The Rules for Paying Taxes with a Credit Card

Catherine Misczuk
April 13, 2017
Taxes And Credit Card

Tax season is here. In fact, the deadline is quickly approaching. That means procrastinators, those dealing with confusing filings, and others who are avoiding the big bill are now looking this fateful day in the eye. But, there’s also the early filers who have already collected their returns.

What many taxpayers don’t know, though, is that you can pay your taxes with your credit card. The IRS lets you pay your dues with access to approved third-party sites. But, while more people are discovering this new way to pay off your taxes, it’s not the best practice for everyone and there are many factors to consider from IRS payment plans to processing fees and if points and cash back are actually profitable.

The Internal Revenue Service authorized three third party sites to handle credit card payments from taxpayers. But, these third party sites charge a fee, which is usually between 1-2% of your total payment. The IRS notes none of this fee will go towards the government, and simply goes towards operational costs for the third party.

Many taxpayers like the idea of paying with a credit card because it is convenient. And because of quick processing, many people who have waited until the last minute can get their taxes paid on time and avoid any late fees. But, there are some limitations as outlined by the agency:

Not all IRS tax forms are eligible for payment by credit or debit card, and there are limits on how often you can make individual and business payments. Visit the frequency limit table by type of tax payment for details. High balance payments of $100,000+ may require coordination with your credit card provider Most credit card payments cannot be canceled You can’t make Federal Tax Deposits

But, the IRS does facilitate a lot by offering credit cards as a form of payment. For example, if you overpay on your taxes, they send you the money -- not the credit card company. That means it’s money in your pocket, not ‘credit’.

Another thing to note is that the processing fee is deductible on personal taxes the following year as a miscellaneous itemized deduction if it is more than 2 percent of adjusted gross income (learn more about that here). If you’re paying taxes on your business, you can also count it as a business expense.

If you want to use your credit card to spread out your payments, though, it’s also important that you know the Internal Revenue Service has payment plan options. You can spread your payments out over years, so if you have a very large bill you can take the time to pay it all out. “Commit to what you know you can pay,” explained Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. “You can always pay more.”

Paying with a credit card is a great option if you want to pay off your taxes quickly and easily. But, the absolute first thing you need to do is make sure you have a large enough line of credit to cover your IRS payment. If you don’t have the credit in the first place, this isn’t an option.

What might also be obvious, but imperative to point out, is that if you don’t have the money to pay your bill up front at the end of the month, paying with your credit card can really cost you in interest. And as Weston points out, “If I need to have my credit card available for emergencies to pay for expenses, because I might not have a rainy-day fund set aside, [I’m] better off not adding that credit card debt.”

Another major draw to paying with a credit card is all the rewards points and cash back that could be awarded. But, it’s important to not dive in head first. Doing the math on what it costs to process a credit card payment in the first place (which is usually between 1-2 percent) with how much cash back you can earn (which is also usually between 1-2 percent) can make you realize it might not be worth it. For example:

2017 tax bill: $3,000 Credit card payment fee of 1.5%: $31.50 Credit card cash-back rewards of 1.5%: $31.50

If this is your scenario, you don’t actually end up making any profit. And, the cash back is usually only redeemable in authorized marketplaces or on credit card statements.

A card with a points system though can be more profitable. Points can add up to be more in certain marketplaces, and if you know you can earn points you’ll use on say, your next vacation flight, then this might be a good option for you. At the same time, it is important to understand your cards limitations on this, and if there is a minimum you need to spend per month or a certain amount of purchases you need to make too. Ben, who runs the popular blog One Mile at a Time, notes: “While no one likes paying taxes, you might as well maximize the return you get out of that spend.”

At the end of the day, paying your taxes with your credit card should be an educated decision that is made off of a variety of factors. By understanding your financial situation, the IRS rules and the rules of your own credit card you can make the best decision for you.

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