Posted by: John S Kiernan

Yes, you can pay your taxes with a credit card. No, it’s neither free nor always a good idea. There are pros and cons to paying Uncle Sam with plastic, and we’ll do our best to lay them out below.

Pros:

• Buy Yourself Some Time:Paying your taxes with a credit card is one way to satisfy Uncle Sam if you won’t have enough cash on hand by the deadline. But your credit line is not your only alternative.

  The IRS offers a number of options — such as an installment plan or an extension of up to 120 days — to people who cannot pay their taxes in full by the deadline (April 18). It is very important that you carefully consider each option, including the associated costs, in order to make the best choice given your circumstances.

• Shift Your Obligation from the IRS: Many people simply don’t want to mess with the IRS. Paying with a credit card solves that problem by enabling you to immediately settle up with the government and then pay off your credit card company over time.

  This may prove especially important for people who are in dire financial straits, as taxes paid by credit card become dischargeable in Chapter 13 bankruptcy (not the case with Chapter 7, however).

• Long 0% Intro Terms are Available: Credit cards now offer 0% introductory interest rates for up to 21 months, which means the right plastic could prevent your tax obligation from becoming more expensive as you work to come up with the cash. You could actually use a 0% card even if you have the means to pay, just to leave your money invested for longer.

  Either way, you’ll need to make sure that you’ll be able to pay off your balance before high regular rates take effect and eat away at your savings. A credit card calculator will be a big help in that regard.

• Opportunity to Earn Rewards: Credit card companies also have initial rewards bonuses worth up to $750 for new customers. But you have to spend a few thousand dollars within a few months of account opening to qualify. That’s where taxes come in. Paying taxes with a credit card is an easy way for light-spenders to meet that initial requirement.

  Even if you aren’t motivated by an attractive initial bonus, lucrative regular earning rates can make paying with plastic an attractive option, too. You can see for yourself by checking out the best rewards credit cards on the market right now.

Professor’s Take: “The consistent downside of paying a tax liability with a credit card is the processing fee, often around 3% of the balance. But this downside can be offset through rewards offered by the credit card company, and low or 0% interest offers. In addition, if bankruptcy is being considered, tax debts are not dischargeable but credit card liabilities are.”

-Jason Cherubini // Assistant Professor of Business Management, Goucher College

Cons:

• Expensive Processing Fees The IRS gives you the option of submitting a credit card payment through one of three processing companies. These companies charge between 1.87% and 2% for credit card payments, so the cost of paying with plastic depends on the amount you owe and the alternatives at your disposal.

  These processing fees can also reduce the rewards value of paying your taxes with a credit card. This is especially true in terms of ongoing rewards (e.g., 2 points per $1 spent), as opposed to an initial bonus worth hundreds of dollars. After all, the best rewards credit cards offer, at most, roughly 2% cash back across all purchases.

• High Regular Interest Rates: Even the best 0% credit cards have regular rates ranging from 12.99% to 22.99%, which can quickly inflate any remaining balance at the end of an intro term (e.g., 12 months). So if you want to maximize the value of this strategy, you’ll need to make sure you can comfortably afford the monthly payments required to have a balance of zero by the end of the intro period.

• Credit Score Damage: Incurring a significant credit card balance always comes with the potential for credit-score damage. If you can’t afford to make the monthly payments, delinquency will be noted on your credit reports. And it will diminish your chances of taking out a loan, renting an apartment or buying a car. Your insurance premiums may even rise, as well.

  That is why it is so important to use a credit card calculator prior to paying your taxes with plastic. This will help you determine the appropriate monthly payments you’ll need to make.

Professor’s Take: “Generally it does not make financial sense to pay your income taxes with a credit card if you will carry a balance. If you enter into an installment agreement with the IRS, you’ll be charged interest and a penalty. However, these charges combined will typically be lower than the interest and fees on a credit card balance.”

- Michelle Lyon Drumbl // Tax Clinic Director, Washington and Lee University School of Law

Final Thoughts

Preparation is the key to ensuring that paying your taxes with a credit card pays off in the long run. In particular, it’s important to use a payment calculator to figure out when you’ll be rid of your balance. In doing so, factor in some breathing room because preparing only for the best-case scenario is a recipe for trouble. Don’t forget to account for the upfront credit card processing fees, either.

You’re on the right track if you’ll be able to comfortably repay what you owe fast enough to prevent fees and interest from exceeding the cost of your other repayment options. That, however, depends on your ability to get approved for a card with a long enough 0% introductory term or lucrative enough initial bonus to make the process worthwhile.

You can check your latest credit score for free on WalletHub to gauge your approval odds. But remember that it can take a couple of weeks to get a new credit card in your hands once you’ve been approved. So it’s especially important to start your tax planning well in advance if you’re considering paying with plastic. Once again, the deadline for both filing and paying taxes is April 18, 2017.

from Wallet HubWallet Hub


via Finance Xpress