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Examining the Pros and Cons of Using a Credit Card to Make Tax Payments

With today's typical credit card APRs exceeding 15% (and many exceeding 20%), charging a substantial tax payment to your card without a solid payoff plan might result in exponentially more money payable in interest over time.

By cheap accountantPublished 4 months ago 3 min read
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Is It a Good Idea to Use a Credit Card to Pay Taxes?

It is possible to pay your taxes using plastic, but is it necessary?This is what you should think about before making a choice:

Risks of Debt

It's not a big deal if your tax bill is less than $200.However, if you place your tax debt of $5,000 or $10,000 on a credit card, you must pay it off, and you may end up paying more interest on the card than you do to the federal government."

With today's typical credit card APRs exceeding 15% (and many exceeding 20%), charging a substantial tax payment to your card without a solid payoff plan might result in exponentially more money payable in interest over time.

If you already have a debt balance that your taxes would only add to, you should only use your credit card as a last resort — and even then, you're probably better off negotiating with the IRS to set out a payment plan or submit an extension. These plans still have interest and fees, but they are far less expensive than credit card interest over the same payoff time.

IRS Payment Plan as an Alternative

If you are experiencing financial difficulties and are unable to pay your taxes in full by Tax Day, the IRS provides payment plans to make payments more reasonable. Apply for one of these first before charging your bill to a high-interest credit card.

These payment plans function similarly to loans in that you will pay your taxes over time (up to 60 months) in monthly payments. However, they are not free. A one-time setup fee is charged, as well as accruing penalties and interest until your balance is paid in full (you can find more information about specific costs on this IRS webpage).

Losi responds, "I think they're wonderful plans." "It's preferable to opt into an IRS instalment programme and spread it out over 60 months at a 9% rate rather than paying it all once and committing yourself to a credit card interest rate north of 15%."

The Effect of Credit

You should also be cautious of the impact charging your taxes to a credit card may have on your credit score. Credit utilisation ratio is an important aspect in credit score calculation, and if you charge a huge amount in taxes, it may consume a large portion of your available credit, resulting in a decline in your credit score.

If you intend to apply for a loan soon, refinance your home, or engage in any other activity that could be impacted by a temporary credit hit, you should keep this in mind.

If you have to carry that tax bill from month to month, paying it off gradually, your credit score may suffer long-term damage. If you don't swiftly restore your usage ratio to a healthy level, the dip could become a long-term pattern. And using up a large portion of your available credit limit leaves you with little wriggle room if you require accessible credit in the future.

Other Payment Options as an Alternative

Although you will not receive any benefits, regular payment methods are just as handy as using a credit card if you have the cash on hand to pay your tax obligation in full.

Losi thinks that DirectPay is the most expedient choice for many of his clients, but he also doesn't rule out sending a conventional check via mail; just make sure your check is postmarked before Tax Day. Even if you postpone your payment until the deadline, both of these are valid possibilities.

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