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Paying Taxes by Credit Card

You may be accustomed to paying your bills with your credit card and do not think twice before making your tax bill payment with this method. Paying your tax liability using a credit card is generally considered a secure way to pay. Additionally, paying with a credit can give you more time, especially if you are facing financial difficulties. However, you should weigh what you’d be paying in penalties and interest that the IRS charges on back taxes against the interest you’ll pay on credit card payments.

paying taxes with credit card

If you are planning to cover your liability over time using a credit card, consider the factors Market Watch discusses, including how to minimize the IRS penalty for late payment:

“’If you’re going to need a year or more to pay it out you could borrow on a low interest credit card and it could be a good deal,’ says Gregg Wind, a certified public accountant in Los Angeles.

“While not ideal, credit cards and lines of credit can help people pay the tax man by this year’s April 17 while avoiding potentially steep late payment penalties and interest charges. The IRS generally charges interest on any unpaid tax starting from the day the tax is due to the date it is paid. Currently at 3%, the interest rate is reset quarterly. And that doesn’t include late payment penalties, which are 0.5% of taxes owed a month. Between interest charges and late payment penalties, someone who is a year late in paying their taxes could see their bill increase by 9%, Wind estimates.

“Those fees can be reduced if one pays with a low-interest credit card, he says. Take someone with a credit card that has a 4% APR. Including a onetime convenience fee of up to 2.4% that third-party service providers charge for using a credit card, fees would add up to 6.4% of taxes owed, he estimates. On a $10,000 bill, that could mean $260 in savings. Someone using a zero percent credit card may be able to save more, but they need to be careful not to carry the balance past the promotional period because the interest rate can shoot up and credit card charges could erase those savings, he says.

“Some investors who don’t want to liquidate important investments to cover their tax bill may be able to set up a similar arrangement by opening a line of credit with their brokerage firm, says Phil Conway, U.S. head of lending for J.P. Morgan Private Bank. For those in the middle of a property sale that still hasn’t cleared or who expect a bonus coming up later in the year, a line of credit can provide more time to pay the bill without forcing them to sell other assets prematurely, says Conway. Interest rate charges can often be around 3% since they are usually 2 percentage points on top of the London Interbank Offered Rate, or the rate that banks charge to borrow from each other. Still, taxpayers should generally aim to clear their credit lines before next tax season to avoid having their debts pile up, Conway says. ‘We’re not trying to say to pay this back like you would pay back a car,’ he says.

“That said, there may be less expensive options for taxpayers who don’t qualify for a low interest credit card or line of credit. Those who need less than 120 days to pay the bill you may be able to set up an informal payment plan with the IRS, says Wind. And the IRS introduced a program this year that gives some filers more time to pay, penalty free. Some people may also be able to set up an installment agreement with the IRS, which would lower late payment penalties to 0.25% of taxes owed a month.”

An IRS installment agreement request can allow you to pay your full liability in monthly payments. As penalties and interest are charged each month, the less time you take to pay your tax debt, the less you will pay overall.