According to the IRS website, the ability to pay your taxes via credit or debit card is not just convenient, it’s also “safe and secure - standard, commercial card networks are used. The IRS does not receive or store card numbers.”
Whew! You mean the folks who have access to my Social Security number, birth date, employment and investment information, income, and address might steal my MasterCard (MA) number and hit the bars?
However, unlike a credit or debit card charge you make at a store, the fee charged by those “commercial card networks” is added to your bill.
Ben Woolsey, director of marketing at CreditCards.com explains that normally this fee is paid by the merchant. “But since the government has to collect 100% of the tax due, the consumer [a.k.a. taxpayer] has to absorb this.”
Three of the eight processing firms that contract with the IRS charge a flat fee ranging from $3.89 to $3.95 per transaction. The remaining ones charge a percentage which, in one case, amounts to nearly 4%. This means that on a $5,000 tax bill you’re forking over an extra $200.
When the IRS first introduced tax payments via credit or debit card more than a decade ago it was touted as a way consumers could earn rewards. “Charge your tax bill and earn enough points for round-trip tickets to the Bahamas!”
However, Woolsey points out that, today, “under no circumstances do the rewards offset the cost of the transaction.”
Credit and debit card companies have simply gotten stingier. “Four to five years ago there were some programs that paid up to 5% back,” says Woolsey. “In those cases, you could have made the math work.” These days, he says, the cash-back or points-for-miles you receive equates to about 1% of the transaction amount. And, “unless you pay the entire balance at the end of the month, interest charges will wipe out any benefit.”
A new law that took effect this year adds an extra-dangerous twist to paying with plastic. Take the case of debit cards, where the money comes directly out of your checking account. If there isn’t enough in your account to cover the full amount of your tax bill and you haven’t authorized your bank to charge you for over-draft protection, your transaction will be rejected. Your debit card processing firm will notify you, but this is typically done via e-mail. “If you thought you paid your taxes and then went on vacation, you wouldn’t get the notice,” says Woolsey.
If you miss the April 15th deadline, the IRS will hit you with a late payment fee and interest.
You could end up in a similar predicament if you use a credit card and are near the limit on your account. “You should check with your issuer because there isn’t a uniform policy in the credit card industry,” says Woolsey. Some companies charge an over-limit fee, while others don’t. Other firms simply disapprove any charge that exceeds your limit.
The good news is that there are safer and less expensive ways to paying your income tax. The simplest is to write a check and mail it in with your tax return.
If you are filing your return electronically you can achieve the same result as you would with a debit card by authorizing the IRS to directly deduct the full amount you owe from your checking account. The transaction goes through the ACH system and bypasses the middleman. There’s a flat fee of $52.
If you can only afford to pay part of your tax bill, you can apply for up to a 3-month extension. As explained on its website, “the IRS offers a short amount of additional time, up to 120 days, to pay in full. No fee will be charged for entering this type of payment arrangement.” You will, however, be charged interest.
Another option is to arrange to pay your federal tax bill via monthly installment payments. You can set up a schedule whereby you agree to pay a certain amount via check, money order, credit/debit card, or over the Internet through what’s called an “online payment agreement” (OPA). An alternative is to authorize the IRS to deduct your monthly payment from a bank account or your paycheck.
Keep in mind that the installment route can get costly, since there’s a fee to set this up and a penalty plus interest is assessed for each month you still owe the government money. In fact, on its Web site the IRS recommends that you “consider financing the full amount of your tax liability through loans, such as a home equity loan… or a credit card cash advance” because this can be less expensive.
Oh, yes. There’s one final option for settling up with Uncle Sam: cold hard cash. Cash payments must be made in person at an Internal Revenue Service office. However, not all IRS offices are equipped to handle cash, so call first.
For more information about various ways to pay your federal income tax bill, visit.
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Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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