In a perfect world, the money you owe for taxes each year would be taken out of your paycheck each period and you’d never have to worry. But, unfortunately that’s not the case for freelancers, service industry workers and people who are self-employed. So what do you do if you owe the IRS but don’t have the cash to pay it all up front? Using a credit card is tempting. But is it really a good idea?
Paying your taxes with a credit card can seem like an incredibly convenient, natural thing if you’re filing online some people even decide to pay with a card so they can take advantage of rewards programs like cash back or airline miles.
But while the convenience of cards and the lure of rewards can be tempting, its important to remember that if you can’t pay your balance off quickly, your credit card’s interest rate could cause you to end up paying a lot more and thatll almost certainly negate any rewards you might earn. A typical rewards plan gives around 1% cash back, but the cost of paying your taxes with a credit card is about 2%. On top of all that, the IRS uses third-party companies that charge a fee of between 1.88 and 2.35% to process your credit card.
But what if youre simply broke? You might think that you don’t have any other choice but to pay with your credit card. Not true. You can pay the IRS in monthly installments instead. You’ll typically get up to five years to pay off your balance with an IRS payment plan, and if you owe less than $25,000, you can choose how much you’d like to pay off each month. The interest rate for these payment plans is 3% quite a bit less than the typical credit card interest rate of around 14%.
There is a one-time fee to set up a payment plan, which kind of sucks. It’ll run you $105, but you can get that reduced by half if you set up your plan to automatically withdraw your payment from your bank account each month. Also, if you meet a certain standard of brokeness, youll be charged $43 with or without auto bill pay. If you’re really hurting and you can prove that you can’t and probably won’t ever be able to pay the taxes you owe, you can apply for something called an offer in compromise. Youll be able to pay less than you owe.
Our advice is to use the IRS payment plan if you can, but if you do decide to simply pay your taxes with plastic, there are a few things you can do to get the most out of the experience. First, remember that you can deduct the convenience fees you’re charged for paying with a credit card from next year’s return. Knowing your credit limit is also crucial, because using too much of your available credit to pay off your taxes can have an adverse effect on your credit score. Finally, if you’re trying to take advantage of a cards introductory 0% interest rate, make sure you can pay your balance off before the promotional rate expires otherwise there’s no point.
Would you pay your taxes with a credit card? Have you done so in the past? What was the result? We’d love to hear your story in the comments section.