Should You Use a Credit Card to Pay Your Tax Bill This Year?
KEY POINTS
- If you can pay your tax bill in full, charging it on a credit card could make sense if you have a great rewards program.
- If you can't pay in full, you're probably better off getting onto an IRS payment plan than putting the whole charge on your credit card.
So you submitted your taxes, only instead of getting a refund this year, you actually owe the IRS a pile of money. If it's the first time you've owed, that may come as a shock. But there could be a number of reasons why you owe money for the first time, such as if you earned side hustle income last year you never paid estimated taxes on or if you earned a lot of interest in your savings account due to higher rates.
If you have a tax bill to tackle, you may be wondering whether it makes sense to pay it using a credit card. And the answer is, it depends on the sum you owe and the benefits your credit card offers.
There can be benefits to paying a tax bill with a credit card
If you have a tax bill you can pay in full -- meaning, you have the money in the bank to cover it 100% -- then it could pay to put that expense on your credit card. See, the IRS does charge a fee to pay your tax bill by credit card, and that fee ranges from 1.82% to 1.98%. But if your credit card gives you at least 2% cash back, you stand to come out ahead by using it. (Granted, you're not making much cash back, but it's something.)
It could also make sense to pay your tax bill using your credit card if you've recently gotten a new card and are trying to meet a spending requirement to snag a sign-up bonus. Let's say you got a new credit card on April 1 that will give you $150 back for spending $3,000 within three months of opening your card. If you normally only charge $800 a month in expenses, you'll end up a little short of the target. But if you have a $750 tax bill, and your credit card gives you enough cash back to make up for the IRS fee you'll pay, then it could make sense to use that card and meet your spending requirement.
Don't use a credit card if you can't pay in full
When you have the money to pay your tax bill in full, charging it on a credit card could make sense. But if you'll be carrying that balance, then using a credit card may not pay.
Let's say you owe $2,500 and your credit card charges 24% interest. If it takes you 18 months to pay off that balance, you'll be looking at $502 in interest alone. So in that case, it could make more sense to sign up for an IRS payment plan.
Now when you get onto an IRS payment plan, you do incur interest and penalties on your tax bill until it's paid in full. But you may not pay nearly as much as what your credit card charges.
For example, as of this writing, the interest rate the IRS charges for underpayments is 8%. But if your credit card charges three times as much, you're apt to fare better with the IRS.
Besides, credit card interest compounds daily, which means your interest can accrue rapidly. The IRS compounds interest quarterly on unpaid tax bills, so aside from the lower rate, you're not accruing interest at as rapid a pace.
The IRS also charges a 0.5% penalty for late tax payments per month or partial month your payment is late, up to 25%. That penalty isn't waived when you go onto a payment plan.
However, for a balance of $2,500, it's $12.50 per month initially. Technically, 18 months of a $12.50 fee is $225. But that assumes you're paying the full penalty each month, which you won't be. Instead, you'll be paying down your balance under a payment plan and therefore whittling down the principal amount the penalty is based on.
All told, using a credit card to pay a tax bill could make sense, but it may not be the best option for you. Run the numbers to see which payment method will cost you the least.
Our Research Expert
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