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April 15, 2016, is approaching, and many people are dreading it: Income taxes are due.
Personally, I remember sitting in the office of H&R Block in tears about 15 years ago, my first year as a freelance writer. I made several financial mistakes that year. One of them was not keeping track of any of the expenses for my start-up freelance business. I owed more in taxes than I could envision paying back within the next few months — or even in the foreseeable future.
The next mistake I made was putting my taxes on my credit card, but I thought it was my only option. Turns out, I had several other choices. (Including keeping better financial records and finding an accountant who really understood small business taxes, which I did the very next year.)
“Can you pay your taxes with a credit card?” Yes.
“Should you?” Probably not.
Fees for Paying with a Credit Card
You can pay your taxes with your credit card easily online through a number of different companies.
It might sound appealing to delay your tax bill by tossing it on your 0% interest, 2 or 5% cash back credit card and paying it over the next year.
But not when you find out the convenience fees imposed by companies who process credit card payments for taxes. Unlike Interchange fees for normal purchases, these fees are covered by the customer, and range from 1.9% to 2.35% for the 2010 tax year. There go your rewards.
Do not put your taxes on your credit card just to earn rewards if you can afford to pay cash.
Paying with a Credit Card Sends a Bad Message
When your creditor sees that you used your credit card to pay your taxes, it sends them a message that you could be in financial trouble. After all, there’s no good reason to do so. They could decide to lower the credit limit on your account or even close your account. Both of these actions will hurt your credit score.
Beyond Credit Cards: Other Options to Pay Your Taxes
Get An Extension to File and Pay Late
Believe it or not, paying taxes is one situation where it might make sense to just pay the bill late. The IRS penalty for late payments (not late filing!) is just .50% (1/2 of 1 %) of the balance owed per month.
Make sure to file for a 6-month extension, though, or you’ll also be subject to a hefty 5% “failure-to-file” penalty and possible legal and collections issues with the IRS. Penalties increase if you file and pay more than 60 days late.
Of course, you don’t want the IRS to put your account into collections or to garnish your wages… or to wind up in jail. We’d never advise anyone to not pay their taxes, but if you can’t mail in the payment until May or June, instead of April 15, asking for an extension and paying late could be your best option. The IRS usually grants a 6-month filing extension to anyone who files the proper forms for an extension, no questions asked.
Additionally, if you have already paid 90% of your taxes through your employer and withholding taxes, your late payment penalties if you filed an extension are only one-quarter of 1 % of your total tax bill.
Set Up An Installment Plan with the IRS
The IRS also offers installment plans if you file Form 9465. Under this agreement, you’ll pay a $105 processing fee (reduced to $52 if you pay be electronic funds withdrawal). With an installment plan, you’ll make monthly payments for up to three years to pay your tax bill in full, as long as you owe $10,000 or less.
You’ll have to show proof that you cannot pay the tax in full by the due date. You are only allowed one installment plan every five years. You may also have to adjust your withholding taxes so that 90% of your taxes will be paid before taxes come due in subsequent years.
Under this agreement, you’ll be subject to interest charges, which are currently 3%, plus the late penalty of .5%, or .25% if you filed on time.
Essentially, the IRS is giving you a 3-year installment loan at 3% interest, plus an additional .25% to .5% interest. This is still better than you’ll get with a credit card, especially since there are currently no credit cards with 0% or even 3% interest for three years.
Credit Card Tax Payments? Don’t Do It.
It may seem tempting to just get it over with and pay your tax bill on your credit card, like I did so many years ago. After all, who wants to owe the IRS money? But in most cases, it’s just not the best financial choice.
Of course, we’re not accountants here at CreditShout and it’s always wise to talk to a qualified tax professional before filing and before making any decisions regarding your taxes. Your accountant can also help you adjust your withholding amounts so you don’t get caught with a large tax bill next year.