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This article was last updated Mar 20, 2015, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
There are several stages that savvy credit card users go through when they find out that they can pay their taxes with a credit card. Their first reaction is usually one of delight. Paying taxes with a credit card can initially appear to create numerous opportunities ranging from interest free financing to earning rewards. But then the second stage arrives, when taxpayers realize that there will be considerable “convenience fees” from using a credit card to pay their taxes.
This fact will dash their hopes of getting a free loan or earning additional points, miles, or cash back at no additional cost. Ultimately, many taxpayers arrive at the third and final stage, where they realistically evaluate the true cost of paying taxes with a credit card, and figure out some scenarios where this can work in their favor.
How Much it Costs to Pay Taxes With a Credit Card
The IRS authorizes several companies to accept tax payments on its behalf. This is appealing to consumers because an online tax payment is convenient; however, some money may be lost this way. A list of these companies, and the fees they charge can be found here. The fees range from 1.87% to 2.35% depending on the company and the type of credit card used. On the other hand, paying taxes with a debit card results in a flat fee of just $2.49 – $3.50 per payment.
The Advantages of Paying Taxes With a Credit Card
First, there is the sheer convenience of paying taxes online. Taxpayers are spared the effort of writing out a check, addressing an envelope, purchasing a stamp, and mailing payment in. Paying with a credit card also produces an immediate confirmation, so taxpayers won’t be concerned that their payment may be lost in the mail.
In addition, there are some situations where the rewards earned can exceed the cost of the convenience fees paid. For example, many cards offer a sign-up bonus that requires a minimum spending threshold be reached within a limited time period. If paying taxes with a credit card is the only way to reach that threshold and earn the bonus, than the fees paid may be worth it.
The Starwood Preferred Guest® Credit Card from American Express has a solid welcome offer that allows new cardholders to get 25,000 bonus Starpoints® after you use your new Card to make $3,000 in purchases within the first 3 months. But since spending all that money in the given time frame may not be possible for some cardholders, making a significant tax payment on this card might be worth incurring $50 -$100 in order to earn the bonus Starpoints, which could easily be worth hundreds of dollars in travel rewards. *This offer and/or promotion has since changed, expired, or is no longer available.
The Barclaycard Arrival Plus® World Elite Mastercard® lets customers earn 2x miles on all purchases, as well as a 5% rebate on miles redeemed, for a combined total of 2.1% of rewards. Considering that the lowest fees are only 1.87%, cardholders can earn 0.23% net rewards on their tax payments.*This offer and/or promotion has since changed, expired, or is no longer available.
Finally, cardholders can consider paying their taxes to receive 0% intro APR interest rates from a credit card that offers promotional financing. For example, the Citi Simplicity® Card - No Late Fees Ever offers an intro APR of 0%* for 18 months on Purchases*. That’s a long period of interest-free payments. That can be well worth the convenience fees for some cardholders.
The Downsides of Paying Taxes With a Credit Card
First, many credit cards will simply not offer rewards worth 1.87% to 2.35% of the total amount spent. But more importantly, taxpayers may be tempted to finance their tax bill using their credit cards at their standard interest rates. At these rates, typically 12 – 28% APR, interest charges will be rapidly incurred. For those who are already trapped in credit card debt, this can just put them further into debt.
Perhaps the biggest reason you shouldn’t use high-interest rate credit cards as payment is because the IRS may have a better option. The IRS will allow taxpayers to set up installment plans at much lower interest rates than the typical credit card. And if its just convenience that taxpayers are truly seeking, not financing or rewards, than their best option will be to pay their taxes using a debit card, absorbing the fee of approximately $2 to $3.
When taxpayers understand the true costs and benefits of using a credit card, they can then choose the best option for their needs.
Receiving a tax refund? Read this article.
* Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.