A Credit Card Could Give You Extra Time to Pay Your Taxes

If tax day for you is lurking like a black cloud, consider using a credit card to cover the tab. When I was a freelancer, my tax bill was over $5,000. While other folks celebrated their refunds, I was preparing to pay the IRS a hefty sum.

To get some much-needed breathing room, I applied for a credit card that featured an introductory 0% purchase APR and a high enough cash-back rate to cover any processing fees. By using it to cover my tax bill, I was able to break up that bill into more than 12 payments, at 0% interest.

What to know before using a credit card to pay your taxes

If you're facing other debt or working to repair your credit, you should consider an IRS payment plan before turning to a credit card.

Even the best credit cards for bad credit don't offer enough perks to make charging your tax bill worthwhile. However, if you have good credit, you can use a card that earns you some combination of rewards, a welcome bonus and introductory interest-free financing to make the transaction advantageous. That's exactly what I did when I faced this dilemma a few years ago.

But you'll need to do some math to make sure your credit card won't cost you more. The IRS and state websites typically charge credit card processing fees of up to 2%, while online tax software services may charge you as much as 2.49%. So you'll want the right mix of credit card benefits -- plus no annual fee -- to neutralize processing fees and come out on top.

How do you pay taxes with a credit card?

You can make your payment directly on the IRS website, with your choice of two third-party payment processors for a credit or debit card. 

Each processor charges about 2%, but it can be more expensive if you use a credit card to file your taxes using an online software service like TurboTax or H&R Block. The fees are broken down in this chart on the IRS website. You can pay directly by selecting  "make a payment" under the payment processor of your choosing.

You can also pay by calling the payment processors directly using the numbers listed on the IRS site. The same fees will apply. 

The IRS says your transaction is safe and secure, and your information will be used solely to make your payment. And it notes that the agency doesn't see any part of the card service fee, which you can deduct for business taxes. If you're worried about security, though, using a virtual credit card can offer additional privacy.

There are some limits on the number of credit card payments you can make with the IRS per year -- you're limited to two in most cases, and you can use two different credit cards for each payment if you want. If you own a business or are self-employed, you can also use your credit card to make estimated tax payments throughout the year.

The benefits of paying taxes with a credit card

If you're going to pay your taxes with a credit card, you can rack up some bonus rewards points or get cash back. 

While the rewards I earned by paying with a credit card were nice (I didn't take home too much after the fee was covered), the true draw for me was being able to take my time with the payment without worrying about interest. I also earned the card's welcome offer, which essentially knocked a couple hundred dollars off my tax bill. 

Even if you have the money to pay off your tax bill, you might consider paying with a credit card if your tax bill is large enough to help you earn a welcome bonus or some extra rewards. Just be sure your credit card's rewards rate exceeds the payment processor fee. 

For example, if you're paying with a credit card using Pay1040, the fee is 1.75%. It's worth charging your taxes only if you're using a card with a reward rate that earns at least 2%. And if the card doesn't come with an introductory purchase APR offer, make sure you can pay off the balance in full before interest begins accruing. Otherwise, you'll be better off signing up for an IRS payment plan.

But be careful, even if your card gives you more time to pay down your purchase. If you don't pay off the balance within the given introductory APR time frame, the balance will accrue interest at the card's variable rate. And with average credit card interest rates over 20% APR, you could end up with an even more expensive payment than you started with.

Tips for using a credit card to pay off your taxes

Here's what to keep in mind if you use a card to pay your taxes, particularly one with an introductory purchase APR:

• Figure out how much you'll need to pay monthly. The key to successfully using an intro APR comes down to getting the balance to zero before the promotional period ends. To do that, you'll have to calculate how much you'll need to pay monthly. Divide your card balance by the number of months in the introductory offer and you'll have your answer.
• Don't use the card for any new purchases. It's hard enough to pay down a large balance in time before it starts accruing interest. If you're adding new purchases on top of what you owe, it'll take even longer.
• Don't get enticed into overspending. If your tax bill isn't enough to earn the card's welcome bonus, don't tack on new purchases to earn it. Focus instead on paying down the balance. Once your taxes are paid off, if there's still time, you can focus on trying to earn the bonus through normal spending habits. Be intentional -- you're trying to use the credit card to improve your finances. Any overspending or any interest charges will set you back rather than put you ahead.

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