avoid paying interest if you use a credit card with a long 0% introductory rate on purchases. Many rewards credit cards provide 0% interest on purchases for 12 to 15 months.
Explained Cons
Higher interest rate: While some credit cards offer a very low rate when you first create an account, most credit card interest rates are far higher than the IRS rate for an instalment plan. The longer you wait to pay off your credit card amount, the more interest you'll wind up paying.
Convenience fee: When you pay your tax due using a credit card, IRS-approved payment processors impose a convenience fee. This rate will range from 1.87% to 1.98% in 2022, depending on the CPU used. A $10,000 tax bill paid by card would include a convenience fee of $187 to $198.
Credit card payments are subject to a limit imposed by the IRS. Except in a few cases, you can only use this option twice per year. This would restrict you from paying with three or more credit cards.
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