Occasionally, charging your taxes is OK
By Ben Woolsey
In recent years the IRS and most state taxing authorities have begun to accept credit cards for tax payments. Whether you need to charge your tax bill because of a cash shortfall or because you want the opportunity to rack up credit card rewards such as cash back rebates or frequent flifer miles, it's a nice option to have -- if used rarely and wisely.
The downside of using your credit card for tax payments is the fee. The taxing authorities must collect 100 percent of the taxes owed and cannot pay credit card companies the traditional merchant fee (usually between 2 and 3 percent). When a customer buys merchandise with a credit card, the merchant must absorb this fee (collecting only 97 cents on the dollar). So for the convenience of accessing a credit card for payments of taxes, a nominal percentage fee is levied to the taxpayer.
Taxation experts say it is better to maintain control of your money throughout the year as opposed to paying too much or too little to Uncle Sam.
Maury Randall, professor and chairperson of finance at Rider University, says that letting the government sit on your money "is like giving the government an interest-free loan."
Frank L. Festi Jr., CPA, CFP and shareholder of Rea & Associates Inc., says that you shouldn't let anyone have your money if they aren't paying you for it. Pay your fair share of taxes -- no more, no less, he says. "If you have credit card debt, you should strive to pay the minimum taxes required and pay as much on your credit cards as possible each month."
Getting yourself in the situation of paying too little, and then not being able to pay your taxes without borrowing, is the worst scenario. It could be the result of an emergency, or it may reveal a lack of financial discipline. Either way, it's a problem.
Not only is there a fee for paying taxes with a credit card, but "the interest rate for most people is higher than what the government would charge under their available installment payment arrangements," Festi says. "Taxpayers should use the option with the lowest interest rate for them. When you elect to pay the IRS, that amount will be completely paid for after a year, which may not be the case if a person isn't dedicated to paying off credit card debt."
Randall says that for those who have already amassed a large amount of credit card debt and lack self-discipline, allowing the government to hold onto the money may be your best option. "If they kept the money, would the person do the right thing -- control their spending and keep the card debt lower -- or would they spend the money and end up in trouble? Might the temptation of having the money available mean that they wouldn't handle it properly?" Randall asks. "If they really need a forced savings plan and they don't have a savings plan in the place of their employment, they really could be better off with over-witholding."
To comment on this story, write Editors@CreditCards.com.
More credit card news.
Updated: April 8, 2008
- Money and credit lessons learned from TV – Whether they're frugal or free-spending, our favorite and classic TV characters are fountains of financial advice ...
- American consumers getting a grip on debt – More American consumers are paying down -- and even paying off -- their debts, according to a September survey commissioned by Wells Fargo & Co. and conducted by Ipsos Marketing, a marketing research company ...
- Credit sin: Does credit save or condemn you? – Will using plastic land you in hot water with your almighty? Depending on the belief system, card use might require some repentance ...