Is It a Good Idea to Pay Taxes with Credit Cards?
Yes, you can pay taxes with credit cards, but no, it may not be such a good idea to do so.
The deadline to file 2009 taxes is only 19 days away. If you owe a large amount of taxes but have difficulties to arrange the money on April 15th, one way to pay the dues without getting into trouble is using a credit card, which could you an additional month depending on the card’s bill cycle. However, such a method may not be a good idea since it’s likely to end up pay more fees for the convenience and extra time you buy, unless you have a credit card that has a super generous rewards program.
Right now, there are three official partners, Official Payments, Link2Gov, and RBS WorldPay that are authorized by the IRS to provide credit card payment services for taxpayers. With these payment partners, you can any major credit card or debit card, such as MasterCard, Visa, Discover, and American Express, to pay federal, state, or local income taxes. Of course, all of them will charge a convenient fee for providing the convenient service:
- Official Payment: $3.95 flat fee for debit card, or 2.35% for credit card;
- Link2Gov: $3.89 flat fee for debit card, or 2.35% for credit card;
- RBS WorldPay: $3.89 flat fee for debit card, or 1.95% for credit card;
As you can see from the above fee schedules, both Official Payment and Link2Gov charge 2.35% for paying federal taxes with credit cards, while RBS WorldPay’s 1.95% fee is the lowest among the three and, therefore, may be the most attractive option.
In addition to the above mentioned extra time one may buy when paying taxes with credit cards, another potential benefit, which could at least offset some of the fees, is the rewards, such as cash back, airline mileage, etc., offered by the credit card. However, with the credit card industry now regulated under a new set of rules, credit card rewards programs are no longer as *generous* as they used to be. For example, some time ago Citi CashReturns Card offered 5% cash back for an introductory period. Now, like pretty much all other rewards credit cards, the cash back is only 1%. If you pay your taxes with a credit card with only 1% rebate, which is like a standard these days, you will still pay a fee of 0.95% or 1.35% of the total tax payment. Even if you have a card with a better rewards program, like the Fidelity 529 College Rewards Card that I own, the cash back is reduced to only 0.05% after the lowest 1.95% fee. Is this worth it? No, not really for me.
Plus, when you put a large amount on a credit card, make sure you can pay it off when the bill arrives. If you are unsure about coming up with the fund, then you should really think twice before using the plastic, given the penalties, not just financial charges, but also hit in credit score, that you could face.
BTW, if you still want to pay your taxes with a rewards credit card after you evaluate the pros and cons, call your card issuer to make sure that such a payment is treated as a eligible purchase for the rewards
Photo credit: Fosforix
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