Things you can put on your credit card: socks, Chipotle, and your taxes.
I was surprised, too, when I first learned that Uncle Sam accepts Visa, Mastercard, Discover, and Amex. I kinda assumed he was the “direct deposit ONLY” type of guy.
But no; you can pay with a card on IRS.gov just as easily as you pay on Amazon.
The question is: should you?
You might be thinking it’s a no-brainer – I’ll get 1.5% cash back on my taxes. Well, you will and you won’t.
Paying your taxes with a credit card is more complicated than that – there are pros and cons, and it may be ideal for some folks and dangerous for others.
What’s Ahead:
Pros to paying your taxes with a credit card
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Your rewards may still exceed the processing fee
Yes, it’s a bummer that the IRS’s payment processing fees basically outstrip your 1.5% or 2% cash back rewards. I mean, technically it’s 1.85% so you could save a whopping 0.15% on your taxes – or $15 on every $10,000 you owe. So maybe you’ll end up with a Chipotle burrito bowl?
In rare cases, though, you might make more than 2% cash back.
Snag that welcome bonus
Another reason to pay your taxes with your credit card is to help reach your spending threshold for a welcome bonus.
This is an especially useful “hack” for top-tier business rewards cards since their welcome bonus spending requirements tend to be high.
For example, the Ink Business Cash® Credit Card offers a $900 welcome bonus for spending $6,000 within three months. That’s a lot for a small business, but not if you pay your taxes with it!
Take advantage of 0% APR
If you’re worried about being able to afford your taxes, putting them on a card with 0% APR can provide time and stress relief.
Take any of the cards from our list of the Best 0% APR Credit Cards. Provided your taxes fit inside your spending limit, you can place them on your card and take as long as you need within your 0% APR period to pay them off, interest-free.
Cons to paying your taxes with a credit card
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Your taxes may exceed your credit limits
Here’s a serious consideration: do your anticipated taxes fall within your credit card spending limits?
If you just got a new credit card right out of school, your spending limits may be pretty low – like $3,000 or $5,000. If you have a secured card, they’re surely even lower.
But not to fret – if your anticipated taxes owed are within a couple of grand of your credit limit, you may be able to simply ask your bank to raise your limit.
If not, then your card may simply be rejected by the IRS, or you may get hit by an over-the-limit fee. Definitely have a chat with your bank before you find out the hard way!
Processing fees might cancel out the rewards
As mentioned, if you’re purely in it for the rewards, you should make sure that your credit card rewards will meet or exceed the IRS’s fees.
If you earn unlimited 1.5% cash back but agree to a 1.99% payment processing fee, well, you’re just out 0.49% of your taxes, which could be over $100!
A massive credit card balance is a liability
As with all big credit card purchases, you’ll want to have a leak-proof plan to pay off your taxes. If you have 0% APR you’re not in a big rush, but if you don’t, the clock’s ticking before regular APR kicks in and bites you in the butt.
To illustrate, if your card has a 26.99% APR and you forget to pay off your $5,000 tax bill before the end of the month, your balance with interest next month will be $5,112.
Oof.
So, if you choose to pay off your big tax bill with your credit card, you’ll definitely want to set up autopay.
It could hurt your credit score
30% of your credit score comes from your “credit utilization,” or how much of your current credit you’re currently gobbling up. If you max out your only credit card on your taxes, well, that’s really high credit utilization – which could impact your credit score.
Now, your credit score should heal over time once you pay off your taxes and return your balance to zero. Plus, there are other ways to repair your credit.
But it’s very likely that if you max out your card to pay your taxes, you’ll take a temporary ding. That’s something critical to keep in mind if you’re applying for a car loan, a mortgage, or if you want to refinance your student loans anytime soon.
Verdict: should you pay your taxes with your credit card?
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You might want to pay your taxes with a credit card if…
The ability to pay over time using 0% APR is worth the risk to your credit score.
If you can’t afford to make a lump sum payment to the IRS, and their installment plans aren’t a fit, financing your taxes with a 0% APR period may be a solid strategy.
It might also be worth it if you’re looking to meet your spending threshold for a big signup bonus. Some top-tier business rewards cards have bonuses of $750 – $1,000.
I personally wouldn’t risk my credit score over that amount unless I really needed the cash – but I might if my taxes owed were well within my credit limit (i.e. $5,000 taxes on a card with a limit of $12,000).
You probably shouldn’t pay your taxes with a credit card if…
You’re purely in it for the cash rewards.
Sure – your percentage cash back may exceed the IRS’s fees, but is it really worth risking your credit score, or missing a payment?
Probably not.
Summary
Paying your taxes with a credit card might make sense if you really need to finance them with 0% APR and/or score that welcome bonus to pay off some other debt.
But in most cases, the 2% payment processing fee combined with the risk of lowering your credit score means paying your taxes with a card probably isn’t worth it.
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