Is Paying Taxes With Credit Card a Good Idea?
At the end of every year, the government is always there to collect taxes regardless of what you are going through. For this reason, the tax season can be extremely stressful, especially if you do not have enough money to pay what you owe.
Perhaps you’re wondering if the IRS allows you to pay your federal taxes using a credit card. Doing these sounds like an excellent maneuver if you can’t raise the amount you owe immediately or just want to earn more points.
While the credit card can be a convenient way to pay your federal taxes, ensure you understand that it will cost you. Additionally, the law prohibits the state government from accepting credit cards directly. To ensure the discourage this method, the government created the following third-party services:
- PayUSAtax
- Pay1040
- ACI Payments Inc.
All these services charge a convincing fee for paying taxes with a credit card. The rates for 2020 range from 1.87% to 2.2% of the payment, depending on the third-party service you have chosen.
Is It Possible To Pay Your Taxes Using A Credit Card?
Yes, it is possible to pay your taxes using a credit card. But is it really worth it? You must note the extra fee you will pay when you choose to pay your taxes with a credit card. The IRS outlines the following fees in advance.
Note that the amount of fee you pay varies with the processor you use. Here is a breakdown of fees associated with third-party payments:
- Pay U.S. tax : 1.85%, minimum fee of $2.69
- Pay1040 : 1.87%, minimum fee of $2.50
- ACI Payments, Inc : 1.98%, minimum fee of $2.50
For example, if you owe the government tax of $2000 and use Pay1040 to make the payments, you will pay $37 in fees. The higher your tax bill, the more you will pay in fees. For this reason, knows your bill before you swap your credit card.
If you decide to file via an online tax preparation company, you will also be charged when using a credit card.
Note that there are no loops to avoiding paying credit card fees when paying your taxes with a credit card. Here you will need to make a tough decision if it is truly worth the fee on your credit card or not
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When Does It Make Sense To Pay Your Taxes Using A Credit Card
It only makes to pay your taxes using credit when you are:
You Want To Hit The Minimum Usage
If you have a new card that requires minimum points to hit and earn bonus points, it would be best to use the credit card. However, you should double-check if the fee charged outweighs the bonus points. If it does, then you should not use your credit card to do this.
You Want To Earn More Points And Rewards
If the credit card you are using, they offer points the more you are using the credit card. It would be smart to use your credit card to pay your taxes in exchange for points or rewards.
Before you use your credit card to pay your tax bill, ensure the fee charged does not outweigh the point or the rewards you can earn. If you have a small tax bill, it will make sense to use a credit card, unlike when the bill is high.
If You Do Not Need Sufficient Funds Available In Your Bank Account
Sometimes life can be smooth and other times it can be rough and rugged, and no matter what circumstance you are in, the government wants its taxes paid. If you do not have money in your bank account, you can use your credit card.
All you need to do is figure out a plan to pay off these credit card charges as soon as possible. Clearing these charges before the deadline will help reduce the accumulation of interest on your credit card.
What Are The Pros Of Paying Taxes Using A Credit Card?
You Will Earn A Generous Welcome Bonus
Most card issuers give a welcome bonus if you spend a certain amount on your card within a given period. In most cases, this bonus is worth thousands of dollars and comes in the form of cashback or travel rewards for your account. In fact, this bonus can be more than $1500 in value.
One of the practical reasons you should use a credit card when paying a significant tax bill is to earn rewards for that spending. If your credit card has no welcome bonus earning on tax payments, it would be best if you sign up for a credit card that does.
Do not sign up on just a random one check for the one that has a generous welcome bonus and offers rewards on tax payments.
Meet Credit Card Threshold
Most credit cards offer rewards once you reach a specific threshold. Usually, this is based on the calendar year or your card membership anniversary. Making huge tax payments can help win rewards during this period.
Use Multiple Credit Cards To Maximize Earning
If you have a huge tax bill, you don’t have to burden one credit card. All three tax processors allow taxpayers to make two separate payments each tax period. Additionally, reports suggest that you can use multiple payment processors for the same tax period.
For example, if you have a $40000 tax payment due. You can use an American Express credit card and your other preferred credit card. Adding $20000 to your American Express credit card will earn 150000 points as a welcome bonus.
Since the purchase is over $8000, you can earn 2x points on the purchase. On the other card, add $20000 on balance to earn 125000 points as a welcome or sign-up bonus.
Buy Some Extra Time To Pay Your Taxes
Before you pay your taxes, ensure you mark the first day of your new statement period to mark the new statement period on the card you are planning to use. Doing this, you may note you have 30 days before the statement closes. When your statement closes, you’ll have 60days to pay your debt in full.
Nowadays, most cards offer a 0% APR for an introductory period for new purchases that equate to 15 months of free interest payment on your tax bill. Note that you need to pay your debt fully before the tax-free period ends; otherwise, interest charges will start accumulating.
What Are The Cons Of Using Your Credit Card To Pay Your Taxes?
Despite all the good said above about paying your taxes using a credit card, it can be a reckless strategy. Why? Most credit cards have high-interest rates, and this can hurt your finances badly.
If using your credit card to pay your taxes will make you unable to pay your taxes statement in full on time, don’t even think about it. It is not a viable method to pay taxes for you; instead, consult a tax professional about your options. Other disadvantages of using a credit card to pay your taxes include
When the Fee Outweighs Rewards
To enjoy the benefits of using a credit card to pay your taxes, you will have to earn rewards that are more worth than the fee. For example, if you charge $2000 to your reward credit card that offers about 1% cashback, but the processing fee is 1.99%, you may end up losing about $20.
Higher Credit Exertion
Your credit exertion ratio is one of the significant factors affecting your credit score. Your credit exertion ratio accounts for the total amount available on the credit card that you are using. For instance, if you had $10000 on your credit and spent $3000 on it, your credit exertion will be 30%.
If your exertion rate is exceptionally high, your credit score can take a hit. Credit experts recommend keeping your credit exertion rate less than 35%. Charging your tax bill on the credit card will put you in danger of pushing the usage too high. For this reason, always ensure you have more credit on your card before you pay your tax bill with it.
Interest charges
If you can’t pay your credit card balance on time, you will have to pay more tax-related charges, and the balance will continue increasing as long as you have the balance. Considering that the average minimum credit card interest hovers with more than 16%, that hefty fee to incur on your card for charging your tax bill is higher than the IRS installment plan.
Is Using the Credit Card the Cheapest Way to Pay Your Tax Bills
If you have only two options to pay your tax bills using your credit card or not paying your tax bills at all, then charging your tax bill using your card is a brilliant idea. Why? Because the penalties that you will incur from the IRS for not paying can be pretty high and can increase quickly.
However, if you have the cash to pay your tax bills, it doesn’t make sense to use your credit card since there are potential interest charges. If you can pay your tax bill within four months, it would be best to choose the IRS installment plan. With the IRS installment plan, you will only be subjected to interest on the balance, plus there is no set-up fee.
Conclusion
Before you rush to grab and swap your credit card on 15th April, ensure you consider other payment options. While it makes sense for some taxpayers to pay their tax bills using their credit cards, it may not be a good idea for others.
Experts recommend that you take a look at the pros and cons of using your credit card to pay your tax bills with your card. As a result, you will be able to make a more informed choice and plan to pay off your credit card statement balance.
Suppose you choose to use your credit card to pay your taxes as a lucrative way to earn points and rewards. Ensure you do your aftermath and make sure the cost is worth the benefit.