Should you ever pay your taxes with a credit card?

Paying your taxes with a credit card can be an incredibly risky financial move. There are other alternatives out there that can be a better option, depending on your financial situation.

|
Susan Walsh/AP Photo/File
The exterior of the Internal Revenue Service (IRS) building in Washington.

In a perfect world, you'd never owe the IRS a cent on tax day. But what if your world isn't perfect and you owe the IRS a lot of money on April 15? You might be tempted to simply pay your debt to the IRS with your credit card.

Resist that temptation. Paying your taxes with a credit card is almost always a bad financial move. You'll not only have to pay a convenience fee for using plastic, but you'll also face high interest rates on your debt. You might even hurt your credit score, depending on how much tax debt you place on your credit card.

"It just doesn't make sense to pay your taxes with your credit card," said Jim Torgerson, owner of Consolidated Financial Solutions in Palatine, Illinois. "You are defeating yourself when you do this."

Why You Shouldn't Pay Your Taxes With Your Credit Card

The problem with paying your taxes with your credit card? It's expensive.

First, the IRS will charge you a convenience fee for paying with plastic. Depending on your unpaid balance, that fee will range from 1.87% to 2.25% of what you owe.

Then there's the interest that your credit card provider charges. Credit cards come with interest rates of 18%, 20%, or more. If you put $5,000 of unpaid taxes on your credit cards, you'll face a big hit in interest payments if you aren't able to pay all that you owe on your cards' due dates.

"Say you put $4,000 on your tax bill and you have an interest rate of 20%. Just think of how much you will pay in interest if you can only pay the minimum required payment each month," Torgerson said. "It could take you years to pay that off, and you'll be paying interest all that time."

A Credit Score Hit

Putting your taxes on your credit card can also damage your FICO score. This is a problem today: Lenders rely on this score to determine who qualifies for loans and what interest rates they pay on the money they borrow.

Putting too much debt on your credit cards will immediately hurt your credit-utilization ratio, an important number for the health of your credit score. If you are using too much of your available credit, your credit score will drop. It will rise if you are using less of your available credit.

Better Options

Torgerson suggests that you search for better options than a credit card if you owe the IRS a large sum of money.

A Loan

The best choice might be to get a personal loan to pay off the IRS debt. You'll probably struggle to get one from a bank, but you might be able to convince a family member to loan you the money. Just make sure that you pay back the dollars according to your agreement. If you don't, you could seriously damage your relationship with whoever loaned you the money.

An Installment Plan

Your next best choice? You can sign up for an installment agreement with the IRS. Under such agreements, the IRS allows you to pay back what you owe in monthly installment payments. Yes, this method will cost you in fees and interest. But the IRS charges far lower interest rates than do the providers of credit cards. Even with the IRS fees, the odds are high that you'll pay less through an IRS installment fee than you would by putting your debt on your credit card.

If you do plan on setting up an installment plan, be sure to file your income taxes on time. By doing this, you won't have to pay the IRS' failure-to-file penalty. That penalty can be hefty; The IRS will charge you 5% of your outstanding balance every month in which you don't file your taxes.

Once you do set up an installment plan, you'll still have to pay a monthly penalty of 0.5% of your outstanding balance until you pay off all of your taxes. You'll also have to pay interest on your balance each month. This interest rate is set each quarter, and equals the federal short-term interest rate plus 3% — much lower than the 12% or higher interest rate on most credit cards.

You'll also have a setup fee to start an installment agreement. That fee is $120 unless you agree to have your installment payments made by a direct debit from your bank account. If you agree to the direct-debit option, your setup fee falls to $52.

To request an installment agreement, you have two options. If you owe more than $50,000, you will have to fill out IRS Form 9465 and attach it with your tax return. If you owe less than $50,000, you don't have to fill out this form. Instead, you can request an installment agreement online at the IRS' website.

If you owe less than $10,000, the IRS will automatically accept your request for an installment plan if you meet certain guidelines: If during the previous five tax years you filed all your income tax returns on time, paid the income taxes that you owed, and did not request a different installment agreement.

If the IRS does accept your request for an installment agreement, the agency will usually require monthly payments that allow you to pay back what you owe during a 10-year period. It makes financial sense, though, for you to pay as much as possible each month to cut down on late fees and interest.

"The IRS is not a bad person to owe," Torgerson said. "They want their money and they'll work with you to get it."

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. This article first appeared at Wise Bread.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Should you ever pay your taxes with a credit card?
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2016/0322/Should-you-ever-pay-your-taxes-with-a-credit-card
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe