Introduction
When it comes to taxes, every little bit of money saved counts. As such, taxpayers need to be aware of all their payment options, including whether they can pay their tax bill with a credit card. Paying taxes with plastic is an option available to everyone, but the pros and cons must be weighed carefully to make informed decisions.
Maximizing Credit Card Rewards: Paying Taxes with Plastic
One of the most significant advantages of paying taxes with a credit card is the potential rewards that can be earned. Depending on the credit card, this could mean points or miles systems, or cashback opportunities. For example, the Chase Sapphire Preferred(R) Card offers two points for every dollar spent on travel and dining and one point for every dollar spent on other purchases. These points can be redeemed for travel, gift cards, or merchandise, among other options. Similarly, the Citi(R) Double Cash Card offers cashback rewards of up to 2% without caps on how much you can earn.
These rewards can then be used to offset the tax bill, effectively lowering the overall payment amount. It’s essential to check the credit card’s terms and conditions to understand how the rewards earned can be used and whether they expire.
The Pros and Cons of Paying Your Taxes with a Credit Card
While rewards are tempting, there are several pros and cons to consider before deciding to pay taxes with a credit card. One of the significant advantages of paying with a credit card is the ability to delay payment. As long as payments are made on time, the amount due on the credit card can be split over several months, providing financial flexibility.
However, one of the considerable downsides of using a credit card to pay taxes is the fees and interest rates. The IRS has contracted with several payment processors to allow taxpayers to pay their taxes with a credit card. These processors may charge a convenience fee, usually between 1.87% and 1.99% of the payment amount, depending on the processor.
Additionally, if the balance on the credit card isn’t paid in full, interest will accrue. Depending on the interest rate, this could lead to significant financial charges, leading to a higher overall tax bill.
Take Advantage of Credit Card Perks: Stretching Your Tax Dollars
Aside from reward points or cashback, using a credit card to pay taxes can provide several perks to help reduce the tax burden. One example is an introductory APR offer, with some cards offering 0% interest for up to 15 months. This feature can help spread out the tax payment and give cardholders more time to pay off their debt.
Moreover, some credit cards come with purchase protection policies. For example, the Amex Gold Card provides damage and theft protection on purchases made with the card for up to 90 days from the purchase date. This can be of benefit to those who make significant purchases during the tax season.
5 Great Credit Cards for Paying Your Taxes in 2021
While not every credit card is suitable for paying taxes, some options cater to the needs of taxpayers. Here are five excellent options:
- The Chase Sapphire(R) Preferred Card: Earn two points per dollar spent on travel and dining; one point per dollar spent on other purchases.
- The Citi(R) Double Cash Card: Earn 1% cashback on purchases, pay 1% when you pay off your balances.
- The Blue Cash Preferred(R) Card from American Express: Earn 6% cashback at U.S. supermarkets, up to $6,000/year in purchases, 6% cashback on select U.S. streaming services, and 3% cashback at U.S. gas stations and transit.
- The Bank of America(R) Cash Rewards Credit Card: Earn 3% cashback in a preferred category of your choice, such as gas, online shopping, dining, travel, or drug stores.
- The Capital One(R) Venture Rewards Credit Card: Earn unlimited 2x miles per dollar spent. Miles can be redeemed for travel, gift cards, or cashback.
All these cards offer various rewards that benefit taxpayers. Before applying for a new card, be sure to research which card offers the best rewards for your situation.
Avoiding Common Pitfalls: Using Credit Cards to Pay Your Taxes Responsibly
Responsible credit card use is critical, especially when paying taxes with plastic. While the convenience and rewards may be tempting, taxpayers must be mindful of their spending habits.
One way to ensure responsible use is to pay attention to fees and interest rates. As previously mentioned, using a payment processor can lead to a convenience fee charged to the credit card. Additionally, interest rates, if not paid in full, can quickly add up, leading to significant financial charges.
Another way to avoid common pitfalls is to avoid high credit card balances. Even if payments are made on time, high balances can negatively affect credit scores, making it difficult to secure loans in the future. Keeping balances low and paying them off in full, if possible, is the best way to ensure responsible credit card use.
Conclusion
Paying taxes is not always exciting, but understanding all payment options can save taxpayers money in the long run. Paying taxes with a credit card can be a viable option for some, with the potential to earn rewards and take advantage of credit card perks. However, be aware of the potential fees and interest rates associated with using a credit card to pay taxes. By responsibly using a credit card for this purpose, taxpayers can earn rewards, reduce their overall tax burden and improve their credit score.
