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It's that time of year again when taxes are on the top of everyone's mind. With less than two months until taxes are due, you may be wondering how you'll pay for any required state or federal payments. One payment option that may have crossed your mind is a credit card.
It can seem enticing to pay taxes with a credit card. After all, you can enjoy at least a 21-day grace period on your payment and may even earn rewards.
But that's not considering any processing fees associated with credit card payments that may outweigh the benefits. So if you can pay taxes with a credit card, will it even be worthwhile?
Below, Select reviews if you can pay taxes with a credit card and the benefits and drawbacks of using a credit card to pay taxes.
Yes, you can pay taxes with a credit card, but the real question is, should you?
Unlike paying your taxes with a bank account transfer, credit card payments aren't free. You'll wind up incurring a fee that's a percentage of your tax payment. The fee you're charged varies by the payment processor you choose.
The IRS breaks down the fees for each payment processor:
- PayUSAtax.com: 1.96% fee, minimum $2.69
- Pay1040.com: 1.87% fee, minimum $2.59
- OfficialPayments.com/fed: 1.99% fee, minimum $2.50
And if you decide to pay with an integrated IRS e-file and e-pay service provider, the fees are higher:
Earn credit card rewards
If you use a rewards credit card to pay your taxes, you can earn cash back, points or miles. Rewards cards earn you a flat rate of 2X points/miles or 2% cash back on your taxes, but recall the processing fee.
For instance, if you owe $1,000 in taxes and choose to pay it with a credit card using the cheapest payment processor Pay1040.com, you'll incur a 1.87% fee. In order to recoup the fee and earn extra rewards, you'll need a card with at least a 1.87% rewards return — which rounds up to a 2% or 2X rewards card.
So, the Citi® Double Cash Card would be a good choice, offering 2% cash back: 1% on all purchases and an additional 1% after you pay your credit card bill. After subtracting the 1.87% fee, you'd be on track to earn .13% cash back on your $1,000 tax payment — which works out to $1.30. That's a minor number, but it can more if you have bigger tax payments.
Benefit from special financing
If you're looking to buy some time on tax payments, you may consider paying with a credit card to benefit from an intro 0% APR period. Cards like the Discover it® Cash Back can provide over a year of special financing on new purchases, but you need to be OK with forking over the processing fee. The Discover it® Cash Back offers 0% intro APR for the first 14 months on new purchases (after, 11.99% to 22.99% variable APR).
Meet spending requirements for welcome bonus offers
If you open a new credit card with a welcome bonus, charging taxes to your card can help you meet the spending requirement. Before using a credit card, do the math to see if the bonus reaps a higher reward than the processing fee.
For example, the Chase Sapphire Reserve® has a welcome bonus offer of 50,000 bonus points after you spend $4,000 on purchases in the first three months from account opening. If you charge $4,000 in taxes to the Chase Sapphire Reserve® using the cheapest payment processor Pay1040.com, you'll incur a $74.80 fee. But considering the bonus is worth up to $750 toward travel when you redeem through Chase Ultimate Rewards®, the processing fee is negligible.
Completing an online credit card payment is quick, and you receive instant confirmation that your payment went through. However, you'll have to pay the applicable fee. As an alternative, if you pay with an online bank transfer, you can receive instant confirmation and get the added convenience of no fee.
Credit card tax payments incur a fee from the payment processor. The fee varies by processor and is currently 1.87% to 3.93% of the payment with a $2.50 to $3.95 minimum, according to the IRS.
If you pay with a credit card that offers a lower percentage of rewards than the fee, it doesn't really make sense to use a credit card.
Interest charges on unpaid balances
If you use a credit card to pay taxes, it's key to pay your balance in full by the due date to avoid interest charges. Otherwise, you can risk debt and high interest charges if you only make the minimum payment and carry a balance month-to-month.
For example, if you charge $1,000 in taxes to a credit card with the average 16.88% APR and only make minimum $35 payments, it'd take you roughly 37 months to pay it off and cost you $287 in interest charges. And if you pay with a credit card, you won't be able to take advantage of any payment plans offered by the IRS.
High credit utilization rate
Paying taxes with a credit card can have a negative impact on your credit score. Charging high tax payments to a credit card can cause a spike in your credit utilization rate, which is the total percentage of your credit you use.
To calculate your utilization rate, simply divide your total credit card balance by your total available credit. So if you have two credit cards with a combined $3,000 balance and a total $10,000 credit limit, your utilization would be 30%. Adding a $2,000 tax payment to that would increase your utilization rate to 50%, which is high.
Credit score calculations weigh your credit utilization rate and it's ideal to keep it as low as possible. FICO found that "high-achievers" (consumers with credit scores 750 and above) maintain utilization rates below 15%.
Limitations on taxes eligible for credit card payments
While many tax payments can be made with a credit card, such as your annual tax return, not all IRS tax forms are eligible.
Now that you know the pros and cons of paying taxes with a credit card, you can decide if it's a worthwhile payment option. If your credit card rewards or welcome bonus offer outweigh the processing fee, a credit card payment can be an option.
But if you're uncertain that you can pay your credit card balance in full by the due date and/or the fees are greater than any rewards, you should stick to free tax payment options, such as a bank transfer.
For rates and fees of the Discover it® Cash Back, click here.