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Don't Pay Your Taxes With a Credit Card

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Paying for groceries? Whip out your credit card. Buying new shoes? Fish that plastic out of your wallet. 

Credit cards are a major convenience for many of us. So you might have been delighted to learn that you can even charge your taxes now. Why not, right? You might even earn some miles for doing so.

Hold on, though -- there actually is a reason to bypass this option. You see, it's not free.

If you charge a pair of socks at your local sock shop, you pay the same price as someone paying cash. But if you charge your taxes, there's a little 2.49% fee involved. If your tax bill is steep -- say, $8,000 -- you'd pay $200 just for the convenience of charging.

(There's pretty much always a fee involved when you charge something, but usually the vendor pays it.)

The tax-payment fee you'd be forking over goes to a third-party processor acting as middleman between you and the IRS. Some card-issuing banks have been alerting cardholders to this option and recommending it. So be informed, and know who will enjoy the biggest benefit. Be wary if you start getting tax-paying advice from JPMorgan Chase (NYSE: JPM  ) , Capital One Financial (NYSE: COF  ) , or American Express (NYSE: AXP  ) -- it may not be in your best interest.

What to do
Don't charge your taxes unless the benefit is worth more than the cost. One of the rare circumstances under which charging might make sense is if you will collect more in cash back -- say, 3% -- from what you charge. In that case, you'll come out ahead ... a little.

Meanwhile, there's the very real danger of getting into debt if you charge your taxes. If you don't pay off that charge pronto, you may end up paying upward of 25% on thousands of dollars of debt, which could cost you more than $1,000 per year. (If you're already saddled with credit card debt, take heart; you can dig out from under it.)

There is an insidious upside to this tax-charging proposition, though. It could fatten the coffers of credit card companies such as Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) and the firms above. If you're an investor in them, maybe you can smile about it.

Longtime Fool contributor Selena Maranjian owns shares of American Express. JPMorgan Chase is a former Motley Fool Income Investor selection. American Express is a Motley Fool Inside Value recommendation. The Fool owns shares of American Express. Try any of the Fool's investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2009, at 12:37 PM, lution wrote:

    Question: Who takes the risk of fraudulent credit card use or someone defaulting on a payment? The 3rd party or Uncle Sam?

  • Report this Comment On March 10, 2009, at 1:26 PM, TMFKris wrote:

    From reading IRS' related Web page, its seems the govt is not taking a risk. If the payment doesn't make it to the Treasury on time, the taxpayer is responsible for the payment and any interest and penalties. And problems have to be taken up with the card company or the processing company.

    This is the page I was looking at:

    http://www.irs.gov/efile/article/0,,id=101316,00.html

  • Report this Comment On March 10, 2009, at 3:27 PM, dpi40 wrote:

    Yeah! dont pay with a credit card, Better to pay uncle sam penalties and interest that add up to 50% or more of what you owe! Who wrote this the IRS. Pay! with the credit card ! even 28% is better than the penalties interest and every other fee the IRS can add to your bill. Try to fight them ....good luck! They have no reason to talk to you or better that even acknowledge that you exist. They treat you like a 3rd class citizen and could care less where the money comes from as long as they get it. Been there ! done that! Have a problem? Get a lawyer! Yeah If I could afford a competent lawyer at 500hr You could pay the IRS they whole system stinks! Wheres Huckabee!!!

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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