What to Know About Paying Taxes With a Credit Card

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Using a credit or debit card might seem like a convenient way to pay your tax bill, especially if you file your return electronically. And it could be especially tempting if you have a rewards credit card that will rack up points or earn you cash back. But paying taxes with a credit card has several drawbacks. Using a debit card isn't the best option, either. Here's what taxpayers need to know:

SEE ALSO: Tax Tips for Your 2012 Return

You'll pay a fee to a third-party payment processor contracted by the IRS to handle credit-card transactions. The processors charge between 1.88% and 2.35%, which would add $94 to $117.50 to a $5,000 tax bill. The minimum credit-card fee ranges from $2.99 to $3.95, depending on which of the five payment processors you choose to use. See Pay Your Taxes by Debit or Credit Card on IRS.gov for more details.

Different fees apply to credit card payments when you e-file your tax return through tax software services other than the IRS e-file program. For example, the fee for credit card payments when you e-file with TurboTax is 2.49% (with a minimum fee of $3.95). Fees for the other integrated IRS e-file service providers range from 2.35% to 3.93%, with minimum fees between $2 and $3.95. See a list of fees for integrated IRS e-file service providers. Fees also can vary among other tax software providers and tax professionals.

If you itemize, you may be able to claim a card-processing fee as a miscellaneous deduction . Only those miscellaneous expenses that exceed 2% of your adjusted gross income can be deducted, though.

Credit-card rewards might not be generous enough to compensate for the high processing fees you'll be charged for paying taxes with your card. Some cardholders can come out ahead if a card offers cash back on this sort of transaction at a higher rate than the processing fee -- and the balance gets paid in full before the due date. But you won't make any money if your rewards card offers just 1% cash back, which is what many cards now offer on most transactions. (Compare offers from leading rewards cards from Bankrate.com.)

Your credit score could take a hit if the amount you charge to your card puts you near your credit limit. Your credit-utilization ratio -- the total of your card balances divided by the credit limits on all of your cards -- will rise and your score could drop because your balance will account for a higher percentage of your credit limit.

You'll pay a fee for using a debit card, too. The flat fee for paying your tax bill with a debit card is $2.99 to $3.95, depending on the payment processor. However, two of the payment processors charge a percentage (1.88% or 2.35%) if you use a MasterCard debit card rather than a flat fee. So if you can afford to pay your tax bill, you'll be better off mailing the IRS a check or having funds automatically withdrawn from your bank account.

Other options

If you're thinking about paying your tax bill with a credit card because you're short on cash, there are other options that might allow you to pay lower interest rates and possibly save money on fees. For starters, though, pay as much of your tax bill as you can when you file your return. That will reduce the penalties and interest that will accrue until your balance is paid in full. Then while you wait for the IRS to send you a bill for the remainder of what you owe, look into the options below or find ways to cut back to save enough to pay your balance.

Consider a low-interest personal loan from a bank or social lending network, such as LendingClub.com and Prosper.com.

The IRS installment plan lets you pay the tax you owe in monthly installments. It does charge a $105 set-up fee ($52 if you make payments automatically from your checking account; $43 if your income is below a certain level). You'll also pay interest (which is currently 3% but is adjusted quarterly) and a monthly 0.25% late payment penalty. However, those rates combined still might be lower than what you'd pay your credit-card company (the average is 13.02% on fixed rated cards and 15.15% on variable rate cards). The fastest and easiest way to request an installment agreement is to fill out an application online at IRS.gov .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Credit and Debt

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