By  Mon Mar 19, 2012

4 Tricks to Avoid Fees When Paying Taxes With Credit Cards

Paying taxes with a credit card can be very expensive, which is why it’s recommended that taxpayers not do it. But, for those who opt to use their credit cards, there are ways to keep more money in their pockets.

With a credit card, you’re charged a percentage fee — the larger your tax payment, the larger your fee.

With a debit card, there is a flat rate convenience fee.

Ideally, you would pay your taxes with a check or electronic funds transfer, both of which are free.

Nevertheless, there are always cash-strapped folks and participants in the customary last-minute scramble to meet the tax deadline. Those who resort to credit cards for tax payments may benefit from these tips:

1. Pay as late as possible

When you pay your your taxes with a credit card, it pays to wait until the last possible minute. Since credit card balances accrue interest, the longer you can postpone payment the less time your debt will have to grow.

2. Use one of these credit cards

The lowest credit card convenience fee, at 1.89%, is available through WorldPay US, Inc. Any credit card that can return the same percentage or more — in cash-back offers or rewards — would help recoup the costs of the convenience charge.

Two credit cards that can do this are the Fidelity Investment Rewards American Express card and the Capital One Venture Rewards card.

The Fidelity Investment Rewards card offers 2% cash back on all purchases and it comes with no annual fee. However, you must have a Fidelity account, where the cash back is deposited.

The Capital One Venture Rewards card, which has a $59 annual fee, will rewards 2 miles per dollar spent on all purchases and miles are redeemed at an effective ratio of 50 miles per dollar on gift cards, merchandise, travel and cash back.

3. Take advantage of 0% balance transfer APR offers

By taking a balance transfer through a credit card with a 0% introductory rate to pay taxes, the tax payment is deferred for the duration of the introductory APR. Essentially, the cash can be used to pay taxes without incurring a convenience fee. But, the card issuer may charge a balance transfer fee, which is typically 3% of the balance transferred.

Like any other form of debt, past due taxes is a debt — a debt to the government — that carries interest. With a filed tax return, the IRS will impose a failure-to-pay penalty (0.5%) and charge interest (currently 3.19%). A balance transfer may result in a small amount of savings.

However, there are credit cards with no-balance-transfer-fee offers. Currently, the Chase Slate card, with a 15-month 0% balance transfer offer and no balance transfer fee, would make great choice to defer a tax payment without getting hit with upfront costs.

4. Buy a prepaid debit card

Major supermarket chains are likely to offer prepaid debit cards, which can be used to pay taxes. At WorldPay US, the convenience fee for using a debit card to pay taxes is a flat $3.49.

And, there are credit cards out there that dole out high rates of cash back on grocery purchases.

As an example, the Blue Cash Preferred card from American Express ($75 annual fee) offers 6% cash back on grocery store purchases. By purchasing a prepaid card with the Blue Cash Preferred, the convenience fee can easily be recouped.

However, there are some points to keep in mind with prepaid cards. Prepaid cards often charge an activation fee, usually less than $10. Additionally, some supermarkets place limits on prepaid card purchases, typically $500 and under. So, this method works for small tax payments where the total fees can be offset by the cash back.

If you’ve got any clever ideas to make it less costly, or profitable even, to use cards to pay taxes, we welcome your ideas.

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