Rachel Presser, Wealth of Geeks
Nearly three-quarters of Americans get a tax refund every year. But what if you fall into the other category? In 2021, the IRS reported that more than 11 million Americans owe a whopping total — more than $125 billion in back taxes.
If you wind up with a massive bill at tax time, how will you pay it? If you have enough in your checking or savings account, you might take the hit and move on because you don’t want any trouble.
But if you owe a worrisome amount of taxes, beyond what you can afford, you may be looking towards more drastic options like using a credit card to pay all or part of the balance due.
TL; DR: It isn’t worth paying your taxes with a credit card — for most people. However, there are always exceptions and some situations where it could be worth it, especially if you meticulously plan your timing.
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IRS interest vs. credit card interest
For most people, needing more time to pay their taxes is the driving factor that makes them consider paying all or most of the balance due with a credit card. If needing more time is your primary motivator, the IRS has several options for payment plans. You can even stave off collection actions if you are concerned about the consequences of late payment.
What ultimately makes the credit card option not worth it for most people is interest rates, plus the fees involved, particularly if you anticipate needing six months or longer to pay your taxes. The interest the IRS charges on unpaid taxes is much lower than the average credit card interest rate, even though it compounds daily as credit cards do.
For the first quarter of 2023, individual underpayment interest is 7%, and it was 6% for the fourth quarter of 2022. Forbes estimates that the average credit card interest rate is 23.56%.
Even when accounting for excellent credit scores and high credit limits coupled with fewer benefits that could lead to interest rates as low as 15-18%, IRS interest is still significantly less.
While IRS interest rates can get confusing because they change every fiscal quarter based on the short-term rates assigned by the Federal Reserve, they are still lower than most credit cards’ interest rates. The higher the balance, the better off you usually are working out a payment plan with the IRS.
This is also due to credit card processing fees. Because the IRS cannot accept credit cards or digital wallets directly, the agency works with three authorized payment processors. The cheapest provider at the time of writing is payUSAtax, which charges 1.85% of the balance. So if your tax bill is $1,000, they would charge an $18.50 fee.
Since that fee is lower than the interest that would be charged, you might opt for this to have peace of mind that your taxes were paid before Tax Day. But if you are paying a much larger tax debt with a credit card, not only is the fee higher in proportion to the debt, but you will now have to pay more onerous credit card interest.
Nevertheless, gaining peace of mind that your taxes are paid on time and you don’t have to deal with the IRS more than you have to is a common reason people pay their taxes with a credit card anyway.
A less-discussed reason someone would use credit cards for federal tax payments is that they are not a resident of the United States but have US-sourced income and no bank accounts there. If this is the case, the IRS has a massive set of codes for foreign wire transfers, but arranging these payments is incredibly costly and often requires going to a bank in person. Arranging a credit card or digital wallet payment through an IRS-approved processor is faster and cheaper.
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Credit card rewards, introductory offers, and balance transfers
Secondary to needing more time to pay, reward programs and new credit card benefits are other chief motivators for using a credit card to pay your taxes. Conventional wisdom states that the value of the rewards program isn’t proportional to the cost savings of avoiding the interest and credit card processing fees.
Investopedia estimates that credit card rewards, specifically travel rewards, are worth about $0.01 per point. Some travel cards make airline and hotel points worth more than cash and shopping rewards, but the reward points often don’t compensate for what you could save on fees and interest.
But this isn’t the case if you open a new credit card when you arrange to pay your taxes and estimate that you can pay the bill in a few months or less.
Some credit cards will make introductory offers that give you 0% interest for up to the first three months. Even after you account for the IRS credit card processor fee, this is definitely worth it if you can pay off all or most of the balance before this introductory period is over. It’s worth it even more if the rewards program is particularly enticing or important to you.
Many credit card issuers also offer “sweeteners” such as 50,000 miles or free hotel stays once you spend a certain amount after opening the card. If those rewards will give you a free trip or other value that exceeds what you’d pay in interest and fees, paying your taxes with a credit card can also be worth it.
Conversely, if you are a seasoned cardholder but need those last few thousand miles to maintain elite status like Delta Gold Medallion, you would need to make a value judgment about whether retaining that status is worth the additional fees and interest. This is especially true if you anticipate needing more than two or three months to pay the balance.
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Filing for bankruptcy?
If you are considering filing for bankruptcy, federal tax debt is generally not dischargeable, but there are some exceptions under the law. Filing your tax returns on time is important because even if you cannot pay at the time of filing, the IRS may actually discharge the last three years of tax debts predating your bankruptcy petition under Chapters 7 and 13. But going forward, you are responsible for any tax debts incurred from your bankruptcy petition.
Depending on the bankruptcy proceedings you initiate, it’s a good rule of thumb to avoid incurring additional debt if it can be avoided. But if you can’t afford to pay your post-petition taxes, you might be able to put that first year’s worth on your credit card if it’s going to be discharged anyway.
Be warned that this won’t work for huge tax bills because credit card issuers can demand you still pay for large purchases. However, luxury items are more likely to be flagged than IRS payments.
Ultimately, paying taxes with a credit card isn’t worth it for most people. But if you’re an exception who needs to maintain elite status, poised to take advantage of an introductory offer that would skirt burdensome interest from both the IRS and card issuers, or need to put bankruptcy proceedings in your favor, it might be worth it to use plastic instead of your checking account.
