You’ve waited until the last minute to file your taxes, and now you realize you don’t have the cash to pay the tax you owe. What to do? Don’t panic. You have options, including the option to pay taxes on a credit card, but is this a good idea? Before making a decision, here are a few things to keep in mind.
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Convenience Fees to Pay Taxes with a Credit Card
When you pay taxes with a credit card, expect to pay what is known as a “convenience fee” or “processing charge”. This fee is charged by the service provider that processes the payment for the IRS, and is in addition to the regular interest charged. As of January, 2015, convenience fees range from 1.87 percent to 2.35 percent of the amount charged to your card, depending on which payment processing company you choose, with a minimum convenience fee ranging from $2.59 to $3.50. 1 These fees may be tax deductible.
Credit Card Convenience Fees When e-Filing
Convenience fees for taxpayers e-filing, or filing tax returns online, range from 2.35 percent to 2.49 percent of the amount charged to a card, with minimums between $2.00 and $3.95 depending on the payment processor chosen. The option to use your credit card for e-filing and paying outstanding taxes is built into various tax preparation software packages, including TurboTax and File Your Taxes, and it’s flexible. Before choosing this option, remember the following:
- you may file taxes early and pay outstanding taxes at a later date when e-filing and paying with a credit card through a tax preparation software practice
- some tax software lets users make one partial payment (must be at least $1.00), allowing you to avoid filing an extension form such as Form 4868
- tax preparation software packages do NOT let taxpayers make multiple payments through their systems
Effect on Your Credit Score
If you’re considering using a credit card to pay your outstanding tax bill, understand that this may impact your credit score. As your credit card balance increases, your credit utilization ratio increases. This represents the ratio of your total credit balance to your total credit limits, and an increasing ratio may indicate you’re experiencing financial difficulties. This suggests an increased risk to lenders, which may affect your credit score.
Credit Card Interest vs. IRS Interest
While paying for taxes on a credit card does incur convenience fees and interest costs, it may be less costly than not paying your taxes and being faced with IRS interest and penalties for late or unpaid taxes. 2 These penalties and fines may include:
- interest on unpaid taxes owed, compounded daily, at the federal short-term rate plus 3 percent
- a failure to pay penalty of 0.5 percent of the outstanding amount monthly
- a failure to file penalty of 5 percent of taxes owing for each month your tax return is late, up to five months. Taxpayers filing more than 60 days late are also subject to a minimum penalty of $135 or 100 percent of taxes owed unless there were special circumstances
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Using your credit card to pay your taxes may also cost less than getting an IRS installment agreement. For example, if you qualify for an IRS installment agreement, you will pay anywhere from $52 to $120 as a one-time installment user agreement fee. 3 Any interest penalties on the outstanding balance continue to accrue until the outstanding taxes are paid in full. But be sure to consider all available options before determining the most cost effective plan to pay your taxes.