You Can Pay Your Taxes With a Credit Card — Here’s Why You Shouldn’t

Cropped shot of an unrecognizable man using a credit card and a laptop to shop online at home.
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Realizing you owe taxes can be a stressful moment, often leading to the crucial question: Can you pay taxes with a credit card? While using a credit card offers convenience, it’s important to think carefully about this option for tax payments. Exploring the potential consequences of using a credit card to pay taxes can help you weigh its impact on your financial health. Keep reading to learn more and discover alternative ways to manage your tax obligations.

Can You Pay Taxes With a Credit Card?

Yes, you can pay taxes with a credit card, but it’s not always the best choice. While this method offers convenience and can even earn you rewards points, it also comes with significant drawbacks. Understanding these can help you make a more informed decision about how to handle your tax payments.

The Cost of Convenience: High Fees and Interest Rates

One major reason to reconsider paying taxes with a credit card is the associated fees. Typically, third-party processors charge a fee for credit card transactions, which can range from 1.5% to 3.5% of your payment. This might seem small, but it adds up, especially with large tax bills.

Moreover, if you can’t pay off the credit card balance immediately, you’ll be subject to high interest rates. Credit card interest rates are usually much higher than other financing options, making this an expensive way to cover tax debts.

Impact on Credit Score and Debt Management

Using a credit card to pay taxes can also impact your credit utilization ratio, a key component of your credit score. High balances can lower your credit score, making future borrowing more difficult or expensive. Additionally, it can lead to a cycle of debt if not managed carefully.

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When Using a Credit Card To Pay Taxes Could Make Sense

There are two situations in which it might be smart to use your credit card to pay your taxes. Some credit cards offer a cash-back bonus for charging a certain amount within the first three months — $150 if you spend $1,000, for example. In this situation, using your credit card to pay your taxes makes sense if you would not otherwise spend enough to qualify for the cash-back bonus.

The other situation involves an introductory interest rate. Some credit cards offer a 0% interest rate for the first year or so. If you have a card on which you are charged no interest, and you cannot pay your tax balance in full in cash, putting it on a credit card will be less expensive than setting up a payment plan with the IRS. Just be sure you can pay it off before your credit card interest rate goes up.

Paying Taxes Smartly With a Credit Card

While generally not recommended due to high interest rates and fees, if you choose to pay taxes with a credit card, there are ways to do it smartly:

  • Leverage reward points: If your credit card offers reward points or cash back, paying a large tax bill can accumulate significant rewards. However, ensure the rewards outweigh the transaction fees and interest.
  • Avoid carrying a balance: To avoid high-interest charges, pay off the credit card balance as soon as possible. Carrying a balance can quickly negate any potential benefits of using a credit card.
  • Choose the right card: Use a credit card with the lowest interest rate or a promotional zero-interest period. This can reduce the cost if you’re unable to pay the balance immediately.
  • Monitor your credit utilization: Large charges like tax payments can significantly impact your credit utilization ratio. A high credit utilization can negatively affect your credit score, so it’s crucial to manage this carefully.
  • Plan for the fees: Be aware of the convenience fees charged by the payment processors. Calculate these costs and factor them into your decision to ensure it’s financially sensible.
Make Your Money Work For You

Alternatives To Paying Taxes With a Credit Card

Paying taxes with a credit card isn’t your only option. There are several alternatives that can be more financially sound.

IRS Payment Plans

For those who cannot pay their tax bill in full, the IRS offers payment plans. These include short-term plans for those who can pay within 180 days without any setup fees and long-term payment plans for larger tax debts. The long-term plans come with a setup fee but provide manageable monthly payments and generally lower interest rates compared to credit cards.

Personal Loans

Taking out a personal loan to cover your tax bill can be a cost-effective alternative to using a credit card. Personal loans often have lower interest rates, reducing the overall amount you’ll pay in interest. Additionally, they come with a fixed repayment schedule, giving you a clear timeline for paying off your debt and helping you avoid the pitfalls of prolonged credit card debt.

Home Equity Lines of Credit

For homeowners, using a HELOC to pay taxes can be an attractive option. A HELOC allows you to borrow against your home’s equity at lower interest rates compared to credit cards. While the interest on HELOCs is not typically tax-deductible when used to pay taxes, this option provides a feasible way to manage larger tax bills.

Borrowing From Retirement Accounts

In certain situations, tapping into retirement accounts like 401(k)s or IRAs might be an option. Borrowing from a 401(k) should be done cautiously, as it could affect the growth of retirement savings. Similarly, withdrawing from an IRA might come with penalties and should be considered only after understanding the implications on long-term retirement savings.

Make Your Money Work For You

Final Take

Deciding how to pay your taxes is a significant financial decision. While you can pay taxes with a credit card, it’s essential to consider all aspects — fees, interest, credit impact and debt risks. In most cases, alternative payment methods offer a more sustainable and financially sensible approach. By evaluating all your options, you can choose a payment method that aligns with your financial health and long-term fiscal goals.

Karen Doyle contributed to the reporting for this article.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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