Paying Taxes Using your Credit Card? Stop! And Read This

The most important day on the tax calendar isn’t April 15, when taxes are due. Instead, it really is April 24: Tax Freedom Day. This day represents what amount of the year you had to work in order to repay your federal and state taxes. For 2015, that calculation came out to around 114 days of punching the clock, which leaves you with 251 days to earn some coin. Of course, your financial obligations in taxes could be looming over you like a dark cloud.

The best course of action would be to pay it back as fast as possible to avoid late fees and penalties. The IRS has made it very easy to make those payments through online transfers. You can also opt for using a credit card to pay your taxes, but is that a smart way to go? Let’s explore this.

The Not-So-Hidden FeesThe first thing to consider when paying your taxes with a credit card are all the not-so-hidden fees. The IRS charges you what they call a “convenience fee” right off the top, which could be anywhere between 1 and 2.25 percent. Yes, you would be paying the IRS for the privilege of taking your money.

There are also the interest charges you’ll be paying to the credit card. Those charges could be as little as 10 percent but as high at 28%. If you’ve charged a substantial amount to pay off those taxes, you could be paying the interest for several years. This will likely also mean an increase in your monthly minimum payments, which could lead to trouble down the line if you miss a payment and start getting hit with late fees.

A Spike in your Credit Score

The credit card reporting companies don’t care what you charge with your credit card. They simply care about how much added debt you’ll be burdened with. The minute you add a huge amount of debt, your credit-utilization ratio is going to spike up. As a result will cause your overall credit rating to go down. This then becomes a problem when you go out to find funds for a new car or mortgage refinancing.

The Retirement Savings Loss

Your added fees and payments can put a dent in your retirement savings. Hopefully, you’re already putting money aside in a 401K or other form of tax-free retirement plan. However, any time you are forced to use additional cash to pay off bill, you’ll be decreasing your liquid assets. “You can’t be without money in retirement. You’ve got to begin saving,” advises financial planner Keith Springer. It’s not merely for the super-rich, for people with hundreds of millions of dollars. It’s for people just like us.”

Alternative Payment Plans

If you don’t have the money readily available and you can’t use your credit card, how should you pay your taxes? You may be surprised to find out that whenever it comes to collecting your taxes, the IRS is often downright tolerable. They provide installment plans for back taxes, allowing you to repay a little bit each month. How is this not the same as the credit card plan? The IRS won’t be charging huge interest fees. You will still be hit with those late charges and penalties, but those are not nearly as expensive you would be charged for a credit card payment.

You could also ask a family member or friend for the loan. However, to make it “official,” put the agreement in writing and set up a repayment schedule exactly like you would with the IRS or credit card company.

Every worker pays taxes. The real issue is how smart you may be with those payments.

Another great way to write off more money from your taxes would be to purchase a home, yes as a homeowner there are several deductions you will be allowed when filing your taxes. If you need assistance in finding your new home in the Tampa Bay and surrounding areas. Nick & Cindy Davis are always just a click here or call to 813-300-7116 away.