So, you're looking at ways to pay taxes with a credit card? It can be tempting, especially if you're facing a hefty tax bill or want to earn those sweet credit card rewards. But is it really the right move for you?
This article explores paying taxes with a credit card, exploring the pros, cons, and key factors to consider before swiping that plastic. We'll cover processing fees, potential rewards, and even ways to strategize your credit card use for maximum benefit when you pay your income tax bill with a credit card.
Understanding the Costs
Before charging your tax bill to your favorite credit card, understand the costs. The IRS doesn't directly accept credit card payments. You must use a third-party payment processor approved by the IRS.
These companies handle the transaction for you but charge a processing fee. This is typically calculated as a percentage of your total tax payment.
What Are the Fees for Paying Taxes With a Credit Card?
The IRS provides a list of authorized payment processors on its website. They currently are: payUSAtax.com, Pay1040.com, and ACI Payments, Inc. Each company sets its own fees.
Usually, the fees range from 1.82% to 1.98% of the payment amount. So, if your tax bill is $5,000, you could be looking at an extra $91 to $99 just for the convenience of paying with a credit card.
While it might not seem like much for smaller amounts, these fees can add up with larger tax liabilities. This is especially true when paying business taxes.
Reaping the Rewards
Why, then, would anyone consider paying taxes with a credit card, given those processing fees? Because using your credit card can offer alluring perks. Here are a few:
Earn Those Credit Card Points
If you're a points and miles enthusiast, you're likely familiar with the joy of earning rewards. Many rewards credit cards offer cash back, points, or miles on purchases.
When you pay taxes with a credit card, you can rack up rewards, especially on a large tax bill. For example, paying a $5,000 tax bill with a 2% cash-back card nets you $100. This almost covers that pesky processing fee.
However, remember to run the numbers to make sure you come out ahead. You want the reward value to be greater than the processing fee.
Snag a Welcome Bonus
Credit card companies love to entice new customers with shiny welcome bonuses. Many offer a large sum of points or cash back after you meet a minimum spending requirement within a specific timeframe.
Using your credit card to pay your taxes could be the spending boost you need to snag that bonus. For instance, the Capital One Venture X Rewards Credit Card offers premium benefits that can offset its annual fee of $395 (see rates and fees). It has perks such as $300 in travel credits, lounge access, and an annual bonus of 10,000 miles.
Get a 0% Interest Grace Period
Some credit cards offer 0% interest for an introductory period. This essentially means you're getting a short-term interest-free loan. This perk is ideal if you need more time to pay off your tax bill without incurring interest.
Just make sure you can repay the balance before that 0% period expires. The last thing you want is to fall into the debt trap with sky-high interest rates.
Weighing the Pros and Cons
So far, we've seen that paying taxes with a credit card isn't as simple as "yay, free rewards.". Let's consolidate what we've learned and dive deeper into the advantages and drawbacks:
Advantages:
Reward Potential: This can be the main draw for savvy credit card users, especially those with high earning rates or those aiming for a sign-up bonus.
Flexible Payment: Credit cards provide flexibility if you need some breathing room. They give you the time to manage cash flow and avoid hefty penalties for late tax payments.
Building Credit History: Consistently paying off your credit card balance in full and on time, including large sums like your taxes, shows responsible credit management, improving your credit history.
Disadvantages:
Processing Fees: This is the major drawback that eats into your rewards. This fee exists even if you're earning amazing points. Always calculate the potential benefit against this expense to see if it's worthwhile.
Debt Risk: Swiping your card to pay taxes is appealing. But, do so only if you are certain you can repay the balance in full before the grace period (if applicable) expires. The high-interest charges from a lingering balance can negate those rewards quickly, and you risk harming your credit score.
Credit Utilization: Charging a substantial amount, like your taxes, onto your card can raise your credit utilization ratio. Credit utilization refers to the percentage of your total available credit that you're currently using. This is a factor in your credit score, and high utilization, even if you pay in full later, can negatively affect it.
Frequency Limitations: This may seem small, but it's essential. The IRS limits the frequency of credit card payments for each tax category to ensure responsible credit use. Familiarize yourself with them before charging everything to your card.
Should You Pay Taxes with Credit Card?
There isn't a universal "yes" or "no". It depends on your individual circumstances. Consider these factors when making your decision:
Your Credit Card Rewards
What type of rewards does your card offer, and at what rate? If your card earns less than 2% back, the processing fees may offset the benefits. It might make more sense to stick with free payment methods, such as direct bank transfers.
Your Financial Situation
Be honest about your current finances. Do you have the ability to repay your balance in full? If you're not financially comfortable making full, timely payments, the high-interest rates could cause more problems in the long run.
Welcome Bonus Offers
Are you working toward meeting the minimum spending requirement for a credit card welcome bonus? Using your card to pay taxes can get you closer to that goal.
Just ensure the bonus outweighs the processing fees. You want the benefit to exceed any cost.
Your Tax Bill Amount
The size of your tax bill plays a significant role. It might make more sense to pay with a credit card if your bill is substantial because you'd earn more rewards.
Just be extra cautious. Remember, a larger bill leads to larger processing fees.
Strategies to Maximize Rewards and Minimize Fees
If you've weighed the pros and cons, crunched those numbers, and decided paying taxes with a credit card is right for you, it's time to strategize how to maximize your benefit.
Combine Your Spending with Two Cards
If you have a hefty tax bill, use multiple credit cards. The IRS limits you to two card payments per tax period.
Consider opening a new credit card with a hefty welcome bonus offer alongside a card you already have. Strategically spread your payments across your cards, earning both ongoing rewards and a bonus.
This maximizes rewards and makes it easier to reach minimum spending thresholds, especially with regular spending habits. For example, a new Ink Business Preferred® Credit Card alongside the Capital One Venture X Rewards Credit Card is a great combination.
Target Category Bonuses
Many credit cards have rotating categories that offer bonus rewards for specific types of spending. If one of your cards has a category bonus for "government services," this can work in your favor when you pay taxes with a credit card.
While unlikely, always check your card's reward program details. Every little bit counts.
Avoid Using a Credit Card If...
... you can't pay the full balance promptly or lack a financial cushion. While the rewards may be enticing, the potentially high-interest charges negate those rewards quickly, pushing you further into debt.
This article's expert, Paul Rosa, suggests finding a low-interest personal loan if paying your taxes on time is a struggle. Paul is a contributor for Business Insider's tax review board.
Choosing to pay taxes with a credit card can be a beneficial tactic when used strategically. Just like managing any aspect of your personal finances, understanding the associated risks, fees, and potential rewards is key to a wise decision.
Make sure the advantages align with your financial goals and situation. Remember to check the processing fees charged by third-party services and factor them into your reward calculations. With careful planning, you can use your credit card as a powerful tool during tax season.