Published in: Credit Cards | Feb. 26, 2019
Should You Pay Your Tax Bill With a Credit Card?
By: Maurie Backman
Owe money to the IRS? Paying your tax debt with a credit card might hurt you in the end.
Most Americans end up getting a tax refund each year, but if you underpay your taxes, whether intentionally or not, you'll wind up in the opposite scenario -- owing the IRS money. This is especially likely to happen if you earned a lot of secondary income from a side job or investments.
Now if you have the money on hand to pay that tax bill, you're all set (even if you're not particularly happy about it). If you don't have the cash in savings, however, you'll need to find some way to cover that expense. Otherwise, the IRS will begin charging you interest on your outstanding tax bill to the tune of 0.5% per month, or partial month, that your debt remains unpaid, up to a total of 25%. That interest will begin accruing if you fail to pay your tax bill, or a portion thereof, by the tax deadline.
Seeing as how 40% of Americans don't have the cash to cover a $400 emergency, it's likely that many who end up owing taxes will find themselves unable to pay. If that happens to you, you might be inclined to charge your tax bill on a credit card and pay it off when you can. That's a mistake that you’ll find could cost you big time.
A better way to pay off your tax debt
The problem with charging your tax debt on a credit card is many-fold. First, the IRS will automatically charge you a hefty processing fee for using a credit card to pay your taxes, which is wasted money on your part. Second, if you're unable to pay that credit card bill when it comes due, you'll accrue interest -- and probably a lot more interest than what the IRS would charge you. Furthermore, carrying that credit card balance for a long time could negatively impact your credit score, thereby making it more difficult and expensive for you to borrow in the future.
It’s a better idea to apply for an IRS installment plan. If you sign up for a short-term plan of 120 days or less, you won't pay a fee to set one up. Otherwise, you're looking at $52 to set up a direct debit agreement with the IRS, or $105 for a standard or payroll deduction agreement. If you're a low earner, however, you might pay just $43.
Furthermore, while you will pay interest under an IRS installment plan, it may pale in comparison to what even a low-interest credit card might charge you. If you're thinking that charging your tax bill on a credit card will at least score you some reward points, remember that 2% cash back isn't worth the 18% interest you’ll likely pay for the privilege of carrying that balance.
Plan smarter for next year
If you wind up in the minority of filers who owe money to the IRS, take it as a sign to do better on the tax-planning front going forward. That could mean making estimated tax payments on your side income to avoid a large bill at the end of the day, or taking gains on your investments more carefully.
At the same time, be sure to build a decent emergency fund so that you have money in the bank to deal with any sort of unplanned expense, whether it's a tax bill, a home repair, or a health issue. Having at least three months' worth of living expenses on hand will help you avoid costly credit card debt, not to mention help keep your credit score intact.
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