Is it possible to pay taxes with a credit card
Is it possible to pay taxes with a credit card

Is it possible to pay taxes with a credit card?

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Credit cards are accepted for tax payments: People often wonder if they can pay taxes with their credit cards, either because they missed something when they filed their estimated return (resulting in an uncollectible debt) or because they are new cardholders interested in earning points, rewards, and discounts.

The answer is “yes”, you can pay taxes with a credit card if you live in this universe. However, there is a big difference between “power” and “duty.” Consider the fact that, if you used your line of credit to pay taxes, you would be accepting the collection of fees, contributions, and interest, which, if ignored, could leave you in an even more serious financial position.

It’s not over yet, though! Taxes can be paid using credit cards without having to die. Let’s take a look.

Taxes can be paid with a credit card?

Yes, of course it is! Credit cards are accepted for paying federal taxes. Credit cards were accepted by the Internal Revenue Service (IRS or Internal Revenue Service) in the Taxpayer Relief Act of 1997, which has been one of the most significant regulators of tax reductions throughout the history of the United States. Following the IRS’s example, most states have enabled credit card payments for state taxes.

There must be a clarification, however. Paying taxes with a credit card is not the most appropriate option, simply because it is possible. Whenever you use your credit card to make a purchase, keep in mind that interest, fees, and deductions might apply, which are not usually appealing to either you or other consumers.

Although there are some situations in which a payment card may be an excellent alternative, this is not true in every case. Instead, you have the following options:

  • Credit cards with rewards. The option is viable as long as the points, miles or cash you earn from the operation is high enough, that is, the points, miles or cash you earn from the operation is greater than the interest you will have to pay at the end of the month. So what do we recommend? Credit cards with good bonus offers and rewards, or better yet, welcome bonuses, are the best choices.
  • Considering a 0% APR credit card. Financial institutions and banks offer credit cards with promotional offers, such as zero percent introductory rates or, what is the same, no interest for a period of time.

Are you interested in these alternatives? Here are some examples:

Cash Back Credit Card from Citi

Among the highest cash-back rates on the market, Citi Double Cash TDC offers 1% at the time of transaction and another 1% after paying off the full debt. The issuer will return 2% ($20) when you pay off the debt if you use it to pay $ 1,000 in taxes (plus 1.87% of the total amount of the transaction for bank fees and commissions). 

Therefore, subtracting the bank commissions from the cash refund, you will end up with a balance in favour of $1.67, at least as long as you pay within the deadline set in the balance to avoid late fees or interest.

What’s an advantage? Citi Double Cash has no annual fee and, under normal conditions, has an APR that ranges from 13.99% to 23.99%. Other advantages include:

  • We have offers for balance transfers. In the case of balance transfers, the card offers an initial APR of 0% for 18 months. Depending on your solvency after the indicated term, you will be charged a variable APR of 13.99% to 23.99%.
  • We have offers for balance transfers. In the case of balance transfers, the card offers an initial APR of 0% for 18 months. Depending on your solvency after the indicated term, you will be charged a variable APR of 13.99% to 23.99%.
  • Payments made before the end of each month are not subject to interest charges. Neither purchases nor balance transfers are subject to interest charges. In addition, each transfer will always be charged a fee of $ 5 -or 3% of the total amount – for the surcharge.
  • Creditworthiness determines the APR. As a result of this data, the bank can calculate your annual interest rate by taking into account your credit score or ability. Because of this, your APR will depend on your creditworthiness rather than the bank’s discretion.

Keep Reading: How to transfer money from a credit card to a debit card

Miles Discover it Card

For every purchase you make with the Discover it Miles card, you can earn up to 1.5 miles. Additionally, you can exchange one penny for prizes and points. How does this work? You get 1.5% back for every transaction. This advantage is maximized by Discover for its customers, since it doubles your miles during the first year so that you can earn 3% on everything you purchase.

Here is an example of your benefits. Discover Miles will refund you $ 30 if you pay $1,000 in taxes with the card. Taking into account that the commission payment is only 1.87% of the transaction, you will end up with a balance in your favour of 11.86.

Additionally, this card is not subject to annual maintenance fees, commissions or fees for foreign transactions.

The US Bank Platinum Visa Card

For those who wish to pay their taxes in instalments, the US Bank Visa Platinum card offers an excellent offer: 0% APR for 20 billing cycles. Therefore, you have ample time to pay your taxes before interest is added by the issuer – more than a year.

New customers are only eligible for this introductory rate, which applies to both purchases and balance transfers. Is it a good deal? Using another TDC and transferring the debt will require you to pay a surcharge. Paying the IRS balance directly with the card will eliminate this.

In the event that you don’t complete the payment before the 20-month period, what happens? For the remaining balance, the financial institution will apply an APR between 14.99% and 24.99%.

Besides the benefits listed above, what other features does the US Bank Visa Platinum card offer? As well as the 0% APR for new customers, you’ll also receive discounts at affiliated stores and merchants, protection for travel and online purchases, mobile insurance, and the ability to set the APR based on your bank score.

Using a credit card to pay your taxes?

Using your credit card to pay your taxes is up to you. Payments can be made online, by phone, or with a mobile device. You don’t need a credit card if you don’t have one! Your debit card will work as well.

Paying your federal tax online can be done by visiting the official IRS website, selecting a payment method that meets your needs (credit card, debit card, electronic wallet) and selecting the company you want to deal with. Follow the instructions on the system once you click “make a payment”.

The procedure will be basically the same if you decide to pay your federal taxes over the phone. Simply enter your information and choose any payment method and processor you prefer.

The website of the tax collection office in your state or the registered number can be accessed for paying state taxes online or by phone. Although localities have their own payment systems, the process is similar to that of the federal government.

What is the disadvantage of paying taxes with a credit card?

Just like any other financial transaction, paying taxes with a credit card also has its disadvantages. Even though you can minimize the damages by selecting a TDC that offers attractive offers and, of course, avoiding the IRS fees that apply to non-payments, you could still experience some inconveniences. Among these things are:

It is not always possible to earn good rewards

To earn rewards and prizes for paying your taxes with a credit card, you should be cautious! Generally, credit cards apply a 2% reward for tax payments, causing the award to be diluted against commissions.

As an example, let’s consider the Citi Double Cash credit card. A flat-rate line of credit with this type of return represents one of the best products on the market. When you use this card through a payment platform like Pay1040, however, the percentage falls to 0.03%. There will be no losses, but there will also be little gain.

Here’s another example. For every dollar you spend at the IRS, you will earn one point if you use a rewards card such as the Chase Sapphire Preferred. You will receive $ 0.02 for each point when redeeming them for cash, which is merely offset by the payment processing fee.

A credit card affiliated with an airline or hotel company would probably be the best option. You can use Cause rewards and attractive discounts during your spare time or next vacation. Additionally, prizes that require a great deal of points can also be exchanged. The minimum requirement is 30,000 points.

Trying to find a good alternative? With the Chase Freedom, you can earn cash back bonuses of up to 5% of what you spend, including purchases made using PayPal and other digital wallets. The downside? The maximum amount you can earn will be $ 1,500 with a maximum earning rate of 5% per quarter. Does your tax bill fall below this amount? If so, a Chase Freedom may be an excellent option for you.

Commissions must be paid

Credit card payments are not handled directly with the IRS platform, but rather authorized through third-party companies. An average of 2% is charged by these companies for processing the transaction.

For example, Pay1040 has the lowest rate (1.87%), while TurboTax’s is 2.49%.

The IRS “fees and information” section provides details about the fees charged by each company.

Interest may be charged in some cases

No problem if you plan to pay your taxes in full when you receive your tax statement! But if you elect to pay in instalments, you will have to take into account interest calculations.

The average credit card interest rate is around 21%. You should choose a credit card with an introductory APR of 0% to avoid unnecessary expenses. You will not have to pay any interest on the loan.

It is always better to choose a payment term than to ask for a cash advance, because these types of transactions come with extremely high fees that could jeopardize your financial stability.

You may affect your credit score

You risk your credit score every time you make a large purchase, even if it doesn’t always happen. But why? Since banks and financial institutions use the rate of credit used to check your financial situation when calculating your solvency and economic capacity.

As a result, with a credit card limit that is higher than your tax bill, your bank can conclude that your financial capacity is lower than it really is. How can this be avoided? Simply pay the balance of your credit card on time.

Keep Reading: Transferring money from a credit card to a bank account

Using credit cards to pay taxes is not the only option

A credit card does not always solve the problem of lack of liquidity, especially when you want to pay your taxes. You can request a payment plan by instalments at the IRS collection office if you do not have other financial resources to cancel your debt with the IRS.

When compared to credit cards, what are the benefits of the IRS payment plan? Few. There are fewer interest rates than those offered by most credit cards on the market, and, as an added benefit, your credit record will not be negatively affected.

Here are the alternatives:

  • 120-day payment delay. Congratulations if you believe you can raise the money necessary to pay your taxes in less than four months and your debt doesn’t exceed $100,000! IRS can help you establish a short-term payment plan. This would result in an interest rate of 5.5% plus a monthly delay fee of 0.25%. You should be aware that if your debt exceeds $ 25,000, the payments will be deducted directly from your checking account.
  • More than 120 days without payment. More commonly called a long-term payment plan. The IRS offers long-term payment plans to individuals whose tax debt totals $ 50,000 or less (including interest and penalties). Unless you qualify for the federal poverty level, you will be charged various fees, including $ 31 for the application. Due to the delay in this case, charge 0.25% per month will be waived, as well as 3% interest, as well as 2.48%additional interest based on the federal interest rate for short, medium, and long-term borrowing. Payments will be automatically deducted from your checking account if you choose this option. Therefore, you won’t have any problems or delays when paying.

Better forms of payment

You may be able to save money by using an alternative to a credit card that charges interest.

Apply for a credit card that offers a 0% introductory rate. Rachel Dix Kessler, consumer advocate at Finder.com, says you can then pay off the balance without incurring interest charges. The only thing you need to do is make sure you pay off the entire balance before the introductory fee ends, she says.

Pay using an IRS instalment plan. You should choose this option if you have more than 120 days to pay your tax bill and owe less than $50,000.

You should fill out IRS Form 9465, “Instalment Agreement Request,” when you file your tax return. The IRS will set up a payment plan for you that can last up to six years. Instalment fees can range from approximately $31 to $225, depending on the amount of taxes you owe. When you make direct payments from your bank account, the fee can decrease significantly.

When you pay your credit card bill, if you owe money in taxes and enter into a payment agreement with the IRS, it won’t show up on your credit report unless you don’t make the minimum payments and the IRS files a tax lien on your property. The American Institute of CPAs in New York City has a director of tax and ethics practice, Cari Weston. The money you owe won’t affect your debt-to-income ratio or negatively impact your credit score.

Take out a home equity line of credit. You’ll probably receive a lower interest rate than you’d get on a credit card. However, you cannot deduct interest on debt unrelated to building, purchasing, or improving your home among other restrictions. Another option is to obtain a personal loan from your bank or credit union.

Finally, should I use a credit card to pay my taxes?

This question cannot be definitively answered. It is ideal for you to carefully consider each option in order to choose the one that best suits you. 

Let’s say you have $3,000 in taxes to pay and plan on paying them within six months. Consider the following options:

  • You will effectively pay no reimbursement or processing fees if you use a credit card with an 18% APR and 2% cash back. This means that your interest would only be 18%, which is $ 159.
  • Credit cards with 0% initial APR do not charge interest. There will be a fee of $ 59.40 for the payment processing, which corresponds to 1.98% of the payment amount.
  • The IRS will charge you $ 31 for the application + 0.25% for each month you are late ($ 45) + $ 82 of interest for a total of $ 158 .

Therefore, using a credit card at 0% APR is the best option. However, not everyone can take advantage of this option, since it depends on whether or not the financial institution approves a new credit card. You can only get the lowest amount with these types of cards if you pay the entire balance before the offer period expires.

Are you wondering whether it is better to set up a short-term payment plan with the IRS? Here are the calculations. With this option, you would pay about $ 50.52 in interest plus $ 30 for delinquency, totalling about $ 80.52.

Having discovered how to pay your taxes with your credit card, it is time for you to evaluate your options. By evaluating your options, you will determine the best financial strategy for you.