NEW YORK (3/2/09)--Although the convenience of charging your tax bill may be tempting, fees and interest could end up costing a bundle (SmartMoney.com Feb. 19).
By paying your taxes with plastic, you commit to pay an additional 2.49%--the fee merchants usually pay credit card companies when you charge purchases. The Internal Revenue Service (IRS) isn't interested in doling its revenue to card companies, so you must foot the charge.
If you're thinking of putting your 2008 tax bill on a credit card, understand the costs:
Paying a $14.94 fee to charge a $600 tax bill may seem worth the convenience to some. But if that tax bill climbs to $3,000, or $4,000, you're looking at fees between $75 and $117. And, unless you pay off your credit-card balance in full the next month, any one of these tax bills will begin to pile on interest.
Some more financially sound options include a personal loan from a friend or family member, a signature loan from your credit union, or an installment plan with the IRS (Bankrate.com video Oct. 1). The $52 installment setup fee and the 0.667% monthly interest rate (8% annual percentage rate or APR) is lower than most credit cards. Even if your card carries a lower APR, the installment plan can help you make quicker and more regular payments. File IRS Form 9465 to get started.
If you decide to use plastic to gain credit card reward points, frequent-flier miles, or other benefits, make sure you're able to pay off the balance in full right away. Accumulating interest on a very large tax bill can quickly wipe out the benefit of those rewards.
Even if you can't afford to pay your tax bill, be sure to file on time. The monthly interest rate for not paying a bill that has been filed is 0.5%, but jumps to 5% for those who simply chose not to file. On a $1,000 tax bill, that amounts to $10 and $50 a month, respectively.
You can find more information about payment options at irs.gov.
For more information, read "Don't Miss Out on Tax Breaks" in Home & Family Finance Resource Center.
courtesy of cuna.org