New York State Tax

Credit Cards and Tax

When April 15 rolls around every year, many Americans are faced with the decision of how to pay their income tax bill. It is generally recommended that individuals plan for their tax liabilities and save a sufficient amount of additional cash in order to pay these bills immediately. However, in some circumstances, this is either not possible or there are other benefits to using a credit card to pay their tax bill. It is important to consider both the pros and cons prior to using a credit card in this way.

The most obvious benefit of using a credit card to pay one's tax bill is earning rewards on this payment. Some cards allow cash back or points on all purchases and payments. However, even when using the card to earn additional rewards, it is vital to find out the specific rules of your individual card. Many cards will put a limit on the cash back earned or will disallow certain types of payments. Using a credit card will also slightly extend the time period allowed to pay the tax bill without any additional paper work. It is important that in both these situations, one pays the credit card bill by the due date, otherwise the benefits earned will be entirely outweighed by the interest charged by the credit card company.

Credit card interest is obviously the greatest drawback of paying a tax bill with a credit card. There is also an additional fee charged by the government to use a credit card. This fee is 2.5% of the total taxes paid. This will add an additional $25 to a $1,000 bill. This type of debt can also be a red flag for credit rating agencies and could actually result in a reduction of credit limits or increased interest rates.

Fortunately, the IRS offers a wide variety of options for individuals that need additional time or assistance in paying their tax bill. The easiest option is to pay the taxes late. The IRS only charges 1% per month. This is significantly less than the interest charged by most credit cards. The federal government also allows for payment plans to be set up with a small upfront fee plus monthly interest payments. These are often much better choices for paying a large tax bill than using a credit card. However, each taxpayer must evaluate their own unique circumstances to determine the most advantageous way to pay off their federal tax liability.

Use these resources if you need help filing your income tax return or need to speak to a professional bookkeeper, accountant or CPA.