If you’re one of the unfortunate taxpayers who will owe taxes when you file your return, you might be tempted to pay your taxes using a credit card and try to take advantage of any cash back or rewards programs you’ve joined. Why not pay with plastic, get a month or so of grace period, and earn a percent of cash back or rewards? It’s a win win, right?
In short – no.
Paying your taxes with a credit is generally a terrible idea. It’s not only more expensive than paying with a check but it can have a big impact on a variety aspects of your financial life. We’ll discuss the many reasons why paying your taxes with a credit card is a bad idea.
The fees  aren’t as high as they once were but you can expect anywhere from 1.88% to 2.35% for a credit card and a flat $2.99-$3.95 for a debit card, depending on the processor you use. There are five linked to from the IRS website and the cards they accept will vary. Regardless of who you choose, you’re still paying a fee and there is no way to escape it. You pay 0% when you pay with a check.
There is the rare case where your tax bill is large enough and your debit card reward program is rich enough that you could benefit by paying with a debit card. Those are rare.
Outside of the fee, there’s also the matter of interest should you fail to pay off the entire bill when it’s due. If you can’t pay your tax bill now, it’s usually better to pay your taxes with an installment plan  and skip the credit card entirely. There are fees associated with starting an installment plan ($105) but you can get it lowered through direct debit or if you have low income. The interest rate (currently in the low single digits) will be much better than what a credit card will be charging you.
Credit utilization is a measure of how much of your available credit you are currently using and a smaller number is better (using less of your available credit). When you put your tax bill on your credit card, it will increase your credit utilization and potentially lower your score. This can have a big impact if you plan on buying a house or taking on a loan within the next few months. This will have an even bigger one if you don’t pay off your bill in full and continue to carry that debt, along with the expensive interest.
Fix Your Withholding
If you have a large tax bill and are currently working, fix your withholding. It’s clearly not working unless you can identify why your taxes were so high relative to your withholding. You can do this by talking to your company’s HR department and they should be able to help you fill yours out properly. You’ll want to make sure that you are paying enough taxes this year because if you are again short, and having followed the safe harbor rules , then you might be assessed a penalty. If you are concerned, speak to a tax professional and they should be able to help.
(Photo: thetruthabout )