Thinking of paying your taxes with a Credit Card? Understand all the costs

Thinking of paying your taxes with a Credit Card? Understand all the costs

Tax period can be very stressful, especially if you do not have money to pay for what you have incurred. While a credit card can be a convenient way to cover your bill, you must understand all the costs.

Because tax laws prohibit the IRS from accepting direct credit cards, the federal government grants this option to three third-party services: Link2Gov Corp., Official Payments Corp., and WorldPay US. All their charges are in a convenient ratio. The discount rate for the payment of taxes on the credit card varies between 1.87 and 2% of the fee, depending on the third-party service used.

You can also pay by credit card if you use tax preparation software with integrated electronic files and electronic payments, although the rates tend to be higher. Those who use a debit card will pay a fixed fee of between $ 2 and $ 3.95. You can also pay with your digital wallet; Normal debit or credit card fees will apply.

Let's take a look at a $4,000 hypothetical tax bill and how much it would cost to pay by credit card.

You Will Pay a Lot More If You Cannot Pay the Balance Of The Card

When you change your debt from IRS to your credit card issuer, you pay interest on the balance. If you only pay minimum payments, this year's tax bill can haunt you a lot more.

A 0% Balance Transfer Card Saves Time and Money

You can open a balance transfer credit card and transfer all your tax payments to it. Balance transfer offers to people with good credit an interest-free period, ranging from a few months to a year.

A 0% rate on one-year promotional credit cards is probably a good deal. "But you'd better repay that credit card in a year.

Also, remember that if your payment is late, your interest rate may increase drastically.

To transfer a balance, you usually pay a commission of about 3% of the balance transferred, and people with imperfect credit cannot benefit from a transfer covering the full amount of the bill.

A Cash Advance Convenience Check Is an Expensive Option

Credit cardholders can also pay the bill with a check-in advance, but this option has a high price. Here's why: Advance checks have high transaction fees, high-interest rates, and no grace period, making it an expensive option.

"Cash advances generally have a higher interest rate than other purchases and generally do not have a grace period."

The IRS Payment Contract Spreads Out Payments

Before removing the plastic, compare the payment costs with the credit card to the costs of a settlement agreement with the IRS.

With a phased payment plan, taxpayers typically have six years to repay a debt. This means that the minimum monthly payment would be the total amount due divided by 72.

You will have to pay a commission to set the installment schedule ($149 or $225, depending on whether you apply online or by mail, phone or IRS office), interest and late fees. Installment fees are reduced to $ 31 or $ 107 if payments are deducted from your bank account. Taxpayers whose incomes meet the poverty-related guidelines of the Ministry of Health and Social Services can benefit from a reduced rate of between $ 31 and $ 43.

The costs do not stop there. Even if you have a payment plan, you will have to pay a late penalty of 0.25% per month until full payment of the debt.

Also, interest, combined daily, must be taken into account. The interest rate, equivalent to the short-term federal rate plus 3%, is set quarterly.

If you select a payment agreement in the payment, remember that you will not receive any tax refunds before paying off the debt. Instead, the repayments will be applied to any remaining debt.

Cards Vs The IRS Payment Contract?

Some, including the IRS, encourage the use of credit cards to make tax payments to earn rewards, such as net miles or frequent refunds. However, card issuers generally award prizes of 1% of their expenses, with third party convenience costs exceeding 2%.

"Taxpayers would probably pay more than third parties for exchange points."

Another thing to keep in mind: an IRS payment agreement will not affect your credit, but while paying with your card, it will increase your debt load. This would affect your credit utilization rate, which could lower your score, leaving you with higher interest rates and a lower credit line.

Ideally, you should have enough money withheld on your earnings throughout the year not to have to fight for tax money. But if your savings do not cover the taxes, you must determine which method of payment will cost you the least.

Whichever option you choose, you should plan to have more money to make sure you do not run out of funds next year.

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