So you’ve just received your tax bill and shockingly, it’s much larger than you had anticipated. In fact, there’s no way that you’ll be able to pay it off any time soon. Yikes.
With the due date looming ever closer, and knowing about all the nasty things the IRS can do to you, you can’t help but wonder:
“Can I pay my taxes with a credit card?”
You remember that there’s room on your card to utilize more credit. Suddenly, paying the IRS with a credit card seems like a mightily tempting option.
In fact, the IRS even suggests that you pay your taxes with a credit card!
Hopefully, you’re smart enough to see that they’re only interested in getting their debts paid. And they don’t really care how much credit card debt you rack up.
So the question is: is it a good idea to pay your federal taxes with a credit card?
In this article I’ll investigate the pros and cons of using a credit card. Hopefully by the end, you’ll see why using a credit card should be your last resort when paying your tax bills.
You should consider the many effective and safe options to pay your tax debt. For example, by using an installment agreement or an offer in compromise. You can even consult with a tax relief expert for an even greater chance at success.
Why you SHOULD pay the IRS with a credit card
Rewards points
Credit cards offer attractive rewards points for your spending. Typically, it takes months or years to get enough points for anything worthwhile.
Needless to say, if you pay off a huge tax debt (think over $10,000), then you’ll be racking up lots of points which you can then use on gifts, travel the world etc. Who doesn’t want free stuff?
Sign-up and Spending Bonuses
In addition to rewards points, credit cards offer sign-up and spending bonuses. The kicker is that the threshold for unlocking these bonuses is usually very high.
For example, you might need to spend at least $5,000 within a month of signing up for a card in order to receive a sign-up bonus. This kind of spending is usually out of the average American’s reach.
Paying off a large expense like an IRS bill can push you over the payment threshold to receive your bonuses.
Convenience
In my opinion, this is one of the biggest reasons why I’d be tempted to use a credit card when paying federal taxes. Using your credit card is easy and familiar. All it takes is an internet connection and you’re in business.
On the other hand, setting up a payment plan with the IRS can be time consuming and downright confusing! Convoluted processes, numerous forms, scraping together your financial statements – it’s no wonder people end up reaching for the credit card when tax bills are due!
Convenience Fees are Tax deductible
A seller charges you convenience fees when you use a payment method (like a credit card) that the seller doesn’t usually accept. When paying your federal taxes with credit cards, you get charged convenience fees.
However, in some situations (like when you’re self-employed), you might be able to include convenience fees in your itemized deductions from taxable income.
To me, this benefit is just “meh” because you still spend more than you save and the situations under which you can claim are limited.
Buy you some breathing space
Most credit cards offer you a 21-day window where your credit card debt is interest free. So, if you think your account might be awash with an influx of cash by that time, this might be one way to tide you over till then.
If your future isn’t so clear though, then this merely buys you a small sliver of breathing room while you contemplate your next move. My take: if you find yourself in this situation, there’s no point trading in your uncertain future with another one.
Summary
As you can see, the benefits of using a credit card tend to center on reaping credit card rewards. None of them point to using credit cards as a financially sensible way to pay the IRS.
I am getting ahead of myself here, but I felt it was important to make this point early. Most people who argue that you should pay the IRS with credit cards aren’t thinking long term.
In the next section I’ll discuss why paying the IRS with credit cards doesn’t help your situation in the long run.
Why you SHOULD NOT pay the IRS with a credit card
High interest rates
Credit card interest rates are a killer. I’ve heard countless stories of small credit card debts ballooning into the tens of thousands. On the other hand, IRS penalties are capped at 25% of the amount you owe, and applying for an installment agreement can cut your penalties down to 0.25% per month.
Here’s a comparison of interest rates you might be paying on your credit card vs an IRS payment plan:
|
Comparison: Credit Card vs IRS Payment Plan (Monthly) |
|
|
Average Credit Card (Interest Rate) [1] |
IRS Installment Agreement (Interest + Penalties) [2] |
| 1.15% |
0.33% + 0.25% = 0.58% |
Sources:
[1] https://www.valuepenguin.com/average-credit-card-interest-rates
[2]https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/irs-procedures/collection-procedural-questions/collection-procedural-questions-3
You’d pay nearly double using a credit card vs an IRS payment plan. I think the numbers speak for themselves here.
Credit card companies don’t have forgiving repayment options
The IRS has programs in place like the fresh start initiative, payment plans and offers in compromise. All these programs are intended to help you pay what you owe.
While more tricky to set up than using your credit card, they have generous repayment terms.
For example, a Streamlined Installment Agreement gives you 72 months to repay your tax debt.
In addition, once you’re on a program, you can expect the IRS to leave you alone. That means, no visits from collections agents, no wage garnishments or bank levys for the time that you’re on the program.
On the flip side, a credit card company may not be so easy to work with. Often, they’ll hand your overdue account over to debt collection companies who then hound you night and day to strong arm you into repaying.
Effect on your credit report
Using your credit card means you are utilizing available credit. You can bet the farm that this will show up on your credit report, and not in a good way.
Your currently owed debts contribute to 30% of your FICO score calculation. Using large portions of your available credit can lower your credit score and make prospective lenders nervous.
They’ll wonder:
Will this person be able to remain current on all their debts come due date?
You can imagine that this can make it difficult for you to get any other sort of loan or financing.
High processing/convenience fees
Using a credit card carries with it high processing fees. Fees can range between 1.87% to 2.35%. This means that you could be roughly $200 just to make payment on your tax bill.
On the other hand, if you look at my guide on how to set up a payment plan with the IRS, you’ll see in the “User Fees” section that you can get set up for as low as $31. Those savings are nothing to sniff at!
If you think $170 is not a lot of money, then I have a suggestion: give me the $170 and I’ll gladly agree with you!
You don’t target the cause of the problem
Of all the reasons why you shouldn’t use a credit card to pay the IRS, this is the big kahuna. If you have troubles paying your tax debt, it could mean that you’re not managing your money as well as you could be.
Rolling your debt over from one source (the IRS) to another (credit cards) does not tackle the root of your problem, nor does it make your problem go away over the long run. At best, you’ll just be kicking the can down the road.
Unless you take actions to correct bad habits that got you into this situation, you’ll never break out of the cycle of debt. Bad habits include: failing to budget, compulsive spending, failing to save enough etc.
Summary
There are so many reasons not to use credit cards that make good financial sense over the long run.
Conclusion: Don’t pay federal taxes with credit cards
If you felt this article was biased, it’s probably because it is. It would be almost criminal of me not to warn you of the dangers of using your credit card to pay IRS bills. The idea gets thrown about a lot, but often without considering the pros and cons of doing so.
Using your credit card to pay federal taxes seems even sillier when you compare it to the payment programs that the IRS offers. Yes, IRS personnel are still self-interested tax collectors. But the savings you can make by taking up a payment program are huge.
If you’d like to know more about the programs the IRS offers to make payments easy, read my article on the IRS Fresh Start Initiative. If you want to get on an installment agreement, read my article on how to set up a payment plan.
