Resist the Urge to Charge Your Taxes

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Pay your taxes with plastic and you'll pay the price. No doubt you use a credit card for the great majority of your purchases. This comes with obvious advantages -- if you pay off the bill in full each month.

Credit cards are accepted for fast food, cell-phone bills and even for church donations these days.

So it's no surprise that you can also use plastic to pay your federal taxes.

With tax season approaching, those who haven't set enough aside from their earnings can find that they don't have enough cash on hand to cover their tax bill.

One solution is to put the taxes due on a credit card. The Internal Revenue Service even has a list of features and benefits of paying your taxes by credit card, which include convenience, safety, availability, security, quick confirmation and the chance to gain rewards.

But paying your taxes by credit card in most cases is a poor option, says Curtis Arnold, founder of CardRatings.com. "The only time it makes sense is if you just don't have the money to pay for your taxes and have exhausted all other financing options."

Many people see paying by credit card as convenient, but it costs money. Unlike retailers that absorb the credit-card charges levied by the bank when you pay by credit card, the IRS has an exemption from this policy.

So guess what? You end up paying the fees.

That comes to a minimum of 2.49% of your payment. If you owe $10,000 in taxes, you would be charged $249 when using a credit card. Even if you are able to put your taxes on a 0% interest credit card, you will still be charged this fee for using a credit card.

If you place the tax you owe on a typical credit card, the damage can be even more, Arnold says. "You are 2.49% in the hole out of the gate," he says, "and if you aren't able to take advantage of a 0% promotional APR, the interest charges could quickly be devastating."

While a credit card may be your only option if you don't have the money available to pay for most goods and services, this is usually not the case with taxes.

"It's important to note that the IRS offers financing options," which typically offer much better terms than the average credit-card offers, Arnold says. The IRS installment plan does come with a one-time user fee of $105, but the interest rate charged (the federal short-term rate plus 3%) is much lower than the typical credit-card rate.

The combination of the lower interest rate and not having to pay the 2.49% credit-card fee will almost always be a better option for those who need to pay their taxes over time.

The IRS also mentions the rewards you can earn by paying with a credit card. But the math rarely supports this. People assume they are being smart by putting their taxes onto their reward credit card to earn airline miles or other perks, but the 2.49% fee makes even using reward cards a poor option most of the time.

"It doesn't make sense to pay for your taxes strictly for reward purposes, because there aren't any standard credit cards which offer a rebate as high as 2.49% for tax payments," says Arnold. (There are cards that offer rebates as high as a 5% on certain other types of purchases.) "The only exception would be with a credit card promotion. If an issuer offers a promo deal, then you'd just have to do the math to see if it is worthwhile."

For example, the Citi Cash Returns credit card offers 5% cash back on all purchases made the first three months you own the credit card. Since the 5% cash back is more than the 2.49% fee, you actually can earn a bit of money by paying your taxes in this instance.

In the end, it's important to realize that the credit card companies and the IRS have selfish reasons for promoting payment by credit card.

The IRS knows that it is "more likely to get paid if they offer more payment options," Arnold says. "It's also a very lucrative business for the companies that accept credit card payments for the IRS [as well as the card issuers]."

 

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