Many taxpayers won’t receive happy news when the file their taxes this year — so many, in fact, that H&R Block employees are having to play therapist with their clients.
For the more than 30 million taxpayers who may actually owe money to the Internal Revenue Service this year, a credit card likely isn’t the best way to go when paying off their tax bill.
The IRS has three card processors that are approved to handle payments from debit or credit cards — and all three charge a fee for these transactions. For credit card transactions, the fee ranges from 1.87% to 1.99%, with a minimum fee of $2.50. If consumers pay their owed taxes by check, there’s no fee.
“In most cases, this will wipe out the value of any rewards you would earn,” said Ted Rossman, industry analyst at CreditCards.com.
And that’s before taking into consideration how quickly interest can accrue if a consumer carries over their tax-related balance.
Another key point: not all tax forms are eligible for card payments. Check this IRS page for more information.
Also see: More Americans are taking longer to pay off their credit-card debt
Here’s what you should consider if you’re on the hunt for rewards
To be sure, card holders could come out slightly ahead from a rewards perspective with certain cards. In particular, the Citi Double Cash C, +0.77% card offers 2% on all purchases, which would include tax payments, meaning that cardholders would at least break even from a rewards perspective relative to the IRS card processing fee. This would also be the case with the Capital One Spark Miles for Business COF, +0.83% and the Blue Business Plus Credit Card from American Express AXP, +1.10%
Putting your tax bill on plastic can also help you if you’ve recently opened a new credit card and are trying to meet a certain spending amount to unlock an introductory offer. For instance, as travel and finance website The Points Guy notes, the Ink Business Preferred Credit Card from Chase JPM, +0.06% offers new card holders 80,000 rewards points after they spend $5,000 within three months of opening their accounts. Given how large a hurdle that may be, a big charge such as a tax bill would go a long way in hitting that mark.
Additionally, travel cards such as the JetBlue Plus Card JBLU, +1.32% or the Hilton Honors Ascend Card HLT, +0.81% from American Express offer special rewards once consumers reach a spending threshold — Mosaic elite status in the case of the first card, and a complimentary weekend night with the Hilton card.
That all said, the rewards-related benefits vanish if a card holder doesn’t pay their tax-related balance in full. Credit card interest rates are at an all-time high, averaging 17.64%, according to CreditCards.com.
For instance, if a consumer pays $4,000 in taxes with a credit card that carries 15.59% interest and then pays off that balance over 12 months, they will be forking over $80 for the IRS credit card fee plus more than $350 in interest.
In other words, if using one’s tax payment as a rewards-generating strategy, it’s important to have enough money in the bank to cover the bill.
Here’s what you should do if you can’t afford to pay your tax bill
Some consumers will naturally want to turn to their credit card as a way to pay off their taxes over time if they don’t have enough money in the bank when it’s time to file.
People in this position can seek an installment plan directly from the IRS by filing a form 9465 with the return (either on April 15 or Oct. 15 if a taxpayer files for an extension.) Consumers can suggest their own payment terms and propose a repayment period of 36 months or less. Generally, these requests are approved automatically if the taxpayer owes less than $10,000.
If you go that route, you’ll need to pay a $31 user fee. You’ll also be charged interest at 0.25% each month on your remaining unpaid balance. If taxpayers do this, they cannot apply for installment payments for their taxes the following year, unless their bill has been fully paid off.
The only alternative people may want to consider aside from the IRS installment plan — since the interest rate they charge is far lower than commercial lenders — is putting their tax bill on a credit card with a 0% interest introductory period. “If you’re disciplined about your payments, the 0% credit card is your best bet,” Rossman said.