This article was last updated on January 31
With tax season nearing an end many tax payers may find themselves owing taxes to the IRS or to their state tax agencies. Cash flow may be a bit tight, so they may opt to pay via their debit or even credit cards. But before doing so, it pays to be beware of the impacts and associated costs with paying your taxes on credit.
How to Pay with your Debit or Credit Card
Paying with your debit or credit card is actually quite easy and most online tax preparation software lets you do this; normally through an IRS approved 3rd party processor (see screenshot below from the IRS.gov site on approved processors). Taxpayers can e-file or paper-file early and then make a payment by credit or debit card later, to delay out-of-pocket expenses. Best of all, if enrolled in a card reward program, taxpayers may earn miles, points, rewards or money back from the credit or debit card issuer. American express and Chase Visa cards, both offer a low cost (with rewards program benefits) approved way to pay taxes through your tax filing software and have no additional costs above the standard convenience fee.
Also, as with most online payment transactions today, paying with credit or debit card is safe and secure because standard, commercial card networks are used. Payments must be made electronically through tax preparation software, a tax professional or a card payment service provider via phone or Internet. The IRS does not receive or store card numbers nor will it disclose payment information for any reason other than processing the transaction authorized by the taxpayer. A confirmation number is provided at the end of the phone or Internet transaction, and the “United States Treasury Tax Payment” is included on the card statement as further proof of payment.
If you pay by credit or debit card, you will have to pay a service or convenience fee (see next section below), which will be included on your bank statement as a “Tax Payment Convenience Fee” (or similar transaction)
Credit or Debit Card Convenience Fees
While paying with a credit or debit card is convenient, you should be fully aware of the fees you may have to pay. Most providers charge a 1.5% to 2% convenience free for paying taxes with a credit or debit card as you can see in the graphic. For example, Official Payments Corporation which handles the processing of payments for leading tax preparers like Turbo Tax charges 2% for credit cards and between $2.25 and $3.95 for ATM/Debit Card transactions. Even though a 2% fee looks small, it would add $100 to a $5,000 tax bill, and if a taxpayer doesn’t immediately pay off the credit-card bill, interest charges from the credit card can create an added debt burden.
The IRS however does note that the convenience fee is a deductible business and individual expense and can be treated as a miscellaneous itemized deduction (subject to the 2% limit).
Other factors to consider:
– Know your credit limit before you charge your taxes. If you are close to your limit, be aware making the charge could hurt your credit score.
– Verify that the tax payment will be treated as a purchase and not a cash advance because cash advances come with high interest rates and typically a 3 percent cash advance fee.
– There is a limit on the number of credit card payments you can make – which means making partial payments is not really an option. Generally the limit for most tax forms (like 1040 for individuals and 940 series for business) has a maximum of 2 credit card payments allowed per tax year.
– The IRS does not receive or charge any fees for card payments. Convenience fees are charged by the service providers so the IRS cannot pay or reimburse any convenience fee to taxpayers.
– If you can’t afford to pay your taxes now, see if you can set up an installment plan with the IRS. The interest rate now is 4 percent for underpayments. Another option may be a personal loan with a bank or credit union where you could receive a lower interest rate, and that rate will likely be fixed, unlike the IRS interest rate and a credit card’s interest rate, which both may change.