Most people hope to get a tax return, or at least break even, but for many taxpayers – income tax time means owing the IRS. If you didn’t plan for the payment and don’t have access to enough cash to pay it when it is due, there are a few options for settling your tax liability: pay it late, set up an IRS installment plan, or make the payment with a credit card.
Why It’s Good
It is possible to make your income tax payment on a credit card, and this payment option provides both benefits and disadvantages that should be considered carefully. The most common reason and benefit of paying taxes with credit cards is that it gives you more time to pay your tax obligation without needing to fill out extra forms with the IRS.
You may think that using a rewards credit card to pay taxes would be a good idea, but the rewards won’t be worth it.
Why It’s Bad
Even though the IRS will accept tax payments with credit cards, you have to make the payment through a third-party service. There are four vendors that handle IRS credit card transactions, including:
When you use a credit card to pay your taxes, you will pay a convenience fee ranging from 1.89% to 2.4% of the total amount of your tax liability, to whichever third-party service you use to process your payment. The more you owe the IRS, the more you’ll pay for the convenience of paying with a credit card. This fee is in addition to the interest you will pay to your credit card company for as long as you have an outstanding balance.
Another possible disadvantage of paying for taxes with credit cards is that the credit card company might consider the fact that you didn’t have the money to pay your taxes a sign that you are having financial difficulty. If you are considered higher risk, they might decrease your credit limit or decide to cancel your credit card all together.
If you put your tax obligation on a credit card in order to have the flexibility to make smaller payments over time, you may run into serious financial difficulty if you have trouble making payments at some point in the future. Paying credit card payments late can result in hefty fees and increased APR — interest will accrue every month that you still have a balance, and the entire situation can negatively affect your credit score.
Other Options for Paying Your Taxes
If you feel the disadvantages of paying your taxes with credit cards outweigh the advantages, but you don’t have enough money to pay for your taxes all at once – you need to consider one of the following options for settling your tax liability.
Borrow the Money – if you have a friend or family member willing to loan you the money to pay your taxes, you can save a lot of money in fees, penalties and interest. This is not an option for everyone, but if it works for you make sure you make the payments to the person who loaned you the money in a timely manner.
IRS Installment Agreements – if you are unable to come up with the money in time to pay for your tax liability, you can contact the IRS to work out an installment agreement. You can complete the process online if your tax liability is under $25,000. Your installment agreement will allow you to pay for your taxes over time, but it is not free. There is a set-up fee, monthly interest and a penalty of 0.5% on the unpaid balance every month until it is paid in full. Once you submit the IRS Installment Agreement Request Form 9465, the IRS will notify you within 30 days if you are approved to make payments and the amount of your payments.