10 Nov Paying Taxes with a Credit Card: Pros and Cons
Are you thinking of using your credit card to clear your debt with the IRS?
Well, it certainly seems like a convenient way to do it, doesn’t it? But before you rush into it, there are several moving parts that you need to be aware of.
First of all, you should know that the Taxpayer Relief Act of 1997 doesn’t allow the IRS to pay a fee to service providers for processing credit card payments. This means that the IRS cannot accept credit card payments directly. Instead, the IRS has authorized three third-party vendors to process these transactions on its behalf:
- PayUSAtax (WorldPay US, Inc.)
- PAY1040.com (Link2GovCorporation)
- Official Payments Corporation (ACI Worldwide Corp)
You should also know that you can’t use your credit card to pay all IRS tax forms, and you can only use it a certain number of times, depending on the payment type and tax year.
Now that we’ve covered the basics, let’s take a look at the pros and cons of paying taxes with a credit card.
1. Credit card rewards
Some credit card companies offer incentives for using their cards. These incentives are typically divided into three categories: cash, points, or miles. If you’re using a rewards credit card, you can earn rewards or cash back when you use it to pay your taxes.
2. Tax deductible processing fees
The third-party service providers authorized by the IRS will charge you a processing fee when you use your credit card to pay taxes. If you itemize deductions, these fees may be tax deductible.
3. Raise your credit score
By using your credit card, you build credit which may raise your credit score. A good credit score may result in lower interest rates, higher credit limits, and access to more credit offers.
4. Online tax prep software discounts
Some processing vendors may offer discounts on online tax prep software when you use them to pay your taxes via credit card. These are helpful tools that aid you in preparing your tax return yourself.
5. Automatic extension
If you use your credit card to partially pay your end-of-year taxes AND indicate that the payment is for an extension, you will automatically earn an extension without needing to fill out any additional paperwork.
1. Accrued interest
You’ll be creating credit card debt that may lead to interest accrual if you’re unable to keep up with the payments. The amount of interest will depend on your total credit card balance as well as any changes to your interest rate. To find out how your finance charges are calculated, read the back of your credit card statement or contact the credit card company directly.
2. Increased interest rate
Using your credit card to pay your taxes may give your credit card company reason to believe that you are experiencing financial trouble. This may result in them flagging you as a potential risk and increasing your interest rate.
3. Convenience fee charges
In order to afford you the convenience of paying your taxes with a credit card, the IRS charges a convenience fee of 2.49%.
If you experience serious financial difficulties to the point where you need to file for bankruptcy, you won’t be able to discharge credit card debt incurred for paying taxes. This is because unpaid withholding tax, Social Security tax, and income taxes are listed in the U.S. Bankruptcy Code under categories of debts that may or may not be dischargeable depending on factors such as age of debt and/or date of assessment.
5. Higher credit utilization rate
Though using your credit card to pay your taxes can raise your credit score, it could have a negative effect on your credit utilization rate. This rate is calculated by dividing the revolving credit you are currently using divided by the total amount of revolving credit at your disposal. Credit scoring models typically use this ratio to determine your credit score. A higher credit utilization rate may result in a lower credit score.
Other ways to pay your taxes
Other than paying directly from your bank account free of charge, you can also use the following methods to get your IRS account up to date:
- Electronic Federal Tax Payment System
This is the best option for businesses or individuals who need to make large payments.
- Electronic Funds Withdrawal
This method can be selected when using the e-filing system.
- Same-day wire transfer
Your bank may charge a fee for this.
- Check or money order
When you opt for paying by check or money order, make sure you include all the required information before mailing your payment to the IRS.
You can pay your taxes in cash at any participating retail store. However, it may take five to seven business days to process your payment, so you’ll need to plan ahead of your due date to ensure that the IRS receives your payment on time.
If you’re unable to pay the full amount immediately, the IRS offers a few options in this situation, including:
- Applying for a payment plan to pay off your taxes in monthly installments.
- Applying for an Offer in Compromise (OIC) to find out if you qualify for a tax reduction.
- Requesting that the IRS temporarily delay collection until your financial condition improves.
The most important thing to remember is that you should never avoid filing or paying your taxes altogether. Doing so will result in penalties and could ultimately lead to the IRS filing a notice of a federal tax lien, seizing your property, charging you for tax evasion, or even revoking your passport. Obviously, paying the entire amount due upfront is the best way to go – if you can afford it.
If you can’t, you may want to consider applying for a payment plan before reaching for your credit card. If you do choose to use your credit card, make sure to pick the processing vendor with the lowest rates to minimize additional fees.
And finally, if you’re feeling weighed down by tax issues and past tax debt, you don’t have to struggle alone. Reach out to our qualified tax relief attorneys. They have years of experience navigating tax laws and have helped over 15,000 clients save $19 million dollars on tax penalties. They will thoroughly assess your situation and provide you with the best options for resolution so you can break free of your tax issues.