If you’re someone who rarely carries cash, you may be used to pulling out your credit card for everything from groceries to concert tickets to gas for your car.
But have you ever considered paying your taxes with a credit card?
The IRS does accept tax payments via credit card, though there are some limitations. And if you plan it out right, you can save yourself money or bank serious points by using a credit card to pay your taxes.
Here’s what you need to know before you decide.
Paying taxes with a credit card vs. an IRS installment agreement
If you get a tax bill that you can’t or don’t want to pay in full, you have two main options: You can set up an installment agreement with the IRS, or you can charge your tax bill to a 0% APR credit card and pay off the balance gradually before the 0% APR promotional period is up.
If you choose an IRS installment plan, you’ll make monthly payments to pay off your tax debt over time. You’ll also pay interest and possibly penalties until your taxes are paid in full.
If you play your cards right, you can save money on interest and penalties by opening a 0% APR credit card and using it to pay your taxes. These cards have promotional periods where they don’t charge any interest on your balance.
If you’re thinking about using a credit card you already have, you can. Just note that you’ll want to make sure you have the cash on hand to pay it off in full when your next bill arrives — otherwise you could end up paying significant interest.
What the experts say
Crystal Stranger, an enrolled agent, author of The Small Business Tax Guide, and the international tax director at GBS Tax, said that she has paid her own taxes via credit card in the past and has recommended doing so to her clients, as well.
“The IRS interest rates are fairly low, but if a 0% APR card can be used and pay this off within the grace period — usually one to one and a half years — then this can be a really smart financial move,” she said. “Depends how well someone manages their debts, though, and how quickly they will pay it off.”
You should only choose this option if you’re sure that you’ll be able to pay your tax bill before the 0% APR period ends. After that, you’ll start paying interest on the balance, and those rates often range between 12-24%.
Stranger said that some of her clients paid their taxes on a 0% APR card one year, then the following year chose an IRS installment plan because it forces them to make a payment toward their tax bill every month.
“The installment agreements normally are spread out over a five year period, so the amount needed to pay it off is lower. If you’re in a cash flow crunch, this can be beneficial,” she said. “But having both tools in your pocket, and not being afraid to use them when they make sense, is really valuable.”
Paying taxes with a rewards credit card
Since a tax bill can often be a four- or five-figure expense, rewards-savvy credit-card users may be wondering whether they can collect points or cash back just for doing their civic duty and paying their taxes.
The good news is that you can! But you’ll want to crunch some numbers to make sure the fees for using a credit card don’t outweigh the points you’ll bank from the transaction.
The IRS uses three different payment processors to complete tax payments via credit card and debit card. Each has slightly different fees — at time of publishing, each charged under $3 for use of a personal debit card and under 2% of the balance for use of a credit card.
What the experts say
Stranger said you’ll come out ahead by using any credit card that offers at least a 2% reward, since the 2% reward outweighs the transaction fee.
“I have done this personally when paying my taxes to get a 0.13% bonus value for credit card cash back rewards, even though I paid off the credit card at the end of the next month,” she said.
You can also use your tax payment to reach the spending requirement to get a bonus on a new rewards card. For example, maybe a card offers you 100,000 in bonus miles if you spend $10,000 in the first few months. Stranger said that she had done just this.
She said that the key is to calculate the fee you’ll pay to the IRS payment processor, then determine the value of the cash back or the mileage you’ll earn from the payment. If the rewards amount is larger than the fee amount, you’re good to go.
Here’s an example: Say you owe $5,000 in taxes. You choose the payment processor with the lowest fee, which is currently 1.87%, and pay with a card that earns 2.5% cash back on all purchases. You’ll pay $93.50 in fees for using a credit card, but earn $125 in rewards, for a net gain of $31.50. Not life-changing, but not bad.
It’s important to note, however, that it only makes sense to use a rewards card if you’re going to pay off the balance in full before your bill due date the following month. The value of any rewards you’ll earn will likely be wiped out by interest charges if you carry a balance, unless you're in a 0% APR period. Late charges may still apply.
Limitations on paying your federal taxes with a credit card
If paying your taxes via credit card seems like a good option for you at this point, congrats. But before you proceed, you’ll want to make sure that your situation allows for credit card payments.
For example, you can only make payments for Form 1040, the typical individual income tax return, two times per year via credit card for your current taxes due. If you’re paying off an installment agreement, you can make no more than two payments per month by credit card.
If your tax bill is very high — over $100,000 — you’ll need to contact the payment processor directly before you proceed.
Paying a tax bill with a credit card can be a great choice for many people. A 0% APR card can help you spread out your payments over time while saving you money on interest and penalties, and a solid rewards card can earn you a bit of bonus cash back or travel rewards on your tax payment.
If you crunch the numbers to make sure that the benefits outweigh the fees and pay off your balance without incurring any interest, you’ll come out ahead.
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