The tax season is here, and you still haven’t figured out how to pay your taxes. If you have an outstanding tax bill, there are many options to explore when it comes to paying your taxes, including paying your taxes with your credit card. Yes, you heard me! You can pay your taxes with a credit card.
It sounds too good to be true, right? You are probably wondering why the IRS can allow you to pay a federal tax bill with your credit card. Well, not everybody can afford to pay their taxes upfront, which is why a credit card is a great option. If you can’t come up with your tax money immediately, using a credit card comes with an opportunity to take advantage of interest-rate promotions or earn rewards.
Because paying your taxes with a credit card seems like a juicy offer doesn’t mean you should jump at it. There are a lot of pros and cons to consider. So here are some questions to ask before you decide to pay taxes with your credit card.
How Can You Pay Taxes With Your Credit Card?
If you’ve decided to pay your taxes with a credit card, then the rest of the process is somewhat simple. Here’s how to do it.
- Determine how much taxes you owe
- visit the IRS payment page
- Go to pay with Debit Card, Credit Card, or Digital Wallet section
- Select pay now by card or a digital wallet and choose credit card
- Proceed to make payment
While you are allowed pay your taxes with a credit card, the IRS has a list of approved credit card processors as well as the processing fee for paying with your debit card, which includes:
- PayUSAtax: 1.96% fee with a minimum fee of 2.69
- ACI payments: 1.98% with a minimum fee of 2.50%
- Pay1040: 1.87% fee with a minimum fee of $2.50
Why Should You Pay With Your Credit Card?
If you are weighing the option of paying taxes with your credit card, here are some incentives to help you make up your mind faster:
Earn Rewards
Earning a generous reward for spending with your credit card is cool, but taking advantage of a massive welcome bonus when you meet a certain spending threshold is way better. When you pay a substantial tax bill with your credit card, you could earn more welcome bonuses, which would offer you huge returns.
Another smart move would be splitting your tax bill across two credit cards to meet the spending minimums and earn more rewards. However, different tax payments have a maximum number of payments allowed per year, so you have to be sure that you are earning rewards at a rate higher than the processing fee. Although processing fees have reduced and rewards have increased recently so your rewards can outweigh the processing fee with some credit cards.
Avoid Interest
Imagine having a $10,000 federal tax bill with little in the bank to cover its outstanding tax bill. Paying your taxes with a credit card will be a smart option if you are looking for an interest-free short-term loan to pay your taxes. Some credit card companies offer cardholders a 0% introductory APR for up to a year or more. This offers payments free from interest charges and welcome bonuses when you meet a minimum spending requirement.
Convenience
When you pay your taxes with a credit card, it’s quick and easy. You get instant payment confirmation, although it comes with a price of processing fee.
Why You Shouldn’t Pay With Your Credit Card?
Interest Charges On The Unpaid Balance
If you can’t pay off your credit card balance immediately, you’ll have to pay interest on any tax-related charges. In that case, this will continue to accrue as long as you have to pay a balance, with the average minimum credit card rate hovering over 15%. That would be a huge fee to incur for paying your IRS bill, and it’s even much higher than what the IRS charges for an installment payment plan. The key is to pay up your balance in full when it’s due to avoid interest charges.
Fees Over Rewards
The earning rewards and 0% introductory APR may be enticing, but it’s not as simple. The benefit from paying taxes with a credit card should be worth more than the fee.
High Credit Utilization Rate
Before you pay your taxes with a credit card, consider your credit score. Paying taxes with your credit card could hurt your credit score. On the other hand, charging a high tax bill to your credit card could increase your credit utilization rate.
To know your credit utilization rate, divide your total credit card balance by your available credit. If your credit utilization rate is more than 30%, you should avoid using your credit card for your tax bills. Of course, keeping your credit score as low as possible is ideal.
Are Credit Cards The Cheapest Way To Pay Your Taxes?
While paying your taxes with a credit card may not be the best option, it’s better than not paying it at all. However, using credit cards may not be the best option if you have the cash to pay your taxes because of their potential interest charges.
An installment plan with the IRS is also less expensive and a great option to consider instead of a credit card. In addition, unlike when you pay your taxes with a credit card, the IRS payment won’t hurt your credit score as long as you make your payment on time.
Take-Home
Can you pay your taxes with a credit card? Seeing the pros and cons, it’s all about you and your financial situation. Be sure to double-check the APR offer. Create a debt repayment plan and, most importantly, consult a tax strategist like Tax Goddess to help you make an informed decision.
The major reason you are considering paying your taxes with your credit card is that your taxes are too high, and you can’t reduce your taxes to zero. But guess who can help you with that- Tax Goddess.
At Tax Goddess, we provide custom strategic tax plans that cater to every client’s unique tax-saving needs. So, if you don’t want to pay high taxes ever again, schedule a FREE consultation today!
Let’s explore the most effective strategies for delivering your financial aspirations.
