Federal Tax Payments by Credit Card [Tax Q&A]

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Federal Tax Payments by Credit Card

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By Roy Lewis

Many of you have read that it is now possible to pay your taxes by credit card. The 1997 Tax Act allowed the IRS to accept payment for federal taxes by any "commercially acceptable means" it deems appropriate under the conditions provided in the regulations. Late in 1998, the IRS issued temporary regulations for paying taxes by credit or debit card. Those regulations indicated that credit cards could be used for payments made on or after January 1, 1999.

You can pay your federal income taxes via credit card in one of two ways:

1. By phone. Once you determine the amount you owe, you can call 1-888-2PAY-TAX (toll-free) and pay your income taxes with a MasterCard, a Discover Card, or an American Express card. (As of this writing, Visa has decided not to participate in this program so Visa cards are not accepted.)

2. By computer. E-filers (those filing tax returns electronically) who use Intuit's TurboTax software can, under an arrangement between Intuit and Discover Card, charge their balance due to a Discover Card. The payment information will be part of the electronic file sent to the IRS should you decide to use this feature.

Under either method, private-sector companies process the credit card transactions and report payment amounts to the IRS. The private-sector companies do not provide the IRS with your credit card numbers (thankfully).

Any catches to paying by credit card?

Under either method, you will be required to pay any convenience fee (generally, the percentage fee that the merchant is required to pay on your purchase). The IRS is not involved in setting or collecting these convenience fees. In fact, the IRS is prohibited from paying fees to credit card companies. This was one of the hurdles that had to be overcome before the IRS could begin to accept credit card payments.

Also, understand that the pay-by-phone system isn't linked to how you file. Therefore, even if you file a normal paper tax return, you can still use the pay-by-phone system. If you file your return, but haven't yet paid your tax, this is an option for you. It can also apply if you file an extension and find you have tax balances due when you actually prepare your tax return. In fact, the system has been improved to such an extent that you can now make your estimated tax payments using the pay-by-phone system.

Perhaps the biggest question on the minds of people intrigued by the pay-by-credit-card option is, "What about freebies such as the airline miles or cash-back rewards I receive with many cards? Will these still apply?" Perhaps not. The credit card companies are likely to treat these tax payments as "cash advances" and will not attach any of your associated freebies to them. So, before you leap, contact your credit card company and ask how they specifically handle tax payments, and whether you'll receive your airline miles and/or cash rebates on the transactions.

States are joining the party too

One final note: The pay-by-phone system is also in effect in several states, such as California, New Jersey, Connecticut, Illinois, Minnesota, and the District of Columbia. The list of states accepting credit card payments is growing. If you don't see your state listed, check periodically on your state's tax-related website for updates.

If only Uncle Sam could make computing your tax balance due as easy as paying it!
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