Pay your taxes by credit card? Here's why not...

It's tempting to pay your state and federal tax bill by credit card. The tactic lets you delay actual payment for a month or so, and maybe earn a few hundred or thousand reward points in the bargain. 

Here's what's wrong with that reasoning:

•If you file and pay your bill electronically, you'll owe more. The IRS authorizes just a few companies to process electronic credit- and debit-card payments. They're permitted to charge processing fees of up to 2.49 percent of your balance. On a $2,000 tax bill, that's an extra $50. Why should anyone get more of your money, especially now?

•If it turns out you can't pay that credit-card bill on time and in full, you're subject to credit-card annual interest rates currently averaging 10.75 percent, according to Bankrate.com. Folks with less-than stellar credit can pay an average of about 13 percent, says Cardtrak.com.

•If you're paying by credit card because you're short of cash now, the government offers an option that can cost far less. The IRS automatically accepts requests for payment installment plans (also called payment agreements) for up to $25,000 in combined taxes, penalties and interest. You'll pay interest as long as you owe, but the IRS's current interest rate--4 percent for the second quarter of 2009--is far less than the average credit-card rate, and isn't likely to jump up sharply over time like a credit-card teaser rate. (If you choose the installment plan, you still have to file the return on time on April 15 to avoid penalties; you just don't have to pay everything then.)

•The average credit-card reward is 1 percent of purchases; on a $2,000, that's worth $20. If you're late on a payment, you'll likely wipe out that reward with penalties and late fees. Why bother? 

Comments

[Credit Master]

Most reward credit cards have higher than usual interest rate and not suitable to carry balances. The most effective ways to use a reward credit card is pay your balance off every month. You should treat it like a charge card.

With the credit card issuers actively cutting credit limit, you should always ensure you spend only 30% of the credit limit available on a card. Or your credit rating/score could suffer when your credit limit is reduced by the issuer.

Perhaps you can take advantage of the 0% introductory offer for purchase which usually range from 3 months to 12 months. But you should plan carefully to pay the balance in full when the introductory period comes to en end.

[Dat To]

Good sound advice. Unfortunately this stuff is not taught in schools.

I've been told by a large Point of Sale company that just sells to small to medium-sized Canadian businesses that up to 30% of the business owners application for payment processing have poor or no credit. They might have skewed numbers compared to the rest of Canada depending on who they focused on selling to, however, this was told to be approx. 5yrs before the gloom and doom of the current economy.

If the business owners are not managing their personal money properly, then transferring the same habits to their business, I'm just wondering what all the employees are doing?

[personal finance deals]

I may already be paying some fees to the credit card company or interest for which I am not really getting any tax break. So if the credit card gives me some rewards, or cash back...its just like they are giving me discount on money I am already paying them. It shouldn't be thought of as extra income on which I need to pay state and federal taxes.

[Taxpayer]

I had no idea they charged 2.49%. Thank you for this article!