Considerations When Paying Your Federal Tax Bill With a Credit Card
If you owe the IRS taxes, and you can pay in full, it is always in your best interests to pay the balance off because IRS penalties and interest can be avoided. If not possible, using a credit card is a viable option, but it must be compared with other possible options such as a a bank loan, or a payment agreement with the IRS (called an Installment Agreement).
The IRS will allow you to pay your taxes with a credit card. The benefit here is you avoid IRS failure to pay penalty and interest, which is currently .5% per month and 3% respectively on the tax amount owed. The 3% IRS interest rate is updated quarterly. However, on the flip side, all of the IRS e-pay service providers charge a convenience fee with the lowest being 1.89% currently (see below).
After you account for the convenience fee you will have to pay, you need to find a credit card with a low APR (10.90%-20.99% is the range now) and or with a long 0% APR introductory promotional period (some are 18 months). You also need to make sure you can obtain the credit limit that you need to cover the amount you can’t pay of your tax bill. If you can pay off the credit card within the 0% promotional period, your only cost is the convenience fee from the e-pay provider you select. However, if you cannot, with an APR of 10.90%, currently you are probably better off setting up an IRS Payment Plan, applying for a personal bank loan or setting up a home equity line of credit (if you own a home) . The chart above should give you a visual breakdown in general of what you need to consider. It excludes the promotional credit card offers out there now (5-18 months generally). Furthermore, it doesn’t include the home equity line of credit possibility since not everyone owns a home.
If you decide to setup an IRS Installment Agreement, there is a fee you must pay with your first-month’s payment (ranges from $52 to $105) and you will need to fill out form 9465, which can be found at IRS.gov. The IRS with their Fresh Start program made it easier for individuals to setup a monthly installment agreement with balances up to $50,000 as long as the taxpayer decides to make the payment method direct debit. If you owe more than $50,000, setting up a payment agreement is possible, but generally will require you to fill out a collection information statement that will provide the IRS with a current snapshot of your financial situation. IRS payments plans generally are granted if you have previously filed your taxes, don’t have other agreements with the IRS, are not in bankruptcy, and the taxes owed are not more than 5 years old. Interest on your unpaid tax balance is compounded daily (currently 3%) with an additional .25% a month failure to pay penalty. The IRS basically will cut the failure to pay penalty in half (generally .5%) if you setup a payment agreement.
Figuring out what is your best option can be tricky because the amount you owe will sometimes determine your possible options. When in doubt, ask a financial advisor or work with a tax professional such as a CPA, or Enrolled Agent. For more information on IRS Payment plans, visit BackTaxesHelp.com or click here to find out more details on setting up a payment agreement with the IRS.
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Comment from Grover
Time October 29, 2012 at 3:15 pm
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