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Uncle Sam Takes Plastic

If only all bill collectors were as amenable as Uncle Sam. Out of checks? Short on cash? No problem: Put your tax tab on your credit card.

Last year, 1.5 million filers used plastic to pay the IRS, compared to 1.2 million who opted for electronic transfer from their bank account. This year, businesses can charge their taxes, too.

True, paying by credit card can make the due date less taxing. The convenience of paying by credit is great for last-minute filers. It also can take the bite out of a big bill -- at least for a little while. Depending on where you are in your billing cycle and the grace period on your card, filers can get a two- to four-week "float" that amounts to an interest-free use of the bank's money -- but only if you pay the balance in full when it comes due.

The mix of looming deadlines and surprising bills plays right into lenders' hands. To make it even more tempting, some credit card companies have beefed-up rewards for customers who charge their taxes. According to a recent article in USA Today, Chase, United Airlines, American Express (NYSE:AXP), and Delta have double-mile deals for customers who use those cards to pay their taxes.

Still, whether it's paying a Mob bagman or the Fed for your debts, watch out for the gotchas:

You can only use IRS-approved middlemen for the transaction. The IRS has authorized two companies to accept payments from e-filers and paper filers: Official Payments Corporation (1-888-2PAY-TAX) and Link2Gov's pay1040 site. Or you can enroll in the Electronic Federal Tax Payment System explained here.

You will have to pay a fee. Usually, a merchant picks up the transaction cost for charges. But in the case of credit card payments to the IRS, the private-sector processors pass the cost on to the consumer. Some companies waive the fee or pick up a chunk of the cost if you purchase a tax-preparation product (such as H&R Block's (NYSE:HRB) TaxCut software or Intuit's (NYSE:INTU) TurboTax). Here's a recent article on the advantages and disadvantages of using tax-prep software.

There are limits and restrictions on rewards: Forget visions of earning nine round-the-world free trips. Lenders put limits on the amount of rewards points you can rack up. Also, be sure to check the time limits on the promotions. Some, like the Starwood Preferred Guest card, only offer their bonuses between March 1 and April 17, though the points accrued are subject to regular reward restrictions. Visit Cardweb.com for a list of current incentives.

Intuit is aMotley Fool Inside Valuepick.

Having tax nightmares about late fees, extensions, and the grim reaper? Dayana Yochim's been there, done that, and composed an Edgar Allan Poe-inspired poem to deal with her fears. She owns none of the companies mentioned in this article and promises to file her taxes on time this year.


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