Unique Advantages of Paying Your Taxes With a Credit Card
Do you owe taxes this year? You might be trying to figure out the best way to make your payments. Interestingly, one of the best ways to make your payment could be with your credit card. With the right approach, you can earn credit card rewards for your payment and take care of your debt to Uncle Sam.
The IRS accepts a number of payment methods for taxes. You can pay with direct deposit from your bank account. It's also possible to send a paper check or pay online. Using a credit card to pay your taxes online offers numerous advantages.
Earning Credit Card Rewards When You Pay Your Taxes
If you have enough room on your credit card to pay your taxes, choose a card that can provide you with rewards like airline miles or cash back. While you have to pay taxes anyway, it makes sense to choose a payment method that will at least get you something free in return.
Another strategy is to apply for a new rewards card and use your taxes to earn your signing bonus in one fell swoop. Many credit cards offer a signing bonus that might amount to a large number of miles for a bigger cash back bonus. In many cases, a signing bonus can amount to between $100 and $350. Most points bonuses for airline miles are enough to purchase a round-trip ticket. Likewise, the point bonus for a hotel rewards card is enough for a free night’s stay. If you pay your taxes with one of these new credit cards, there is a good chance that you can use your debt to Uncle Sam to get a little something extra.
Avoid Paying Interest on Credit Card Payments
For the best result, you do need to make sure that you have the money to pay your taxes. This works best if you aren’t stuck paying interest on your tax bill. If you don't have the money to pay your taxes upfront, you can try to use a balance transfer credit card with a 0% APR introductory offer for purchases.
As long as you can pay off your credit cards before the 0% APR ends, these cards can be ideal for paying your taxes, even if you don't have the money now. Create a budget plan that allows you to make regular payments so that your tax bill is paid off before the promotional period ends. This can make paying your taxes more manageable without costing you anything extra.
How Much Does It Cost to Pay Your Taxes With a Credit Card?
Another consideration is that there are fees attached to using credit cards to pay your taxes. Depending on the payment processor you use from the options offered by the IRS, you might need to pay 1.87%, 1.96% or 1.98% of the total (with a minimum fee of $2.50-$2.69). If you pay with credit card, you need to be willing to pay the fee — and it should be worth the rewards you receive.
In order to make it worth it, your bonus will need to offset what you are paying. If your tax payment will push you over the limit to get enough points for an airline ticket (worth $300), that can be worth the cost of the fee. If you have a really big tax bill, this probably isn't the route for you to take.
As what you owe in taxes increases, so does the processing fee. Once you start owing more, you end up seeing a lower return. Calculate the fee ahead of time to see if your bonus is worth it.
When to Avoid Using Credit Cards for Your Taxes
Even though credit cards can be a great way to pay your taxes, it's not always the best option. If you don't have the money to pay off your credit card immediately, you should consider using other options to pay your taxes. Getting stuck with a high interest rate on your credit card for your taxes can get expensive and result in even more debt. If you don't qualify for a 0% APR deal, look into some of the options offered by the IRS to help you make payments.
The IRS offers an installment plan to help you pay taxes if you don't have the money immediately. You can even apply for this plan online as long as you owe less than $50,000 in total taxes, interest and penalties. You will have to pay a fee to use this plan, but it is usually less than what we pay in interest if you pay with your credit card. Contact the IRS to learn more about this option if you're having trouble paying your taxes.
If you owe money in taxes this year, make sure that you consider your options. When you have money in the bank, or good enough credit to qualify for a 0% introductory APR deal, it makes sense to use your credit card and reap the rewards.
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Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.