Pay Your Taxes by Credit Card and Score Some Points!

How many of you build, track, and maximize credit card points for personal benefit? I certainly understand the strategy. If you already have to pay a big tax bill, the idea of earning thousands of points, miles, or cash-back rewards in the process can be pretty appealing.

And yes, you can pay federal taxes with a credit card. But before you throw a $20,000 tax bill on your favorite rewards card, you need to understand the processing fees, interest costs, IRS rules, and rewards math. Paying taxes with a credit card can make sense in the right situation, but don't assume the points automatically make it a good deal.

How to Pay Your Taxes With a Credit Card

Whether you file your individual income tax return electronically or on paper, the IRS allows you to make certain federal tax payments using a credit card or debit card through an approved third-party payment processor.

The IRS currently lists Pay1040 and ACI Payments, Inc. as approved processors. These companies charge their own processing fees, which are separate from the taxes you're paying. The IRS currently shows Pay1040 charging 1.75% for personal credit cards and ACI Payments charging 1.85%, both with a $2.50 minimum. You can also use certain digital-wallet options through the approved processors.

Here's the important part: always start at IRS.gov when you're ready to make the payment. That way, you can see the processors currently approved by the IRS, compare their current fees, and make sure you're sending your money through the right service.

Advantages of Paying Taxes With a Credit Card

There are several reasons why using a credit card to pay your taxes might make sense.

1. You Can Delay the Cash Leaving Your Bank Account

Paying by credit card satisfies the tax payment while shifting the balance to your credit-card company. That can give you additional time before the cash actually leaves your bank account. But remember, you're not eliminating the debt. You're moving it.

2. You May Avoid IRS Failure-to-Pay Penalties

If you use a credit card to pay the IRS balance in full by the payment deadline, you aren't leaving that particular tax balance unpaid with the IRS. That can help you avoid failure-to-pay penalties and IRS interest on that amount. But again, you're replacing IRS debt with credit-card debt, so you need to compare the costs.

3. You Can Earn Credit Card Rewards

Here's the fun part. Depending on your card, you may earn:

• Airline miles
• Hotel points
• Cash back
• Flexible travel rewards
• Other credit-card rewards

If you're going to pay the IRS anyway, earning a pile of rewards sounds fantastic. But do the math. The payment processor charges a fee, so your rewards need to be valuable enough to justify that cost.

Disadvantages and Fees

There are two major downsides you need to consider.

1. Processing Fees

The IRS doesn't charge you a fee for paying by card, but the approved payment processor does. Credit-card fees are generally charged as a percentage of the payment, while debit-card payments may have a flat fee depending on the processor and type of payment. These fees can change, so always double check current IRS-approved processor fees before making your payment.

For personal federal income taxes, don't automatically assume the processing fee is deductible. The IRS does state that card processing fees associated with paying business taxes can generally be deductible business expenses.

2. Credit Card Interest Can Get Expensive Fast

This is the big one. Do not assume your credit card is cheaper than owing the IRS. If you're carrying a balance on a high-interest credit card, the interest could quickly wipe out whatever benefit you received from the points or miles. If you can't pay the credit card off quickly, compare the total cost against other options, including an IRS installment agreement.

Can Credit Card Rewards Make Paying Taxes Worth It?

Possibly, and this is where things get interesting. Let's say you're making a large tax payment and your credit card earns valuable rewards. If the value of those rewards exceeds the processing fee, you could potentially come out ahead. But don't simply compare percentages.

Maybe you're trying to hit a minimum-spending requirement for a substantial new-card bonus. Maybe you're earning travel rewards you know you'll actually use. Maybe your card gives you a straightforward cash-back percentage.

Run the numbers based on your card, your processing fee, and the actual value you'll receive. If you're paying a 1.85% processing fee to earn 1% cash back, congratulations, you just paid extra money for the privilege of earning fewer rewards. That's not a strategy.

On the other hand, if the rewards or bonus you're earning are worth substantially more than the fee and you're going to pay the card off without incurring interest, the math may look very different.

Credit-card rewards earned through ordinary purchases and spending are generally treated as rebates or discounts rather than taxable income. However, not every bank bonus or reward program works exactly the same way, so don't assume every reward you ever receive is automatically tax-free.

What Taxes Can You Pay With a Credit Card?

The IRS permits credit and debit card payments for a variety of individual and business tax obligations, subject to the processor's rules and payment limitations.

Depending on the payment type, this can include:

• Individual income tax balances
• Estimated tax payments
• Extension payments
• Installment agreement payments
• Certain amended return balances
• Certain penalties and other individual tax obligations
• Certain business tax payments

However, not every federal tax obligation can be paid by credit card. For example, employers generally cannot make required federal tax deposits by card. Before making a payment, check the IRS payment page for the specific tax form and payment type you're trying to pay.

Paying Taxes With a Credit Card When Filing an Extension

Here's another useful option. If you need additional time to file your individual federal income tax return, you can generally receive an automatic six-month extension by making an electronic extension payment and properly designating it as an extension payment. In that situation, you generally don't need to separately file Form 4868.

But remember my rule about extensions: An extension gives you more time to FILE. It does not give you more time to PAY.

Your estimated tax balance is still generally due by the original payment deadline. Paying that balance by credit card is one way to make the payment while still giving yourself additional time to finish the return.

What About State Taxes?

Some states also allow taxpayers to make state tax payments using a credit or debit card. But don't assume the federal system applies to your state. Federal and state tax payments are separate, and each state can have its own processors, fees, restrictions, and payment procedures.

Check directly with your state's taxing authority before making the payment.

Credit Card or IRS Payment Plan: Which Is Better?

If you're considering a credit card because you don't have the cash to pay your tax bill, stop and compare your options before clicking "submit." A credit card isn't automatically better than an IRS payment plan.

Look at:

• The credit-card processing fee
• Your credit-card interest rate
• How quickly you can pay off the card
• Current IRS interest rates
• Applicable IRS penalties
• The cost and terms of an installment agreement
• The value of any credit-card rewards you'll receive

For qualifying taxpayers who timely filed and enter into an approved installment agreement, the IRS failure-to-pay penalty can generally be reduced from 0.5% to 0.25% per month while the agreement is in effect, although IRS interest continues to accrue.

So don't make the decision based on the fact that you'd rather owe Chase or American Express than the IRS. Run the numbers.

And if you already have the cash sitting in your bank account and don't care about credit-card rewards, remember that the IRS also offers electronic payment methods that don't carry the same credit-card processing fee.

The Bottom Line

Yes, you can pay your taxes with a credit card, and in the right circumstances, it can be a smart move. You can earn points, miles, or cash back, give yourself some additional cash-flow flexibility, and make sure the IRS gets paid by the deadline. But the points aren't free if you're paying a processing fee to earn them, and they're certainly not free if you carry the balance and start paying credit-card interest. Know the fees, know the value of your rewards, and run the numbers before you make the payment.

And here's the bigger issue: if you're using a credit card because a huge tax bill caught you completely by surprise, we need to talk about more than your payment method. We need to talk about your tax strategy. Book a Comprehensive Tax and Business Consultation with my team at KKOS Lawyers. They can look at your income, business structure, estimated payments, deductions, and overall tax picture to help you plan before the tax bill arrives. Earning points on a tax payment is great. Finding legitimate strategies that reduce the tax bill in the first place is even better.