Should You Pay Your Taxes With A Credit Card?

If you own your own business or have not been deducting enough from your paychecks each week, you will probably owe some income taxes when tax time rolls around. This is never fun, and if you do not have the money in your checking account right now, you might be tempted to pay the taxes with your credit card. A word of advice: don’t.

When you owe income tax to the federal government or the state government, they are aware that the amount you owe may be over the amount you have access to at the moment. They prepare for this eventuality by allowing taxpayers to file for an extension to pay their debt. You can arrange for a payment plan to be in effect for the total amount.

You will, of course, pay interest on the amount that you are putting off, but the interest rate that the government charges are relatively low. With state governments, this number will vary, so check with your local state tax office. But for the federal government, the current interest rate on unpaid taxes is seven percent, which is the federal short-term rate plus three percent.

Now consider your credit card. Most credit cards carry an interest rate of anywhere from twelve to twenty-one percent. If you owe taxes you can’t pay, you probably have a higher interest rate credit card. This means that whatever you pay in a lump sum to the government, you will be financing your credit card company at the interest rate you pay for your regular purchases. If this is fifteen to twenty percent, you will end up paying much more for your taxes.

In the end, it pays to work within the government’s system of extensions and take their lower interest rate on the amount of your tax you cannot pay yet. If the payment play they offer you is still too steep for you to pay each month, call the hotline number provided on the offer and request another plan be arranged. You may need to show proof of your income to do this, but it will be worth it, so you don’t default on the unpaid taxes.