Fees Charged for Using Credit Cards to Pay Taxes are Deductible

Yesterday, I wrote a post on why it may not be a good idea to pay your federal taxes with credit cards. The reason is that fees charged by service providers (at 2.49% of the amount paid) cannot make cardholders benefit from the transaction, unless the card has a rewards program that can compensate the cost.

With that being the case, it seems paying taxes by credit cards can still be an option, because fees charged by service providers, Official Payments and Link2Gov, are actually deductible, believe it or not. According to an IRS new release a couple of days ago, “credit or debit card convenience fees charged for paying federal individual income taxes electronically are deductible for some taxpayers who itemize.”

That’s a good news. However, you can’t just deduct the fee when filing tax returns:

Not everyone who pays the fees will be able to deduct them. Taxpayers first must be eligible to file a Form 1040 Schedule A to itemize their expenses. And, taxpayers must have enough miscellaneous expenses to exceed the 2 percent threshold. These expenses include items such as tax preparation costs, job search expenses and unreimbursed employee expenses.

So you will be out of luck if you do have enough miscellaneous deductions to go over the 2% threshold. Nonetheless, it’s still good to know that the IRS is relaxing previoius rules on this matter.

The deduction can only be claim for the year when the fee is paid. If you are using credit cards to pay your 2008 tax this year, you can only deduct the fee when filing your 2009 tax returns.

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