If you haven't got enough cash to pay for your annual taxes, using your credit card is a possible option. Read on to find out what advantages and disadvantages this can have.
That time of year comes when you have to pay your taxes. Ideally, you should have saved money to cover this expense during the year, but sometimes, for different reasons, this is not the case. If this happens, there are a few ways to deal with the problem:
• You can pay the IRS late. The monthly late fee is 1 percent of the balance due, $10 on a $1,000 tax balance.
• You can set up a payment plan with the IRS for a one-time fee of up to $105 plus monthly interest.
• You can pay with your credit card. If you choose this, you're subject to the terms and conditions of your credit card agreement.
If the credit limit of your credit card is enough, you can pay your taxes with it and then have the flexibility to pay off your credit card over time. Sometimes owing your credit card issuer feels less stressful than owing the IRS, but if we choose to pay taxes with a credit card, there are a few things to consider before doing so.
Pros of paying taxes with a credit card
You can earn rewards on the balance when you use a rewards credit card.
You’ll have more time to pay your tax bill. Putting your taxes on your credit card lets you pay beyond the April 15 deadline without the need to fill in forms.
You may avoid interest if you have a credit card with a long 0 percent introductory rate on purchases and can pay off the credit card balance before this period ends. You must, of course, consider what the fee will be once the period is over and if it is worth it.
Cons of paying taxes with a credit card
But despite the advantages that paying with a credit card may have, there are some important drawbacks to take into account:
There are processing fees. When you pay your taxes by credit card, the IRS charges a convenience fee that’s 2.49 percent of your tax bill. Putting a $10,000 tax bill on your credit card, for example, will cost $250. If you pay with a credit card that offers a lower percentage of rewards than the fee, it probably doesn't make sense to use a credit card.
It can hurt your credit score and your card lender could think you are a risk. If you need to use your credit card to pay your income taxes, your card issuer may see it as a sign of financial trouble. As a result of the increased risk, your card issuer could raise your interest rate, lower your credit limit, or even cancel your credit card.
You’ll pay interest on the tax you owe. Unless you are in the introductory period mentioned before, the longer you take to pay your credit card balance, the more you’ll end up paying in interest. Using a low-interest rate credit card will reduce the amount of monthly finance charges you pay on the balance.
You can’t bankrupt the debt. Income tax is one of the types of debt you can’t bankrupt (along with child support and alimony). So, if you have financial trouble, later on, be aware that bankruptcy won’t discharge credit card debt incurred from taxes.
There are limitations on taxes eligible for credit card payments. While many tax payments can be made with a credit card (your annual tax return for example), not all IRS tax forms are eligible.