The IRS has a page describing the benefits of paying your taxes by credit card.  They tout the:

  • Convenience,
  • Security,
  • Proof of payment, and
  • Ability to earn cash, miles, or other rewards if you have a rewards card.

Paying your federal taxes by credit card comes with a price  -  2.49% to be exact.  It’s called a “convenience fee” although I don’t find the fee to be convenient.  The card issuer charges the fee because by law the issuer is not allowed to charge the IRS a fee.  

I usually jump at the chance when I learn of an opportunity to pay one of my regular bills by credit card because my card pays 1.5% cash back.  However, when there is a convenience fee you need to consider the numbers.

If You’re Getting a Refund, You’re Also Getting an Assignment

Before we look at credit cards, first I want to talk to those of you that don’t owe taxes.  If you are employed and you don’t owe taxes on your 2007 tax return, your employer is over-withholding from your paycheck.  If you are self-employed and you don’t owe taxes, you are over-paying your estimated taxes.

If your refund is big, say more than $1,000, I’m giving you the assignment to learn about withholding and adjust the amount withheld from your paycheck (if you’re employed) or the amount of your estimated taxes (if you’re self-employed) so that you won’t receive a refund next year.  No matter how hard I rack my brain I just can’t think of a good reason to give Uncle Sam an interest-free loan. 

The Numbers

Now back to credit cards.  Let’s look at the financial benefit of paying your taxes by credit card and see how it weighs against the 2.49% fee. 

If you have the American Express Blue Cash card, the amount of your cash back bonus is 1.5% of the amount charged. 

In addition to the cash back from a credit card, there is a benefit to deferring payment of your taxes.  As explained here, you should be able to defer payment by about 30 days.  Depending on what you do with the money during those 30 days, deferral should save you about 0.40%.

Combining the Blue Cash reward and the deferral, you should save about 1.9% by paying your taxes with credit card.  You won’t come out ahead after the 2.49% fee. 

What About the Other Advantages?

The IRS also touts convenience, security, and proof of payment as reasons to pay by credit card.  I’m not sure I buy their reasoning on convenience or proof of payment.  But they have a point on security.  Let’s take them one by one.

As far as convenience, I think it’s just as convenient to write a check and include it with my payment.  But then I am part of the 7% that still file paper returns.  I have never used Turbo Tax or any other software.  If you use software to prepare your return, and especially if you file electronically, I imagine it’s easier to pay by credit card.  Can someone confirm or deny this in the comments?

As far as proof of payment, I don’t understand how a credit card statement is better proof of payment than a check.

On security, your choices are between putting your credit card information on your return or sending a check which has your bank account information.  I think we all have the expectation that the IRS safeguards our information.  But in case something happens and my information falls into sinister hands, I would rather have my credit card compromised than my bank account. 

Why?  Because there seems to be better protection for credit cards.  I believe the maximum amount you can lose due to credit card fraud is $50 as long as you report it promptly.  But if your bank account gets emptied, I think it’s much harder to recover the money.

However, the chances that your tax return finds its way into sinister hands seems remote at best.  Besides, if a fraudster got hold of my tax return he’ll see the puny numbers and realize I’m not worth his time.

Summary

Despite the IRS’s best intentions, I’m not convinced that it’s a good idea to pay your taxes by credit card.  I’m sticking with a paper check.

Final Point

If you do choose to pay by credit card, the IRS provides this helpful reminder: “Cards should not be forwarded to the IRS with the return or form” (their emphasis). 

They don’t want your credit card.  In case you were wondering.

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