If your 2012 tax liability is larger than you anticipated and you don't have the funds to cover your tax payment, setting up a payment plan with the IRS or getting a loan may not be your only options. The IRS accepts credit card payments for Federal income taxes, which means you could make your tax payment with an American Express, MasterCard, Visa, or Discover card. Paying taxes with a credit card can be convenient and save you money--but there are some drawbacks. Regardless of how you choose to pay your taxes, you need to file your return on time to avoid interest charges and penalties from the IRS.
Here's a closer look at the pros and cons of paying taxes with a credit card:
Benefits of paying taxes with a credit card. Convenience - the IRS accepts credit card payments made by phone, online, or through the e-filing system. You can authorize the transaction quickly and easily, and you won't need to use any payment vouchers to complete the transaction.
Immediate payment - choosing to pay your taxes with a credit card means the government will receive the funds on time and you won't be subject to late-payment penalties and other fees. Then it's up to you to make payments to the credit card company and take care of the debt on your own timeline.
Opportunity to earn credit card rewards - if you use a rewards credit card, you may be able to earn points, cash back, or frequent flier miles for your transaction. Such gains can be significant when your tax liability is more than a few hundred dollars and you can cash in those rewards at your convenience. However, not all rewards programs allow cardholders to earn rewards for payments to the IRS. Check your cardholder agreement for rewards eligibility requirements and to find out if there is a cap on any a cash back rewards.
Potentially lower interest charges - if your only options to take care of that tax liability are to take out a personal loan with a high interest rate or put the balance on your credit card with a lower interest rate, paying with a credit card could help you save money. You wouldn't have to worry about any early payment penalties if you were able to pay a larger amount in a given month, and you would earn less interest on the balance for as long as you carried that liability.
Drawbacks of paying taxes with a credit card. Convenience fees - the IRS does not charge processing fees for credit card payments but you might end up being charged a convenience or flat fee. These fees are usually calculated as a percentage of your transaction amount, so make sure you're coordinating the transaction through a company that charges the lowest fees.
High interest charges - if you are charging your tax liability to a high-interest credit card and aren't paying off the balance in full within a few months, you will be subject to high interest charges. The longer you take to pay off the balance, the more interest you will accumulate and you may end up reaching or going over your credit limit. Take the time to compare credit cards and terms to see how much available credit you have. If you're trying to maintain good credit, you'll want to avoid charging a large balance on the credit card that has the smallest credit line.
Potential changes to credit report - if the amount you charge to your credit card is fairly large and you carry that balance for several months or longer, you could damage your credit score. Remember the amount of available credit you have is one factor in determining your credit score, so you want to do whatever you can to increase that amount. Consider the pros and cons of charging that large amount to a credit card you may not be able to pay off within a reasonable amount of time.
Learn how to earn cashback rewards without spending extra cash and other useful credit card tricks from Sabah Karimi's personal finance website, WiseBread.com.