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you pay taxes with a credit card
If you're strapped for cash, there's
an easy way to get Uncle Sam off your back: Use a credit card to
pay that IRS bill. But a quick fix could be an expensive one for
For the second year in a row, taxpayers can
use plastic to satisfy their debt to the federal government. The
program was a hit last year, with filers charging $147 million on
American Express, MasterCard and Discover to cover their 1998 returns.
Visa, which has more than 50 percent of the card market, is not
Business is expected to accelerate this season
because the IRS
has expanded credit card authorizations to include estimated taxes
and extension payments.
"The system has been up since Jan. 14, and it's
going very well," says Bruce J. Zanca, senior vice president of
Payments Corp., an e-payment provider that has a contract
with the IRS to process credit card tax payments. "It's still early
in the tax season. As we get closer to April 17, we expect to see
a lot more activity."
But consumer agencies are urging people to do
the math before using credit cards to pay the Tax Man. If you can't
wipe out the balance quickly, you could end up forking over more
than double what you owe the government.
"For the one-third of Americans who have a balance
due on their taxes, credit cards could turn out to be an expensive
option," says Mike Kidwell, vice president of Debt
Counselors of America.
There are three ways to pay taxes with a credit card. All of
them carry extra charges.
- Call Official Payments' toll-free number,
1-888-2PAY-TAX, and use the voice response system. The company
levies a "convenience fee" of 2.5 percent to 3 percent for this
service based on the amount. The fee for a $5,000 tax bill, for
example, is $133.
- File electronically using Intuit's TurboTax
or MacInTax software. These programs are a service of Discover
Financial Services. Discover charges 1.75 percent of the tax payment
and $1 per transaction.
- Write a "convenience check," payable directly
to the IRS. Convenience checks, which come attached to credit
card statements, are treated like a cash advance. There is no
grace period and card companies usually charge 2 percent to 4
percent of the amount.
If you use a low-rate card and clear the balance
right away, the interest savings might make up for the fees. Otherwise,
you could watch your children go from diapers to debts of their
own before your 1999 tax bill is paid off.
If you charge $3,000 -- which is the average
tax bill -- and make minimum payments of 2 percent of the balance,
it would take 26-and-a-half years to pay it off, assuming a 15 percent
interest rate. The total payout: $7,699, of which $4,609 is interest
and $90 is the service charge.
But if you sign up for the IRS installment plan,
you have a five-year deadline. The government charges a $43 set-up
fee, 8 percent interest -- until April 1, when it goes to 9 percent
-- plus 0.25 percent of the balance due each month. Your total outlay:
$4,061, of which $1,018 is interest.
"Using the IRS payment plan cuts the total payment
by more than 40 percent," says Kidwell.
other payment options
Other alternatives might be taking the money from a savings
account or obtaining a short-term loan at a lower interest rate.
The IRS also accepts debit card payments.
"It pays to figure out how much each option
will cost you," says Kidwell.
Even those who plan to pay off the balance,
but just want the airline miles or cash back, might find their rewards
negated by Official Payments' fee.
If you charge $10,000 to the GE Rewards MasterCard,
you get a cash rebate of $135. But the fee for that tax payment
It takes an average of 25,000 airline miles
to earn a free domestic plane fare. A $25,000 IRS charge might get
you the ticket, but the fee for that is $699. If the card company
levies an annual fee, which most do for flight rewards cards, you
could end up paying $750 or more for the trip.
A credit card, however, can be a way to avoid
severe consequences. People who are certain they can't meet the
IRS' installment payments, or fear they will be late with payments
or miss them, might want to consider plastic.
the credit card issuer than the IRS
"There may be some psychological or practical value to owing
a credit card company rather than the IRS," says Kidwell. "When
it comes to collecting a debt, the IRS has more options than your
credit card company."
The IRS can seize your bank account, pinch your
paycheck, or take other income or assets. A creditor or collection
agency can't touch your holdings without a court judgment. Remember
that taxes paid by credit card cannot be excused by filing bankruptcy.
With the tax deadline five weeks away, consumers
still have time to figure out what they owe and how they are going
to pay it. This year's deadline is extended two days, to April 17,
because the usual filing date falls on a Saturday.
"This is not the time to procrastinate," says
Suzanne Boas, president of CCCS
of Atlanta. "There may be a certain sense of dread in facing
up to an IRS bill, but the sooner you can work out an acceptable
payment plan, the sooner you will feel in control of your future."
-- Posted: March 13, 2000