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Is Paying Your Taxes With a Credit Card Wise?

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    I'll admit, there have been times in the past where I have used a credit card to get me out of a financial pinch. I mean, that's one of the reasons why they are there, emergencies. I came across an article that weighed in on the pros and cons of using a credit card to pay your taxes, and I think it all comes down to your number of options and intent.

    We pretty much all know that the IRS will take your taxes in a number of different ways, checks, electronic transfers, credit, debit, your first born, and blood. All joking aside, we have a number of options, but what if you only have one? See, there lies the predicament. You may be escaping a possible audit, but you're also trading one devil for another if you aren't careful. Paying your taxes with your credit card could really hurt your finances and credit score, especially if the balance sits long enough to accrue interest. According to the article, the average interest rate on a credit card is at 17.6%, which is a record high. Just remember, it isn't free to pay your taxes with a credit card.

    For those who aren't limited to just their credit card, theres an upside to using it. Say you have enough cash to pay it and you have an open card just collecting dust and not rewards. You could use that opportunity to literally reap the rewards that you get on your card by quickly putting the balance on and paying it off.

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    I ran into a bit of a pickle back in 2014 when I filed my taxes for the first time as a private contractor. If one thing is true, it's that the IRS will figure out a way to get their money one way or another. The route I decided to take was enrolling in a payment plan directly with the IRS. They let me choose my monthly payment and the rest is history. Four years later I was no longer indebted to the U.S. Government!
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    The only times I would ever consider paying a tax debt with a credit card is if I could pay it off under a promotional 0% interest fee. (or if the interest fee was lower than the govt's, which almost nobody's cards are). So if it's not in that 12-18 month promotional 0% intro period don't do it. Just makes more sense to accrue less interest with the govt. Last I checked its like 5-7% vs 17%+ with credit cards.

    The only other time it would be a consideration is like you said in the original post, if you have the cash and can pay that card off in the same month BEFORE any interest accrues on the card. That way you can earn 1-2% cash back if you have some kind of rewards card.

    But even then, just consider this: I believe it's more expensive to pay your tax debt with a credit card vs a bank account. Meaning there is a credit card service fee. Whatever that fee is, say its $10-30, you have to weigh that added expense vs what you will get in credit card rewards. 1-2% cash back is pretty small. So your tax debt would have to be several thousands of dollars for it to even make sense.

    So really I wouldn't ever do it unless I did not have the money but I had a credit card with 0% interest with many months to pay the debt without interest and I knew I could pay it off in full before that card's intro rate disappeared.

Categories: Income Tax & Credit Cards