Tax Time – Should you pay with a credit card?

The short answer is this is a pretty bad idea.  Let’s discuss why.  For the sake of this article, let’s assume you will not be carrying the balance on your card, have exceptional credit and are simply looking to use this option to maximize your points or rewards.

Let’s look at the economics of this method of payment.  The IRS’s web site has this handy table that provides all the options.

Service
Provider

Telephone

(English and Spanish)

Website

Convenience
Fees

(Credit Card Option)

Convenience
Fees

(ATM/Debit1 Card Option)

Customer
Service
Number

Link2Gov Corporation
1-888-PAY1040tm 

(1-888-729-1040)

2.35%3
$3.892
1-888-658-5465
RBS WorldPay, Inc.
1-888-9-PAY-TAXtm
(1-888-972-9829)
1.95%3
$3.892
1-888-877-0450    (live operator)
1-877-517-4881(automated,  24/7)
1-888-877-0450 (live operator)
2.29%3
$3.892
1-888-877-0450      (live operator)
1-877-517-4881(automated,  24/7)
Official Payments Corporation
1-888-UPAY-TAXtm
(1-888-872-9829)
officialpayments.com/fed
2.35%3
$3.952
1-877-754-4413
1.90%3
1.90%
1-866-964-2552
1 The ATM/Debit card must be a Visa Debit Card, or a NYCE, Pulse or Star Debit Card.
2
Flat fee per transaction.
3
Contact the service provider to receive up-to-date information regarding fees.  The minimum convenience fee is $3.89 for L2G and RBS, and $3.95 for OPC.

As you can see the cheapest “Convenience Fee” applies to the Official Payments MasterCard Option.  This method will cost you 1.9% of the amount charged.  This is limited only to MasterCard.  The RBS WorldPay, Inc. option via PayUSTax.com of 1.95% for credit, but offers the choice of Visa or MasterCard.

If we take a look at NerdWallet.com’s list of top rewarding MasterCard and Visa offers, for those with perfect credit, you will see that the most rewarding MasterCard is only 1% cash / value back, while with Visa you can get up to 2% back (in Venture Rewards).

So in theory, you may be able to scrap together 5/100ths of a % of value here and possible a bit more with sign up bonuses. But that is hardly worth it.  For example, if you had a huge $50k tax bill, this would only net you about $25 in bonus – hardly worth the effort.  More realistically, on $5000 in taxes that would be only $2.50.  Again, not worth it.

What if you don’t have any other choice?

First off you always have a choice and using your credit card is probably the worst possible option!

  • The interest on the credit card will more than like be 10% to 30% depending on your credit
  • Some credit cards will consider this a cash advance and charge additional fees and interest
  • There are better options

Here are some better options to consider:

  • $25,000 or less in combined tax, penalties, and interest can use the Online Payment Agreement (OPA) or call the number on the bill or notice (have the bill or notice available, along with the social security number). A fill-in Request for Installment Agreement, Form 9465 (PDF), is available online that can be mailed to the address on the bill.This does carry fees (Approximately $105) and interest (~4%), but both are way less than the credit card option.
  • More than $25,000 in combined tax, penalties, and interest may still qualify for an installment agreement, but a Collection Information Statement, Form 433F (PDF) may need to be completed. Call the number on the bill or mail the Request for Installment Agreement, Form 9465 (PDF) and Form 433F (PDF) to the address on the bill.
  • The IRS has a page on the topic here.  Note, financing through the IRS may be the best option as their rates are based on the Fed’s short-term rate + 3%… as opposed to credit cards which are usually the Fed Prime rate (3.25%) + something.  Tip: Be sure to shop around though!

  • Consider getting fixed 1, 3 or 5 year loan through a site like Prosper.com or LendingClub.com.  Here you can get loans starting at ~6% fixed for 3 years.  Way better than a credit card, assuming you have good credit.  Lower credit will have higher rates.

As always, be sure to get advise from your tax or financial adviser.

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