Paying taxes is an unavoidable reality for most people. As tax season approaches, you may be wondering if you can pay your tax bill with a credit card. Using a credit card provides some potential benefits, like earning rewards and getting extra time to pay However, there are also costs and risks to be aware of before swiping your card. In this article, we’ll explore whether paying taxes with a credit card makes sense for you.
Is It Possible to Pay Taxes With a Credit Card?
The short answer is yes, you can pay your federal taxes using a credit card. The IRS allows taxpayers to use credit cards through approved third-party payment processors. When you pay by credit card, the processor collects your card information and payment amount. They charge your card and send the funds to the IRS on your behalf.
This is a legitimate and legal method of paying taxes. The IRS will accept credit card tax payments up to certain limits based on your tax type and circumstances. However just because you can pay with a card doesn’t necessarily mean you should. There are pros and cons to weigh first.
What Are the Processing Fees for Credit Card Tax Payments?
Processing fees are the worst thing about paying taxes with a credit card. The IRS does not accept card payments directly. Instead, you must use one of the IRS-approved processors below:
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Pay1040 – Charges a 1. 75% fee for credit card payments (minimum $2. 50), 2. 89% for commercial cards (minimum $2. 50), and $2. 15 for consumer debit cards.
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ACI Payments – Charges a 1.85% fee for credit cards (minimum $2.50) and 2.95% for commercial cards (minimum $2.50). The fee for consumer debit cards is $2.10.
As you can see, the processor takes 1. 75-2. 95% of your tax payment as a fee. This fee does not count toward the taxes you owe. You’ll pay it separately on top of what you owe the IRS. Also, if you owe a lot of tax money, that can add up.
If you pay your taxes by card, it costs about $18 to $30 more for a $1,000 payment. The fees would add up to about $175 to $300 on a $10,000 tax bill. Ouch!.
Pros of Paying Taxes With a Credit Card
Given the drawback of fees, why would anyone pay taxes with a credit card? There are a few potential benefits:
Earn rewards – If you use a rewards credit card, you can earn cash back, points, or miles on your tax payment. To come out ahead, the value of the rewards you earn needs to exceed the processor’s fee. With the right card, this is achievable on large tax bills.
Meet minimum spending for bonuses – Opening a new credit card with a welcome bonus offer? You could potentially use a tax payment to help meet the required minimum spending level to earn the bonus.
Delay payment – Paying taxes with a card gives you until the payment due date to pay off the balance. This can provide short-term financing if you don’t have the cash on hand upfront.
Spread payment over time – Some processors allow you to split your tax payment across multiple smaller transactions on the same card. This effectively lets you finance the taxes over time.
Earn business rewards – If paying business taxes, you may be able to earn extra points, miles, or cash back through your small business credit card.
Cons of Paying Taxes With a Credit Card
There are also some significant drawbacks and risks to keep in mind:
Processing fees – As mentioned above, you’ll pay 1.75-2.95% of your tax bill as a processing fee. This cuts into any rewards you might earn.
Interest charges – If you carry a balance on the card, interest charges can dwarf any rewards or savings from delaying payment. Pay it off in full each month.
Higher utilization – A large tax payment may increase your credit utilization ratio, negatively impacting your credit scores if you carry a balance.
Payment limits – The IRS restricts the number and dollar amount of credit card tax payments within a certain time period. Make sure you don’t accidentally exceed the caps.
Limits on deductibility – If paying business taxes, card processing fees over $2.50 may not be fully tax deductible.
No extensions – Paying taxes with a card does not grant an extension if you cannot pay the card balance. You’d still face penalties for paying late.
Key Considerations When Paying Taxes With a Credit Card
If you decide to pay your taxes with a credit card, keep these tips in mind:
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Compare processor fees to pick the best one for your card type. Fees often vary based on whether you pay with a consumer or commercial card.
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Calculate whether the rewards will outweigh the processing costs. Target cards with high rewards rates.
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Pay off the balance in full when the payment is due to avoid interest charges. Don’t spend beyond your means.
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Watch out for caps on the number and dollar amount of card transactions with the IRS.
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Consider the impact on your credit utilization ratio and scores, especially if carrying a balance.
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Double check that card payments meet any deductibility requirements if paying business taxes.
The Bottom Line – Should You Pay Your Taxes With a Credit Card?
Paying taxes with a credit card is possible, but also risky. It makes the most sense if you have a rewards card where the value of points or cash back earned exceeds the processing fees. Just be sure you can pay off the balance in full by the due date. Otherwise, the extra costs and potential damage to your credit is probably not worth it.
Before swiping your card, run the numbers and weigh the pros and cons carefully. Oftentimes, you are better off choosing another payment method to avoid fees. But in certain situations with the right credit card, paying taxes with plastic can be reasonable or even lucrative.
Comparison of the best credit cards for tax payments
Below, youll find the general earning rates for the top credit cards you can pay your taxes with, along with TPGs September valuations of what value your earned rewards are worth.
Remember that the possible return also depends on making the most money using the method described in the “Caveat” column. It does not, however, take into account the value of any welcome offer you might get. We also assume a 1. 82% fee for paying by credit card (more on that below).
If your business can deduct the convenience fees you pay, you will make even more money. Talk to your tax advisor about this possibility.
Earning a big credit card welcome bonus
Many rewards cards extend welcome offers worth hundreds (and sometimes $1,000+) in cash back or tens of thousands of points if you spend a certain amount on your new card within a specific time frame.
When paying a big tax bill, the best reason to use a credit card is that you can get bonus points from the first purchases you make with a new card. That’s because the points you earn can help pay for the fees you have to pay to use your card for taxes.
Some travel rewards cards have especially high minimum spending requirements for earning a bonus, so a tax payment might be just the thing to put you over that threshold.
You usually only come out ahead using a card to pay taxes when youre attempting to qualify for a large welcome offer at the same time as you are earning rewards at everyday rates. And if you can otherwise hit the minimum spending requirement without paying taxes with the card (and incurring those fees), its better to cut a check to the IRS. CLINT HENDERSON /THE POINTS GUY
Before you choose to pay your taxes with a credit card, make sure you can pay your card balance off in full since, if you dont, you can get hit with interest charges and late fees that quickly wipe out the value of any rewards you might earn. Accruing 20-25% interest on your credit card bill will easily negate a 3-4% return on spending through the points you earn.
Should I Pay My Tax Bill With an Introductory 0% APR Credit Card
FAQ
Can I use a credit card to pay my taxes?
Visit Pay your taxes by debit or credit card for more information on card payments. Visit e-file options for information about IRS e-file.
Is paying taxes with a credit card a cash advance?
You won’t have to pay extra cash advance fees or a higher cash advance APR if you pay your tax bill with a credit card. The transaction is counted as a retail purchase, not a cash advance, so you’ll pay the normal purchase APR without added fees.
Can you pay the IRS with a credit card by phone?
The IRS continues to remind taxpayers to watch out for email schemes. Taxpayers will only receive an email from IRS Direct Pay or EFTPS if they have requested the service. Any of the authorized processors let you use a debit or credit card to pay. You can do this online or over the phone.
Can you use credit card debt on taxes?
Credit card interest is not deductible on income taxes. The personal interest deduction was eliminated in the Tax Reform Act of 1986. Interest payments on home loans, student loans, and investment property may be tax-deductible. Personal expenses cannot be deducted as business expenses.
Can you pay taxes with a credit card?
You may wonder if you can pay your taxes with a credit card. After all, putting your taxes on a credit card with rewards could help you get cash back, points, or miles that you can use for travel. Your estimated tax payments are typically due as follows:
How much does it cost to pay taxes with a credit card?
Fees applied for paying taxes with a credit card vary depending on the specific tax and payment processor that you use. For example, TurboTax has a convenience fee of 2.49% for credit card payments. Federal taxes can be paid with a fee of 1.82% though PayUSATax.
Can I use a debit card to pay my tax bill?
If you have the money to pay your tax bill and still want to put it on plastic for convenience, use a debit card instead of a credit card. The three IRS-approved processors only charge fees ranging between $2 and $3.95 to pay by debit card. You can also pay the IRS directly, with no fee, by entering your bank account information.
Should I charge my taxes to a rewards credit card?
After all, charging your taxes to a rewards credit card could mean you earn cash back, points or miles toward travel. Your estimated tax payments are typically due as follows: Although you’ll generally get dinged with service charges and other fees for using a credit card to pay your taxes, it may still be worthwhile for a few reasons.
How do I pay taxes with a debit card?
If you want to pay your taxes with a debit card or digital wallet, you’ll need to go through one of the IRS’ three independent payment processors: payUSAtax, Pay1040 or ACI Payments. Once you choose a processor, you can pay via phone or online. This method involves a processing fee of about $2 and some change.
What is a good tax bill for a credit card?
Experts recommend keeping it to less than 30%, but the lower, the better. By charging a large tax bill to your card, you could put yourself in danger of pushing your utilization too high, so be sure you have plenty of available credit before you pay taxes with a credit card.
