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Planning To Pay Tax Bill With Credit Card ?

  Sanjiv Gupta CPA  Published 
Planning To Pay Tax Bill With Credit Card ?

It is the time of the year to pay taxes, again. Have you planned for your tax payment? If you are thinking about the various options available to pay your taxes, you should certainly consider paying taxes using your credit card.

Don’t panic!! After all, paying your tax using your credit card is not a bad idea at all.

Let me explain how you can benefit by paying tax using your credit card.

Credit cards are extremely dangerous if they are not used with due care. Caution should be exercised about the payment date and the amount. Nevertheless, if they are used wisely there is no better option than a credit card to manage your payments. By paying your tax through a credit card, you can buy time to repay the money. Though making payments through a credit card will lead to paying interest, the rate of interest charged by the credit card company is way lower than what the IRS would charge for defaulting on tax payment.

Let us consider this classic example. Assuming that the last date for payment of tax is April 20th, IRS would start charging interest on any outstanding tax from the due date to the date the tax is paid in full. The current rate of interest is 3%, which is revised quarterly, and the additional interest rate for late payments is another 0.5% a month. If a taxpayer is late by one year, the total interest rate would work out to approximately 9%. On the other hand, for a credit card with an interest rate of 4% annually and another 2.4% interest rates as a one-time convenience fee, that a third-party service provider charges for using a credit card, the total interest rate still works out to around 6.5%. So, on a $20,000 bill, the savings would be approximately $500. For someone using a 0% credit card, the savings could still increase. But the point of concern here is the due date for the credit card bill payment. If the credit card dues are not cleared in time, all the savings accumulated here will go down the drain.

For people, who are unable to avail of a credit line, this option may make no sense. Such people may approach the IRS and set up payment options with the department. Of late, IRS has unveiled schemes for taxpayers who need less than 4months to settle their tax amounts. Under this arrangement, tax filers can avail of a certain grace period where they can still pay their taxes, penalty-free. But the details of this arrangement need to be checked with the department as these rules and programs are not fixed and may vary from each tax year to the next.

All said and done, it is very important to pay taxes on time. Considering that the penalty rate may go up to as high as 9%, it is very important for tax filers to figure out ways and means that are cheaper and affordable to them. For all those who hold a credit card, the above-mentioned option could prove beneficial and worthwhile to give it a try and pay taxes on time.