by Bill Hardekopf
April 16 is less than one month away, and paying your income taxes with a credit card may seem like an easy payment solution or a quick way to earn reward points.
But what you may not realize is the significant processing fee added to your tax bill when you pay by credit card. Unless your credit card reward program pays cash or miles that have a higher value than this processing fee, it doesn't make sense to pay by credit card. In addition, paying by credit card has other financial risks.
Credit card payments to the IRS are processed by third-party providers. These companies charge a processing fee, which averages 2.35% (as low as 1.89% through PayUSATax.com and as high as 3.93% charged by FileYourTaxes.com). The fee is a deductible business and individual expense.
If your tax bill is $8,000, a processing fee of 2.35% will cost $188, which is rolled into your credit card's balance. If you don't pay off your card's balance in its entirety at the end of the month, you will begin to incur interest rate charges on the $6,188 balance, which, depending on the account's APR, can be an extremely costly way to pay your taxes.
If you are sure to pay off the balance by the end of the month, the card must pay cash back rewards or miles that are greater than this processing fee in order for this payment method to make sense.
Before charging your taxes on a credit card, check into installment options from the IRS, especially if your credit card has a high APR. The IRS will charge interest, but it may be less than what you would pay with your credit card.
If you feel you must pay be credit card, here are a few additional tips:
- Find out your credit limit before you charge your taxes. Debt utilization is a major factor in credit scores. If you use too much of your available credit, you can lower your credit score.
- Payments must be made through tax preparation software, a tax professional, a card payment service provider, by phone or online.
- Do not write your credit card number on your tax return.
- Make sure your payment is treated as a purchase, not a cash advance. The cash advance APR can be as high as 25% with some cards, and the cash advance fee varies from 3%-5%, depending on the issuer.
- Payments can not be cancelled.
- You can also pay with a debit card and the fee is much cheaper. For example, you will be charged a flat fee of $3.89 when you use your Visa Debit card (Pay1040.com).
If you are still paying off last year's taxes that were charged to your credit card, then it may be time to seek help from a credit counselor like the National Foundation for Credit Counseling.
Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates.