Do you have an income tax bill this year? If you simply can’t afford to pay your tax bill, you have a few options.
- You can pay the IRS late. The monthly late fee is 1% of the balance due, $10 on a $1,000 tax balance.
- You can set up a payment plan with the IRS for a one-time fee of up to $105 plus monthly interest.
- Or, you can pay by credit card. In this case, you're subject to the terms and conditions of your credit card agreement. Before you use credit to foot your tax bill, make sure you understand the advantages and disadvantages of paying your taxes this way.
The Benefits of Paying Taxes By Credit Card
You can earn rewards when you use a rewards credit card. Take advantage of the rewards your credit card offers by putting your taxes on your credit card. Watch out, some rewards credit cards have restrictions on the type of purchases and minimum charges before they start rewarding you.
You’ll have more time to pay your tax bill without filing extra forms. Putting your taxes on your credit card lets you continue to pay your tax bill beyond the April 15 deadline. The IRS has this option, too, but you to file additional forms to take advantage of it.
Drawbacks of Paying Taxes By Credit
You’ll pay interest on the tax you owe. The longer you take to pay your credit card balance, the more you’ll end up paying in interest. Using a low-interest rate credit card will reduce the amount of monthly finance charges you owe.
There are convenience fees. When you pay your taxes by credit card, the IRS charges a convenience fee that’s 2.49% of your tax bill. If you owe $1,000 the convenience fee will be close to $25. Putting a $10,000 Tax bill on your credit card will cost $250. Obviously, the more you owe in taxes, the higher your convenience fee will be.
You can’t bankrupt the debt. Income tax is one of the types of debt you can’t bankrupt (along with child support and alimony). So, if you have financial trouble later down the road, be aware that bankruptcy won’t discharge credit card debt incurred from taxes.
Your card issuer may think you're a risk. If you must use your credit card to pay your income taxes, your card issuer may see it as a sign that you're having financial trouble. After all, why would you use your credit card if you could afford to pay your taxes? As a result of the increased risk, your card issuer could raise your interest rate, lower your credit limit, or even cancel your credit card.
Assessing the risks
Paying by credit card may give you the flexibility to pay over a period of time, but should be considered just like any other credit card purchase. Your balance is still subject to your credit card agreement. Interest rate and fees will continue to be dictated by your creditor. Late payments will be included on your credit report, will impact your credit score, and could affect your ability to get credit cards and loans in the future.