Paying the tax piper with plastic

When it comes to taking a cruise, your spending doesn't end when you've booked the trip. Lots of cruise-related expenses have the potential to bust your budget, from the flight to your embarkation point to drinks on the cruise to shore excursions. So-called add-on expenses can equal or exceed the cost of your cruise if you're not careful.

"The trend is for some cruise lines to offer relatively low prices to get people on the ship and then hit them with cash fees for little expenses here and there that after a week can really add up," says Eileen Entin, owner of Diamond Cruise and Travel in Hightstown, N.J.

Payers of federal quarterly estimated taxes now can charge those four extra amounts throughout the year, not just in April. Then there are the state taxes that can be put on plastic, too.

Why? The process is relatively simple. First, decide which card has room for your tax debt. Then visit either company's Web site or call its toll-free number. Five or six steps later, your payment is made.

In addition to these two services, most tax software programs allow you to pay electronically, and that includes by credit card. The convenience fee is still charged in these cases, but it goes to the software vendor, who then transmits it to the card processor. The software companies don't charge extra for e-filers who say "charge it."

Taxes: just another purchase
Another factor boosting tax charges: Americans view these transactions as just another purchase.

Taxpayers pay the IRS by credit card for the same reasons they regularly pay with plastic. It's convenient, it allows them to put off paying a bill for a month, and, in many instances, it's a way to rack up frequent-flier miles or other bonus points.

Jordan Goodman, author of "Everyone's Money Book," once paid a $28,000 tax bill with his American Express card. In the process, he accrued a lot of membership award points.

But, says Goodman, using credit cards to pay Uncle Sam isn't right for everyone. You have to balance the convenience fee you're charged when you make your tax payment. Will the amount of frequent-flier miles outweigh that fee?

"You have to do your arithmetic before committing to this," agrees Donna LeValley, a tax attorney who has served as contributing editor of the popular J.K. Lasser "Your Income Tax Guide" series.

Increasing interest
For the credit card option to make sense, a taxpayer also must pay the credit card company promptly to avoid account interest.

Some credit cards that offer frequent-flier miles or other bonuses also charge a higher interest rate, so you could end up paying thousands of dollars in interest if you elect to pay only the minimum due each month. Bankrate.com tracks the most current annual percentage rates for air-mile cards.

You're not off the hook either if you have a low-interest rate card or you shift your balance over to one. That's because the credit card companies will quickly charge you the usual higher market rate even if you are one day late, Goodman says.

If you must pay taxes by credit, call your credit card company and ask them to issue a check to pay the IRS, your state, or both advises Eva Rosenberg, the Web's Tax Mama. That way, you won't pay the convenience fee, but will earn your frequent-flier miles or bonus points.

This method also is available through use of convenience checks that many card issuers periodically include in billing statements. However, these checks generally come with their own fees. And while many cards offer low introductory rates to encourage use of the checks, the ultimate interest could end up higher than what's charged for regular plastic purchases. Interest rate information may not be listed on the check; check your card holder agreement or call the issuer.

These costs could, depending on what you owe Uncle Sam, match or outpace what you would have paid by simply charging your tax bill.

Other payment plans
Thinking twice about pulling out the plastic to pay your tax bill? There are other options for people who don't have the cash on hand:

• Work out an installment agreement with the IRS. According to Edward Kaplan, an attorney with Green Radovsky Malone & Share in San Francisco, the IRS interest rate on tax deficiencies generally is much less than that charged by your usual credit card issuer. The IRS adjusts its rates quarterly based on the federal short-term rate, meaning interest for underpayments will stay at 5 percent for the quarter starting April 1.
  
  
• Get a personal loan from your bank or a credit union.
  
  
• Establish and draw on a home equity line. Interest here may be deductible on next year's tax return.
  
  
• Avoid credit card vendor fees by using the Electronic Federal Tax Payment System. Businesses have been using EFTPS for years to directly transfer various taxes to the IRS. Now the agency is encouraging individuals to use the system for annual returns and estimated tax payments. Of course, this method requires you have the funds in your account to pay the IRS. You also need to enroll and get a PIN number, so don't wait until the last minute. And check with your bank to see if it charges a transfer fee.

Again, each of these payment methods involves costs in addition to your tax bill. Only you can be sure whether one of these options, or paying with plastic, makes sense come April 15.

If you can pay the bill off within the grace period and the fees don't outweigh the convenience and card perks, it could be the right move for you. But if you're paying by credit card out of desperation because you don't have the cash on hand, explore other payment avenues first.

One thing is clear regardless of which payment vehicle you choose. They all go down the same road to the ultimate destination: the tax collector.

Jenny C. McCune is a contributing editor based in Montana.