The IRS has implemented a number a changes to it’s policies in the last several years, and believe it or not, some of them (such as free e-filing) are actually beneficial to the taxpayer! Paying your taxes with a credit card, however convenient this may appear, is most likely not a wise financial decision for most people.

There are a number of reasons a taxpayer might be drawn to the appeal of charging Uncle Sam’s “annual fee” on a credit card.  The most obvious (and potentially worst) reason for using a credit card is that an individual just doesn’t have the money to pay their taxes. On the other end of the spectrum, self-proclaimed saavy credit card users (like me) are always looking for ways to rack up additional rewards points by using cards for “all necessary expenditures”. And taxes certainly fall in that category, for the majority of us– Right?

The problem is, you are paying for this convenience,  and the fees can be significant– ranging from roughly 2.5 to 4.0 percent of your payment amount.  Ouch! For a $2500 payment, this “convenience fee” may be in excess of $100, at these rates. This fee is not donated (er, paid) to the IRS, either– it is paid directly to an intermediary, or service provider, that the IRS has identified as an approved source for handling transactions.

The best choice for making your tax payment if you are unable to afford payment when due is to consider the IRS installment payment plan. Although there is a small fee to set it up (about $50) and automatic bank account deduction will be implemented as part of the repayment agreement, and you can spread payments over 5 years or less. The interest rate you will be charged is significantly lower than a typical credit card rate (federal short term interest rate plus 3%) , and this variable rate will be calculated quarterly. Unless you are able to secure a dynamite introductory rate on a credit card and pay off the debt in full during the promotional period, the installment plan is likely to always be superior to “the good old fashioned” credit card.

And those rewards cards? Unless you can find one that gives a blanket 5% or more for ANY purchase, good luck justifying the convenience fee. It makes no sense to “charge it”  if the cost outweighs the reward, and I’ve never seen “tax payments” as a bonus category on any of the multitudes of credit cards I’ve utilized over the years. That’s not to say it’s impossible to beat the fee (sometimes credit cards offer temporary teasers, such as 5% cash back on “all purchases the first XX number of months) but these often also have a cap as well ($500 is typical), so be sure you do your math before swiping.

The use of credit cards to pay your tax bill may sound appealing, but definitely consider the cost of this convenience before paying with plastic!

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