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Planning to Pay Taxes With Your Credit Card? Stop! And Read This.

Anum Yoon
2 min read
Planning to Pay Taxes With Your Credit Card? Stop! And Read This.

The most important day on the tax calendar is not April 15, when taxes are due. Instead, it is April 24: Tax Freedom Day.

This day represents how much of the year you had to work in order to pay off your federal and state taxes. For 2015, that calculation came out to around 114 days of punching the clock, which leaves you with 251 days to earn some coin. Of course, the money you owe in taxes could be looming over you like a dark cloud. The best course of action is to pay it off as quickly as possible to avoid late fees and penalties. The IRS has made it easy to make those payments through online transfers.

You can also opt for using a credit card to pay your taxes, but is that a smart way to go? Let’s explore this question.

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Related: The Tax Exemption That Can Save Thousands for Buy & Hold Investors

The Not-So-Hidden Fees

The first thing to consider when paying your taxes with a credit card are all the not-so-hidden fees. The IRS will charge what they call a “convenience fee” right off the top, which could be anywhere between 1 and 2.25 percent. Yes, you would be paying the IRS for the privilege of taking your money.

There are also the interest charges you’ll be paying on the credit card. Those charges could be as low as 10 percent but as high at 28 percent. If you’ve charged a significant amount to pay off those taxes, you could be paying the interest for several years. This will also mean an increase in your monthly minimum payments, which could lead to trouble down the line if you miss a payment and start getting hit with late fees.

A Spike to Your Credit Score

The credit card reporting companies don’t care what you charge on your credit card. They only care about the amount of added debt you’ll be burdened with. The moment you add a huge amount of debt, your credit-utilization ratio is going to spike up. This in turn will cause your overall credit score to go down. This then becomes a problem when you go out to find funds for a new car or mortgage refinancing.

The Retirement Savings Loss

Your added fees and payments can put a dent in your retirement savings. Hopefully, you’re already putting money aside in a 401K or other type of tax-free retirement plan. However, any time you are forced to use extra money to pay off bill, you’ll be decreasing your liquid assets.

“You can’t be without money in retirement. You’ve got to start saving,” advises financial planner Keith Springer. It’s not just for the super-rich, for people with hundreds of millions of dollars. It’s for people just like me and you.”

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Related: JUST RELEASED: Brand NEW BiggerPockets Book on Real Estate Tax Strategies!

Alternative Payment Plans

If you don’t have the funds on hand and you can’t use your credit card, how should you pay your taxes? You might be surprised to learn that when it comes to collecting your taxes, the IRS can be downright tolerable. They offer installment plans for back taxes, allowing you to pay off a little bit each month. How is this different from the credit card plan? The IRS won’t be charging huge interest fees. You will still be hit with those late fees and penalties, but those are significantly less than you would be charged for a credit card payment.

You could also ask a family member or friend for the loan. However, to make it “official,” put the agreement in writing and set up a repayment schedule just like you would with the IRS or credit card company.

Every worker pays taxes. The real issue is how smart you can be with those payments.

What do you think?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.