Yahoo Finance 2 Reasons To Pay Your Taxes With a Credit Card
When it comes to paying taxes, the majority of Americans typically e-file their taxes and pay by drawing money directly from their bank account. In fact, e-filing has become the most popular form of tax payment with nearly 94% of all tax payments in 2022 being filed electronically, according to Pew Research.
However, there are other ways to pay your taxes, including IRS Direct Pay, making a cash payment at participating retailers or even using your credit card. When you pay your taxes with a credit card, several advantages come with it when done strategically. Here are the reasons you may want to consider paying your taxes with a credit card — and potential drawbacks to keep in mind when doing so.
Earn Cash Back or Rewards
Many credit cards offer points, miles or cash back for every dollar you spend — even on taxes.
“This could be a great way to rack up a bunch of rewards all at once, especially if you have a highly rewarding rewards card or if you’re eligible for a sign-up bonus that requires you to spend a certain amount in a particular time frame,” said Erika Kullberg, attorney and personal finance expert.
Additionally, paying your taxes with a credit card can turn this mandatory expense into an opportunity.
“If you owe a couple thousand dollars for example, getting 3% cash back on that means $30 added back to your account,” said Scott Lieberman, founder of Touchdown Money. “If your processing fee was $20, you’d make money by using a credit card to pay your taxes.”
Added Flexibility
Another advantage of using your credit card is the cash-flow flexibility it provides if you have a credit card that allows you to spread out the cost over time.
“This can be especially handy if you have an unusually large tax bill you need to pay off in a timely manner but favor having the option of stretching out the payment over a longer period without crushing your cash flow,” Kullberg said.
Paying with a credit card can also help if you don’t readily have the cash available to pay your taxes.
“If you know you can get the cash soon and can avoid interest charges, paying taxes with a credit card now can get the IRS off your back while you pay the bill with zero or one extra interest payment,” Lieberman said.
Potential Drawbacks of Using a Credit Card
While these are great benefits that come with paying your taxes with a credit card, there are some disadvantages to watch out for if you don’t use your credit card strategically. For instance, although the IRS allows you to pay your taxes with a credit card, doing so will require a processing fee, which is a straight charge on every transaction.
“In the case of credit cards, it ranges between 1.87% and 3.93% of your payment,” Kullberg said. “Add that to the rewards you accumulate with your credit card and it is easy to see how, within no time, you might be paying more for the payment than what you would for using any other form of payment.”
Also, if you don’t pay off your credit card on time, this can result in interest payments or late fees.
While paying taxes with your credit card can be a great advantage when it comes to potential rewards and cash-flow flexibility, it’s important to keep in mind possible fees if you truly want to make the most of these benefits.
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This article originally appeared on GOBankingRates.com: 2 Reasons To Pay Your Taxes With a Credit Card
