So the worst has happened after calculating your tax return: you owe money in taxes this year. Is there a way to make lemonade out of the grand experience of forking over a big chunk of cash? How about racking up some rewards points or travel miles on one of those rewards credit cards? Well, it isn't quite that simple.
At MyBankTracker.com, we love credit card mileage and other rewards points, but we also believe that it doesn't make any sense to spend a lot of money for too little reward. The good news is that you can pay a tax bill with a credit card, but the downside is that the associated fees can be substantial.
None of what follows is a solid replacement for meeting with a qualified tax planner with ample experience in managing debt and personal finances, but the information will help you ask better questions along the quest to save money and get more out of the finance tools you have.
Payment handling services
The IRS website lists the percentage charged by third-party services that allow you to pay by debit or credit card, whether you e-file or pay by mail.
Rates are as follows:
- They start at 1.87 percent for payments by mail
- Can go as high as 3.93 percent for e-filing, but
- The average is about 2.35 to 2.50 percent in either case.
- At 2.35 percent, you'll pay23.50 for every1,000 owed.
- In addition, each service charges a handling fee of2-3, so it is important to crunch some numbers and decide if it is worthwhile.
Do the math, but weight the goals
Since it costs money to pay with a credit card, it's important to do the math to see if the gain in rewards points or mileage bonuses offsets those charges. However, there are other reasons that are perhaps less tangible in terms of dollars that might make paying taxes on the rewards card a smart idea.
Will the amount paid in taxes and fees push you over a spending threshold and into a higher rewards bracket? Will the extra spending bump you into any other bonus category? If so, then the associated perks might be worth spending a few extra dollars. All of these factors depend on the terms of your card, so it is important to look at the terms closely.
Now for another caveat. You need to know how the bank that issues your credit card will treat the expenditure. Will it be treated like any other purchase, or will it fall into the category of a cash advance? Cash advance terms are usually more costly in the long term, because the interest is usually higher, and the non-cash advance principle needs to be paid off before your monthly payments are applied to the cash advance balance. This means you are paying the higher interest rate for longer on a cash advance. Other associated fees may also be incurred.
Credit card convenience checks
Credit card convenience checks might be an option to pay your taxes, earn points, and skip the fees paid to third-party credit card processing services, but may come with the same additional fees and balance principle problems as cash advances, or worse. Know the terms before signing on the dotted line as every bank manages this differently for different cards and accounts. Read your user agreement carefully and call the bank to clarify. Ask for the details in writing in case you don't have the most up-to-date terms.
Know your payment habits
None of what has been written above takes credit card interest rates into account, and assumes the debt incurred from the tax payment will be paid off in full during the billing cycle to avoid accruing interest. If the debt can't be paid off right away and the interest is high, considering other options might be a good idea. Perks aren't worth much if the cost exceeds their value.
Shirley Pulawski is a freelance journalist who frequently contributes to MyBankTracker.com.
