Eric Bronnenkant, head of tax at Betterment, said it’s certainly an option even though it’s a high-interest one. He said consumers need to consider four things before using their credit card to pay their tax bill.
The IRS, by law, is unable to pay any credit card transaction fees. Thus, all IRS payments will be handled via a secure third-party the agency uses. These fees are percentage-based with convenience fees of $2.50 to $2.69 with percentages from 1.87 percent from two percent of the entire tax bill and the card used. For 2017, the flat fee to pay a tax bill by debit card was no more than $4.
For people paying off a large tax bill with money in the account, paying by debit card is the sensible option. A list of the approved payment companies and their convenience fees you can see at this link to the IRS website, a list of online loan company’s websites you can find here .
Cash Flow Issues
If you are unable to pay your tax bill before it comes due, you can pay by credit card. This keeps you from paying the IRS penalties, accrued interest and fees. However, if you can swing it and are granted permission, you can set up an installment payment plan with the IRS. This is especially worthwhile for anyone that has a large tax bill and would pay more in interest on the credit card balance.
Most cards provide some kind of cash back or another incentive program. If you pay your tax bill through your credit card and can pay it off without the balance going into the next month, you may want to look at the processing fees and the rewards benefits. What is the economic approach here?
If you need to carry the balance into the next month, consider a card that has a zero or low short-term interest rate.
If your tax bill isn’t very much, putting the debt won’t do much to your credit score. The larger the tax bill, the higher your credit utilization ratio will be. The ratio looks at the total debt against your available credit. The ratio should be less than 30 percent. If you have anything more than 50 percent, creditors deem you not-so-creditworthy.
Most people who e-file pay their tax debt by credit card, but you can also pay it by phone if you’d like. Credit cards are a smart option if you don’t want to carry a balance, want to get rewards from the “purchase” or just don’t have the money on hand to pay the debt off before tax time.