Federal income tax returns — and taxes owed — are due July 15, and if you’re staring at a big tax bill, you might be tempted to charge it on your credit card. That way, at least, you’d reap some rewards points as your money flies off to Uncle Sam. But the decision is more complicated than you might think.
The Internal Revenue Service (IRS) has contracted with three companies to process federal income tax payments by credit card. They each charge a fee, ranging from 1.87 percent to 1.99 percent, to process your payment.
Clearly, if your credit card offers two percent cash back on purchases, you’re not going to make much money. “You’d barely be coming out ahead,” says Ted Rossman, industry analyst at creditcards.com. On a $10,000 tax bill, you’d get $200 back on a card that offered two percent cash back on purchases, but pay between $187 to $199 in fees. The net gain of $1 to $13 might not seem worth it, although at least you would effectively eliminate the processing fee.
If you have a rewards card and get points for your purchases, however, you may be able to get some benefit from charging your taxes. Here again, you should make sure that the amount you pay in fees to the tax processing service is less than the value of your points.
Let’s return to the example of the $10,000 tax bill and assume a $187 fee for charging your taxes to Uncle Sam. Points are typically worth about one to two cents apiece. If your credit card company gave you 10,000 points for charging a $10,000 tax bill — a penny a mile — you’d earn the equivalent of $100, still not enough to make charging your tax bill worthwhile.
Some card companies offer different amounts of points for different types of purchases: two points per dollar for airline tickets, for example, and one point for groceries. Some may offer no points for charging your taxes. “We encourage verifying with your credit card company which category charging your taxes will fall under,” says Christina Taylor, head of operations at Credit Karma Tax.
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Is it ever possible to make it worthwhile to charge your taxes? Possibly. “You need to be a bit creative,” Rossman says. The creativity comes from getting a new card with a big sign-up bonus. For example, suppose your card issuer offered 40,000 points for signing up. In this case, you might be able to get 40,000 points for signing up with the new card and 10,000 points for paying the $10,000 tax bill. In that case, you’d have 50,000 points, or $500 at a penny a point.
Typically, these offers require you to charge a certain amount over a set period to earn those points, and charging your taxes could possibly cover those requirements. But, says Rossman, you’d also have to check if the card has an annual fee, what the card charges in interest and whether points are worth more for what you’re looking for — say, airline points. “It’s going to require a bit of work, and it will only work for a narrow slice of credit card customers,” Rossman says.
You also need to be sure that you can pay off your credit card balance in full once you charge the taxes; otherwise, you could get stuck not only paying the processing fee for charging your taxes, but the interest that your credit card charges, which currently averages 16 percent annually, according to bankrate.com.
If you have the money to pay your tax bill and still want to put it on plastic for convenience, use a debit card instead of a credit card. The three IRS-approved processors only charge fees ranging between $2 and $3.95 to pay by debit card. You can also pay the IRS directly, with no fee, by entering your bank account information.
Don’t do this
If you don’t have the money to pay your federal income taxes, don’t just ignore the deadline and not pay your taxes or file your tax return. Your federal taxes won’t go away. If you don’t file a return and don’t pay the taxes owed, the IRS will charge you 5 percent a month on your unpaid taxes, up to 25 percent.
If you can find a credit card that offers a zero percent introductory interest rate, and you don’t have cash on hand to pay your tax bill, charging your taxes might make sense. You just have to be very careful to pay your entire account off before the introductory period ends and high interest rates kick in.
If you can’t qualify for a zero percent introductory rate, you could also work out an installment plan with the IRS. The drawback: You’ll still owe the penalties and interest on your unpaid taxes, and you may have to pay a set-up fee.
As bad as it may seem, charging your taxes is better than not paying at all. “The worst thing you can do is nothing,” says Taylor. “Start researching now, and come up with a plan you can follow so you can budget for it over the life of the loan.”