Home > Managing Debt > 4 Reasons to Avoid Paying Taxes with a Credit Card

Comments 2 Comments

Taxes_Chris_Young_CCFLickrThe IRS suggests that paying your taxes with a credit card is a convenient and safe way to pay Uncle Sam. It might be convenient and safe, but it isn’t cheap. Here are four reasons you shouldn’t pay your taxes with a credit card:

#1: Convenience fees are added to your payment

You can pay taxes with a credit card, but you’re not making the payment directly to the IRS. The IRS is using third-party service providers that charge convenience fees ranging from 1.90 percent–3.93 percent of the amount you owe.

But here’s an example to give you an idea of how much this costs. On a $2,000 tax bill, you could pay around $47 ($2,000 x .0235) if you use a service provider with a 2.35 percent fee. You’ll be informed of the fee amount before the payment is authorized. But do you really want to give the IRS an extra $47? I didn’t think so.

Now, sometimes life doesn’t go the way we expect it to. If you’re having cash flow issues and you simply have no other alternative than to use your credit card, you’ll be pleased to know that the convenience fee is tax deductible. For an individual expense, taxpayers may deduct the fee as a “miscellaneous itemized deduction” on Form 1040, Schedule A. But the deduction is subject to the 2 percent limit, so discuss this with your tax preparer.

Note: If you’re thinking of using a debit card, there’s a flat transaction fee up to $3.95 for all but one of the service providers.

[Related article: Pay Your Taxes With Plastic? Beware.]

#2: You could end up paying interest on your IRS payment

If you don’t pay the credit card bill in full before the grace period ends, you’ll be paying interest on your tax payment. Let’s do the (very simple) math to illustrate what can go wrong here.

Let’s say your credit card APR is 15 percent and you manage to pay the $2,000 payment off in one year. Your payments would be $185 per month and you’d end up paying $170 in interest. So now you’ve paid the IRS $2,217.00 ($2,000 + $47 + $170) and you only owed $2,000. And guess what? It’s a year later and it’s time to pay your taxes again.

And even if you have a card with a zero percent introductory APR for 12 months, you’re still paying an extra $47 for the convenience fee. I don’t mean to harp on this, but I think we all pay enough taxes already.

#3: Using a credit card could raise a red flag to your issuer

Whether it’s true or not, paying your taxes with a credit card can make it look like you’re desperate for cash, which can create an impression that you’re suddenly a credit risk. The payment will also reduce the amount you have left on your credit limit. This decreases your revolving utilization ratio, which can also lower your credit score.

From the issuer’s point of view, they might start worrying about your ability to pay your bills. This could lead to a decrease in your credit limit, an increase in your APR, or other unpleasantness. If you do end up using your credit card, paying it off quickly should help dispel any notion that you’re in dire straits financially.

[Credit Card Roundup: The Best Secured Credit Cards]

#4: The rewards usually aren’t worth it

Using our example, if you pay off your balance right away, you’re spending an extra $47 to pay your taxes with a credit card. If you’re getting 2 percent cash back (and that’s pretty generous), that’s $40.94 ($2,047 x .02). You’re in the hole by a little over $6. And remember, some cards have thresholds and caps. So if the pursuit of rewards is the driving force here, make sure you read your rewards program details carefully so you can determine if this makes any sense for you.

Image: Chris Young, via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team