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Don’t Pay Your Taxes With Your Credit Card!

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Credit card companieS!Image by eliazar via FlickrI received a kind letter from American Express today. It was addressed, “Dear Ryan.” How nice.

Then the letter went on to tell me how convenient it would be for me to pay my tax bill with my American Express Business Gold Rewards Card… In fact, I could earn one Membership Rewards Point for virtually every dollar in taxes that I charged to my business card!

You can pay your taxes with a credit card?

Yes you can. It turns out there are two IRS approved companies that are able to process credit card payments over the phone or on-line. The two companies, Link2Gov and Official Payments, charge a “convenience fee” of 2.49%. That was in the fine print at the bottom of the kind letter AmEx sent me.

I’ll be honest, I really like my AmEx business card (especially because I received a nice credit card bonus to sign up for it!). But just because I like my card, doesn’t mean I will use it to pay my taxes!

Does it make financial sense to pay your taxes with a credit card?

I’m not sure what your reward points are worth, but I doubt mine are worth 2.49% on my business card (at least not on this type of purchase). Since I owe $1,100 on my taxes this year, it would cost me $27.39 to pay my taxes. Keep in mind these fees are on top of tax software or accountant fees, and any transaction or interest charges if not paid in full. For me, it doesn’t make sense (¢ents) to use my rewards card.

While it doesn’t make sense in my situation, there can be benefits to paying your taxes with a credit card. If you have a credit card that offers 3-5% cash back, then this might not be a bad move if you have the funds to pay your taxes in full when the bill comes. It also frees up cash flow and allows you to defer payment for another month or so. But for most people, I just don’t see this as being a good option.

As for me, I owe $1,100 and I will mail the check on April 14th. (Traffic is generally awful on the 15th!). It will probably take a couple days for the IRS to process the check, so that money will remain mine for awhile longer – earning interest, just as I prefer!

You can pay your taxes with a credit card, but that doesn’t mean it’s a good idea. If it earns you enough cash back, then consider it, otherwise leave it alone!


Published or updated April 6, 2012.
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{ 17 comments… read them below or add one }

1 Curious Cat Investing Blog

Good post. Paying huge fees on top of taxes is a bad idea. I find it so annoying that credit card companies try and trick “customers” into paying them huge fees. If you have to hide what you offer customers that is a very bad sign. Honest, ethical behavior would require stating obviously what will be charged. But instead these credit card companies try and fool you into obligating yourself.

The idea that business moves were amoral should have disappeared with the end of the robber barron era. The behavior of credit card companies is disheartening. If you are embarrassed by the true offer you have for customers don’t try and trick them – give them a deal you are not embarrassed to present to them.

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2 Mrs. Micah

I guess the government won’t foot the usage charge that most businesses have to put up with. Makes sense.

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3 Dividend growth investor

I think that paying your taxes through a credit card does make sense for certain taxpayers. Let’s say you barely make ends meet and it would be difficult to come up with $1100. If you had to borrow money to pay IRS, you’d most likely end up in one of those payday loan places..
Another advantage to paying via a credit card is if you just signed up for a credit card with 0 percent interest for 6-12 months. Pay the $1100 now with a credit card and then make minimum monthly payments for 6-12 months and then pay off the credit card in full at the end of the zero percent offer period. At the same time collect interest payments (open one of those online accounts with bonuses).

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4 Alan

Some points are really nice to play with, air miles for instance. Hard to get but worth it in the end. But I don’t know if they would be worth the 2.5% extra to pay on your cc. People should be careful with using there credit cards for taxes. Imagine what could happen if you couldn’t pay the cc out, just another ploy to get you to pay more.

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5 Jesse

Honestly, on top of the whole “not worth it for rewards” Id add “not worth it due to hassle.” Applying for a cashback credit card, then getting it, activating it, paying taxes with it, then paying it off….just too much hassle for 20 bucks!

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6 Ken Clark - CollegeSavings.About.com

I agree… this seems to be a rip-off.

Even if you file, but can’t pay your taxes, the “failure to pay penalty” is 1/2% per month… compare that to an unpaid credit card at 1-2.5% per month!

Make sure you file though… that is just the failure to pay penalty… failure to file is like 5% per month!

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7 Eden

I guess paying your taxes on a credit card beats going to jail for not paying…but outside of that I hope there aren’t too many people doing this.

I also received a similar offer- from Chase I think. I laughed when I saw the email subject and saved it in my inbox in case I felt like writing a post on it.

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8 Curious Cat Investing Blog

I am willing to bet using a “no interest” credit card that way will make you sorry. Not seeing the credit card companies promise I predict they will try to trick you out of your money. I bet they treat this as something not allowed for the free rate period. My guess is they probably have similar rules about cash advances. They charge you huge fees up front and they charge you a huge interest rate on top of that starting the day you pay (not when you get your bill). But I could be wrong.

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9 Frugal Dad

There is very little I agree with putting on a credit card, and taxes are near the bottom of that list. You are right in advising to steer clear, unless you are doing to solely for the rewards.

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10 Ryan

Frugal Dad,

Even then doing it for the rewards would be a stretch for most people. Still, there may be a few cases where it is worthwhile.

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11 PT

Yeah, sad for the person who resorts to using this method.

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12 Trent Hamm

The only reason to consider doing it is if you get a reward of some sort that actually exceeds the value of that 2.49%. If you have a credit card that actually does this, you’re quite lucky.

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13 Ryan

Trent, I agree. Most rewards cards don’t pay more than 2-3% unless it is an introductory rate, or for certain purchases such as gasoline or grocery stores. The only other way I can think that this would be a viable option would be if you had serious cash flow problems and a credit card with a 0% introductory offer for several months. Even then, I wouldn’t want to chance it.

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14 Dieselmania

amex gave a promotion earning you double MR points for paying your taxes. $1100 = 2200 MR points = 2200 airlines miles. for an average ticket of $400 (25000 miles) your 2200 miles are worth $35.2 which is more than the $27.39 fee to pay your taxes with the card. It all depends on how you will be using those points you earn. in your case it was a small benefit. Compare to people who have to pay 20K to 30K in business taxes.

PS. you are still earning interest on your $1100 until you pay your amex card 30 days after april 14th.

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15 The Sim

I paid my taxes last year with a 0% purchase credit card, and intend to do it again this year. I have a card with sufficient line of credit with 14 months of 0% interest introductory rate remaining. I will pay minimum payments each month, keeping the cash in an online savings account earning ~3%, then pay it off in one lump sum at the end (it was better last year when you could get 4.5%). After taxes on the earned interest (!), it works out to pretty much 0 gain or loss for paying your taxes this way, but the benefit of not having to actually pay out most of the cash for an additional year (always nice to have cash on hand in case of emergency, if it doesn’t cost you anything). To my knowledge, these transactions are considered ordinary purchase transactions by the credit card companies (this was my experience last year), and will be treated as such on your bill. The extra 2.49% is simply included as part of the purchase price by the payment processor.

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16 The Sim

ps, sometimes you even get cashback rewards on purchases even for the 0% intro rate cards, so this can be an even larger incentive.

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17 Ray

Easy Money, I used my Citi CashRewards card which pays you back 5% for the first 3 months on anything you spend it on. Let’s see 2.49% from 5% = 2.51% profit.

I’ll pay off my credit card like I do every month and I just made 2.51% for using my credit card. I love how people are so negative with the possible negative events which could happen.

Obviously, If I don’t pay my credit card then I would be charged interest… really? I had no idea that would happen. – This is no different than anything else in life. If you know the rules and you pay your bills and read the fine print you will be fine. If you can’t function outside the box, then don’t use your credit card. I know how to use my credit and milk them for all the free rewards and 0% money they will throw at me.

This is a great deal if you can make more than the 2.49% fee, otherwise don’t use your CC.

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