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Paying Taxes with a Credit Card Isn't Worth It

Thinking about paying your federal taxes with your credit card? Think again. While the Internal Revenue Service will accept credit card payments for taxes due, the IRS works with third-party collectors who charge a service fee per transaction.But what about racking up airline rewards or collecting points? It's not worth it. These third-party collectors charge an average 2.35 percent on transactions, which completely cancels out any credit card with rewards. For example, if you owe $2000 in taxes this year and plan to pay by credit card, it would cost $2047 -- which means you would spend an extra $47 on taxes to collect roughly $20 in rewards points. Ouch.

Is the IRS Charging a Premium on Credit Cards?

Not exactly. Credit card companies charge a fee for each transaction a card holder makes. However, when you charge an item in a store, the merchant generally chooses to not pass on the credit card processing fee to the customer as a way of encouraging more credit transactions. On the other hand, thanks to the Taxpayer Relief Act of 1997, the Treasury prohibits the IRS from paying credit card transaction fees. The submission of any credit card payment must go through one of these third-party IRS e-pay service providers.

How to Avoid Paying Fees on Your Taxes

Obviously, paying your taxes with your credit card isn't your only payment option. The government gladly accepts payments made by check or money order made out to the "United States Treasury." Otherwise, you have the option of paying your balance electronically through an Electronic Funds Withdrawal or by paying with a debit card (which includes a flat fee of $3.89 per transaction).

Setting up Payment Installments

If you can't pay your entire tax balance in one fell swoop, your credit card might seem like your last hope. Luckily, there are other options like establishing a Federal taxes payment installment plan. Payment options will change based on the applicant, but here are a few key points to remember:

  • You must file and pay your taxes by April 18, 2011.
  • If you need more time, you can submit for a six-month extension. During the extension, you will not incur a penalty, but a 5 percent interest rate will accrue on the total tax balance.

If you have a larger tax balance after the six-month extension process, the IRS suggests financing payments of your tax liability through personal loans or credit cards, as the interest rate and applicable fees by banks and credit card companies are typically lower than the combination of penalties and interest from the Internal Revenue Code.

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Logan Abbott's picture

Logan Abbott is a personal finance and credit card expert with over 5 years of experience writing about each topic. He is a graduate of the USC Marshall School of Business, and also contributes to other online finance publications. He has been quoted in the New York Times, San Diego Union Tribune, TheStreet, and more.

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