Thinking about slapping Uncle Sam's bill on your credit card? It might cost you a lot more than you think.
Worried about how you're going to pay your tax bill? It might be tempting to slap it on plastic. After all, you've probably heard you can charge taxes due on your 2004 federal income-tax return on your Visa, MasterCard, Discover Card or American Express. What if you want a filing extension? No problem. You can just charge what you expect to owe the IRS. And if you owe estimated taxes for tax-year 2005, you can charge those, too. In fact, in some states, credit-card payments are available for your state income-tax bill as well.
Clearly, charging your taxes is convenient. And with the right card, you can even rack up some extra frequent-flier miles (or other goodies) to boot. So what's wrong with this picture?
The "convenience fee," that's what. It amounts to a hefty 2.5% of the amount you charge. It's like the fees merchants pay credit-card companies when you charge your purchases. Only in this case, the "merchant" is the Internal Revenue Service, and Uncle Sam isn't interested in turning 2.5% of his revenues over to the card companies, which means you have to pay it. Until now, you may have been blissfully ignorant of these merchant fees, but you will become painfully aware of their bite when they come directly out of your own hide. The money is collected by one of the two vendors that facilitate these transactions (Official Payments Corp. and Link2Gov Corp.), and split with the card issuers.
Granted, paying $10 for the convenience of charging a $400 tax bill to your credit card isn't really a sin. But what about paying $125 on a $5,000 tax bill? And in addition to that, your friendly credit-card company steps up and starts charging you interest (often at 12% or more annually), unless you pay off your bill within the grace period. Bottom line? You can probably find a better way to dig up the money to foot the bill.
Our suggestion? Try to find other (less expensive) ways to raise the cash needed to pay your taxes. Perhaps your credit union, your parents or your rich brother-in-law. Also, don't overlook the IRS itself. You may qualify to set up an installment payment plan with the government. If so, this is often the cheapest way to go. You'll be charged a $43 setup fee and then a monthly interest rate on the outstanding balance. Currently, that interest rate is .71% per month (which equates to 8.5% annually). However, the interest rate is subject to change every quarter.
Of course, if you have a credit card with a very low APR -- say 5% or less -- this could turn out to be the cheaper option. That is, provided you really do pay off your tab in a reasonable amount of time (i.e., before that introductory rate jumps up to something much higher). If so, visit officialpayments.com or pay1040.com to process your payment.