Do you have an income tax bill this year? If you simply can’t afford to pay your tax bill, you have a few options.
- You can pay the IRS late. The monthly late fee is 1% of the balance due, $10 on a $1,000 tax balance.
- You can set up an with the IRS for a one-time fee of up to $105 and monthly interest.
- Or, you can pay by credit card. Before you use credit to foot your tax bill, make sure you understand the advantages and disadvantages of paying your taxes this way.
How paying taxes by credit card benefits
You can earn rewards when you use a rewards credit card. Take advantage of the rewards your credit card offers by putting your taxes on your credit card. Watch out, some rewards credit cards have restrictions on the type of purchases and minimum charges before they start rewarding you.
You’ll have more time to pay your tax bill without filing extra forms. Putting your taxes on your credit card lets you repay your taxes beyond the April 15 deadline. The IRS has this option, too, but requires you to file additional forms.
Drawbacks of paying with credit
You’ll pay interest on the tax you owe. The longer you take to pay your credit card balance, the more you’ll end up paying in interest. Using a low-interest rate credit card will reduce the amount of monthly finance charges.
There are convenience fees. Not only is there interest rate on your credit card, but also convenience fee that’s 2.49% of your tax bill. If you owe $1,000 the convenience fee will be close to $25. Putting a $10,000 Tax bill on your credit card will cost $250.
You can’t bankrupt the debt. Income tax is one of the types of debt you can’t bankrupt (along with child support and alimony). So, if you have financial trouble later down the road, be aware that bankruptcy won’t discharge credit card debt incurred from taxes.
Assessing the risks
Paying by credit card may give you the flexibility to pay over a period of time, but should be considered just like any other credit card purchase. Your balance is still subject to your credit card agreement. Interest rate and fees will continue to be dictated by your creditor. Late payments will be included on your credit report, will impact your credit score, and could affect your ability to get credit cards and loans in the future.
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