If you have considered paying your taxes with a credit card, you’re not alone. The urge can be strong, if only because of the convenience factor. Some investors are tempted to pay this way in a lower income year, or if they are unprepared on April 15th, because they feel it’s the smart call to be billed at a later date. But doing so can have serious consequences. Let’s talk about some of those repercussions, why you should never pay taxes with a credit card, and what alternatives you have.
Using a Credit Card Will Cost You More
The IRS penalizes taxpayers who pay with plastic heavily. Uncle Sam charges a “convenience fee” and may also hit you with every penalty the law and Tax Code allows. You could end up paying an additional 2.25% of your tax balance. Most of us don’t have that kind of money laying around to donate to the IRS. On top of all that, your credit card company’s interest will mean you’re paying more in the long run anyway. With hefty interest rates on some cards reaching 20% or more, these costs can become astronomical. The longer you take to pay off the credit card bill, the more you will pay. The only “winners” in this situation are the IRS and credit card companies–not the taxpayer.
Paying Taxes With A Credit Card Damages Your Credit Score
Making payments with credit will affect your FICO score. This one mistake can follow you for years. Using large amounts of credit at once damages your credit, particularly if you have a hard time paying it off. The huge costs alone could also result in maxing out cards, which for most people means digging yourself into a deep hole of debt. Credit score damage has many real-world consequences, particularly if you are ever going to need a loan. But don’t worry, there are better ways to get this job done.
Alternative Ways to Pay
Here are some of the options you have for ensuring you don’t end up in nightmarish debt with the IRS.
- Get a personal loan. If you are fortunate enough to have family and friends who will assist you in meeting your tax debt, take advantage of this. You won’t suffer significant interest, but of course, it is wise to pay your benefactors back quickly. Failure to do so could damage these valuable relationships.
- Explore installment plans. The IRS actually offers installment plans for struggling taxpayers. If you get one, you will pay your debt back in increments monthly. There will still be fees and interest rates. After all, Uncle Sam loves squeezing us all for every penny. But he has a heart: these interest rates will most likely be far lower than what a credit card company would charge. Just be sure to file on time to avoid the 5% late penalty, so that you won’t add to the debt.
- Plan ahead. If your real estate business is structured properly, you can minimize your tax payments. Consider structuring your business as a pass-through entity to minimize debt.
Royal Legal Solutions Can Help You Manage Tax Issues
Whatever your reasons are for wanting to make your tax payment with a card, firms with tax attorneys like Royal Legal Solutions can help. Our tax professionals can evaluate your personal situation and help you determine the best way to make your payments.