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Pay your taxes by credit card? Here's why not.

IRS offers options that aren't as potentially costly

Last updated: February 2014

It's tempting to pay your state and federal tax bills by credit card. That tactic lets you delay actual payment for a month or so and maybe earn reward points in the bargain. 

Here's what's wrong with that reasoning:

• If you file and pay your bill electronically, you'll owe more. The Internal Revenue Service authorizes just a few companies to process electronic credit- and debit-card payments. They charge credit-card processing fees, that this year are as high as 2.35 percent of your balance. On a $2,000 tax bill, that's an extra $47. Why should anyone get more of your money?

• If you can't pay your credit-card bill on time and in full, you'll be subject to the card's annual interest rates. Even low-interest cards are currently averaging around 11 percent, according to Bankrate.com.  

• If you're paying by credit card because you're short of cash now, the government offers an option that can cost far less. The IRS automatically accepts requests for payment installment plans (also called installment agreements) for up to $50,000 in combined taxes, penalties and interest. You'll pay interest as long as you owe, but the IRS's current interest rate—3 percent for the first quarter of 2014--is far less than the average credit-card rate, and isn't likely to jump up sharply over time like a credit-card teaser rate. (If you choose the installment plan, you still have to file the return on time on April 15 to avoid penalties; you just don't have to pay everything then.)

• The typical credit-card reward is 1 percent; on a $2,000 tax payment, that's worth $20. If you're late on a payment, you'll likely wipe out that reward with penalties and late fees. Why bother?

— Tobie Stanger

See our Income Tax Guide for more advice and tips on preparing, filing and saving on your income tax return.

   

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