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Why paying your taxes on a credit card is often a bad idea

It is better to set an installment arrangement

It is better to set an installment arrangement with the IRS rather than putting your tax payment on a credit card, experts say. Photo Credit: Getty Images/iStockphoto / alfexe

Taxes have to be paid, and putting them on your credit card might seem a good option. Maybe you need more time to come up with the money, or you’re imagining the rewards you could rack up by putting a big expense on your card.

But paying the IRS with plastic probably isn’t a good idea, and here’s why.

  • You’ll pay processing fees

When you buy something with a credit card, the merchant pays processing fees to the financial institutions that handle the transaction. But when you put a tax payment on a credit card, the IRS doesn’t pay those processing fees. You do.

To pay federal taxes with a credit card, you have to use one of the IRS’ third-party credit card processors, which charge fees of 1.87 percent to 2 percent of the amount you put on the card. If you use software such as TurboTax to file returns and pay taxes online, the fees may be higher.

These fees could eat up your credit card rewards. Most cards offer only a 1 percent to 1.5 percent rewards rate for this type of transaction.

  • You could incur interest charges

“Depending on the interest rates on your credit card, you could end up paying a lot,” says Trish Evenstad, president of the Wisconsin Society of Enrolled Agents, a group of tax experts. Her advice to people who can’t pay in full: “Pay as much as you can by the April 18th due date, then you can set up an installment agreement with the IRS to pay the remaining balance.”

For 2017, it costs $31 for qualified taxpayers to set up an installment agreement online and pay via direct debit from a checking account, according to the IRS website. That’s in addition to 4 percent annual interest on unpaid federal taxes and a penalty of 0.25 percent of the outstanding balance for each month the agreement is in effect. That works out to an annual percentage rate of about 7 percent in interest.

It’s a much better deal than 13.61 percent, the average APR for all U.S. credit card accounts that were assessed interest in the last quarter of 2016, according to the Federal Reserve.

  • You could hit your credit limit

Charging a big tax bill on your card could put you within spitting distance of your credit limit, making it easy to max out the account and incur penalties. Your credit could also suffer.

  • Better ways to pay

If you have the money to pay your tax bill, pay by check or direct debit to avoid fees.

If you need more time, an installment arrangement with the IRS likely is your best option.

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