Pros and Cons of Paying Your Taxes by Credit Card?
It is that time of year again and you have learned to dread it...tax time. It happens every year and we should all be prepared, but the ugly truth is, many of us are not. We often find ourselves stressing over April. We have a gnawing feeling in the pit of our stomachs about how much money we are going to owe. Even worse, we question how are we going to pay for it.
No matter how many experts we enlist, the damage is usually done by the time we try to change the amount we owe. So, you have found yourself in that place again where you owe money. You are debating paying your taxes by credit card and wondering if that is even a good idea. Keep reading to find out what options are available to you.
What Are Taxes?
You know you have to pay taxes with each paycheck. You know that April 15 is the deadline for filing your tax return, but do you really have any concept of what taxes are? There are many different taxes that you have to pay throughout your lifetime, but I am only going to focus on income tax here. Let us spend just a few moments talking about the dirty details of income tax.
Simply put, an income tax is a fee that is handed to you by the federal, and in many cases, state government. You are legally bound to pay these taxes. You cannot avoid them. Believe me, many people have tried and they always fail. It may take IRS a few years to find out, but they always do.
There are deductions that are legal for you to take to lower the amount of taxes you pay, but you should make sure you stay within the parameters of the law when doing so. Every person that earns an income is subject to this tax. Income tax is associated with the money you earn, as a result of payment for services rendered.
There are different tax brackets which are based on the total earnings you have for one calendar year. The higher the tax bracket in which you fall, the higher the percentage of taxes you must pay. Everyone that earns over the limit set by IRS must file a tax return. When you owe money to IRS, there are a few ways you can make those payments, one of which is paying your taxes by credit card.
Is It Possible And Should You Pay Taxes With a Credit Card?
Well, yes and no, it is possible to pay taxes by credit card. Technically, the law does not allow the IRS to accept credit card payments directly from you. As a result, they use outside third parties to collect the credit card information and process the payment. Those third parties are Link2Gov Corp, Official Payments Corp, and WorldPay US.
Each of these third parties charges a fee for allowing you to use your credit card. That fee can range from 1.87 to 2 percent of the payment you want to make.
Another option is to use software to prepare your taxes, such as Turbo Tax. You can e-file your taxes with them and there is an option to e-pay. They also have fees, which are often more expensive than paying it through the third party that goes directly to the IRS. You could also use a debit card with this service, as well as a digital wallet. Fees apply to all of these options.
Pros of Paying With a Credit Card
Since you now know that you can pay your taxes by credit card, we can talk about the benefits to doing so.
Zero Percent Interest Rate
If you have a zero percent interest rate credit card, or you can open a new credit card that will give you zero percent interest for a period of time, you could pay your taxes by credit card to IRS at one time and have a little more time to pay off the credit card without it accruing interest.
If you can pay off your credit card before the zero percent interest ends, then you will not have to pay any interest or additional fees on the money. You will have to pay the initial fee for using your credit card. If you think that you can pay off the balance on time, this might be a viable option for you.
Pay Your Tax Debt - One Time Fee
If your particular credit card has reward points, you will get those from paying your tax debt with your credit card. The biggest pro of using a credit card with zero percent interest to pay your taxes is you only have to pay one fee one time. If you set up a payment plan, there are many fees, which I will get into a little later in this article.
As long as you have a zero percent interest credit card and pay it off timely, this could be the best option for you. You can also split the payment up between two credit cards to share the wealth, if you will, among more than one card.
Cons of Paying with a Credit Card
As with everything there are also negatives with paying for your taxes by credit card.
Credit Score
One of the biggest drawbacks to using a credit card is now you have taken on this debt. Once you use your credit card, it becomes a debt that impacts your credit score. You have added to your debt to income ratio and increased your credit utilization. All of those things can have a negative impact on your credit score. If you focus on paying off all of this debt quickly, it may have a minimal impact on your credit score for a short time.
Unpredictable
Another downside with taking on this debt is you never know what is going to happen in the future. You may use your credit card for this debt and tie up that available credit, so if you need it, you may not be able to access it.
Fee
The other downside to using your credit card is that you have to pay a fee. The lowest fee could be 1.87 percent and the highest could be 2.5 percent. To put that in perspective for you, if you owe $4,000 to IRS and you have a 2.5 percent fee, then your fee is $100. If you owe $10,000 to IRS, then your fee is $250. It may not seem like a lot of money, but when you are already paying thousands, do you really want to pay more on top of that?
What Is an Installment Agreement?
If you are considering paying your taxes by credit card, you should also know that the IRS does offer installment agreements. These agreements are ways that you can make regular payments each month until the debt to IRS is paid. There is another option to delay your payment by 120 days and then pay it off all at one time.
120 Days Deadline
To delay your payment by 4 months, you must owe less than $100,000 in taxes, penalties, and interest. You have to apply for the plan with the IRS. You will pay interest on the amount you owe, which is currently 5.5 percent and a late fee of 0.25 percent for every month that you take to repay the money. If you owe more than $25,000 the IRS wants to take the money directly from your checking account.
Long Term Plan
This is the other payment plan. If you owe $50,000 or less in tax, penalties, and fees, you may be eligible for a long term payment plan. This means it is going to take you longer than 120 to pay the IRS the money you owe them. You also have this month deducted directly from your checking account. There are many fees associated with this payment plan. There is a setup fee, a late fee of 0.25 percent of the balance every month until it is paid and on top of all that, you also have to pay interest, which is compounded daily.
Pros of Installment Agreement
There are some pros to setting up an installment program. Before you decide to pay your taxes by credit card, make sure you have all the facts.
Low Payments
When you set up an installment plan, you usually get 6 years to pay the debt. That also means that the minimum amount you owe each month could be the total amount divided by 72. In the above scenario where you owed $10,000 that would mean you would owe $138.89 per month (before fees anyway). That is a low payment for a personal loan, which is basically what you just got from the government for the past year.
No Effect on Your Credit Score
An installment agreement has no impact on your credit score. As long as you make the agreed-upon amount to IRS each month, they will not come after you for any more money for that specific tax year, anyway. They will not garnish your wages, but you have to pay what you agree to pay. They do not report the amount you owe them to the credit bureaus unless you no longer pay them. An installment agreement is often a great way to go when it comes to paying money back to IRS, even with all the fees.
Cons of Installment Agreement
Before you decide to pay your taxes by credit card, make sure you understand the negatives associated with an installment agreement.
Lots of Fees
There are a ton of fees if you want an installment agreement with IRS. First, you have to pay to set up the installment plan. That fee varies from $149 to $225 depending on how you set it up, such as over the phone, by mail, or at an office. The fee is reduced if you agree to have your bank account directly debited.
Once you have the setup fees added on to what you already owe, then you have a late penalty. Yes, even though you are scheduling a payment plan, your payment is still considered late and you have to pay a penalty of 0.25 percent of the amount you owe each month until the debt is paid. The good news here is each month the amount you owe decreases and so does your penalty.
Interest
Now, you have the setup fee and the monthly penalty, but it does not stop there. You are also charged interest on top of those fees. The interest is compounded daily and it is usually the federal rate plus 3 percent.
No Tax Refund
Another point to consider is that as long as you owe IRS money, even if you are paying on a payment plan, you will not get a refund. If you are due a refund in a future year and you still owe money to IRS, they will keep your refund. You will not see any of it.
What If I Don't Pay My Taxes?
You have found out how much you owe either because you have finished your taxes or used a tax owed calculator. You find yourself in that terrible position where you cannot afford to pay your taxes. You cannot even pay your taxes by credit card. Now what?
Always File on Time
The first thing you should know is that you have to file your taxes on time, even if you cannot afford to pay them right now. Waiting past the deadline to file your taxes is a mistake unless you filed an extension. You should not just ignore them. That is a really bad idea.
You Cannot Avoid It Forever
You also cannot pretend that you do not owe the IRS money. They will come asking for it eventually. You face serious penalties for not paying your taxes. The IRS can garnish your wages when you do not pay them what you owe them.
Negotiate with the IRS
You should pay whatever you can, no matter how little it is. This shows some effort to pay it on your part. If you cannot pay any more, apply for an installment plan. If for some reason, you cannot have an installment plan, you can attempt to find some other tax relief. You can attempt to make a compromise offer with the IRS. In this scenario, you offer an amount to IRS that is less than what you actually owe them. Just offering it is half of the process. IRS must accept your offer.
They will only do that if they believe that is the most money they will ever see from you. In order for this to happen, the IRS examines all of your personal finances. They want the details of your financial situation. There is a form you must fill out. They have a tool called an offer in compromise pre-qualifier on their website that can give you some indication of whether you will qualify for a compromise.
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Can I Save Money on My Taxes?
Before you make the decision to pay your taxes by credit card, you should make sure you are paying the least amount possible to IRS. There are ways to save money so that you do not owe so much at the end of the year. You can have more withheld from each of your paychecks so you are paying more taxes throughout the year.
You can also pay extra money quarterly for your taxes so you will not owe it in one lump sum at the end of the year. You can contribute more money to your retirement fund, which makes your taxable income decrease. You can make sure you take all of the possible deductions that are available to you. If you are doing your taxes manually on paper, you can switch to a tax preparation software that is geared to helping you find the most deductions possible. You can also make an extra mortgage payment so that you have more mortgage interest to deduct.
Conclusion
April 15 happens every year and every year, you have to file an income tax. You cannot do anything to stop that, however, you can take some steps to make that process a little easier for you. Before you make the decision to pay your taxes by credit card or by some other means, make sure you are making the best decision for you when paying your taxes. It may make more sense to apply for an installment plan. You have to weigh all of your options to be sure you are choosing the right one.