Paying Taxes with a Credit Card

Using credit cards for payments might not be as advantageous as taxpayers hope.

In 1999, the IRS for the first time allowed taxpayers to pay their federal taxes with a credit card. Some taxpayers saw this as a way to accumulate frequent flier miles—by charging taxes to a credit card that offers frequent flier miles for dollars charged. Unfortunately, a recent IRS news release confirms that there are some features to this program that make it unlikely that taxpayers will be able to fly anywhere soon. Here are the details:

2 ways to pay taxes by credit card. There are 2 ways for you to pay your taxes by credit card:

(1) Phone option. The pay-by-phone option allows you to charge taxes to American Express, Discover, or MasterCard accounts by calling 1-888-2PAY-TAX. An automatic voice response system will guide you through the process. Visa cards are not accepted, even though they represent about one-half of all credit cards used in this country. It is possible that Visa cards will be accepted in the future.

Key point. Taxpayers charging an estimated tax payment will not have to file the paper Form 1040-ES. The phone system, operated by Official Payments Corporation of San Ramon, Calif., will open January 14, 2000. The estimated tax payment option will become available March 1, 2000.

(2) Computer option. Three tax software developers (Intuit, Nelco, and Orrtax) offer electronic filing (e-file) and pay combinations for individuals. In these programs, the credit card payment information is part of the electronic return filed. The Intuit program (TurboTax) currently allows tax payments with the Discover card, Visa, MasterCard, Optima, or American Express.

What taxes can I pay by credit card? The phone option will accept three types of payments: the balance owed on a 1999 return; a projected balance of 1999 taxes due on a request for an automatic extension of time to file; or an estimated tax payment for tax year 2000. The computer option will accept the actual tax liability paid with your electronically-filed tax return.

Is there a maximum amount that I can charge? The maximum charge accepted by phone will be $99,999.99. There is no limit on taxes paid using the computer option.

How much will it cost me? The IRS does not set or collect any fees for credit card payments, but two other fees may apply.

(1) Convenience fee. There is a “convenience fee” that is charged by the company that processes the credit card payments. This fee is based on the amount of taxes charged. For example, the fee for a $1,000 charge is $35; the fee for a $2,000 charge is $68; and the fee for a $5,000 charge is $133. If you file electronically using TurboTax or MacInTax software and charge your balance due, your credit card company will process your payment and charge you a convenience fee.

(2) Cash advance fees. Credit card companies may charge a “cash advance” fee when taxpayers charge taxes to their credit card—if the charge is treated as a cash advance rather than a payment. You should check with your credit card company to see if imposes a cash advance fee on such charges, and if so, the amount of the fee. To illustrate, “cash advances” charged to a Visa credit are assessed a 3% fee.

The bottom line. Is it worth charging taxes to a credit card in order to earn frequent flier miles? Here are the factors to consider:

(1) Amount of miles needed for free travel. How many miles are needed for a free round-trip coach class ticket on my preferred airline? In most cases, the answer is 25,000 miles. This means that you will need to charge $25,000 (at a rate of one mile per dollar charged) to earn a single round-trip domestic ticket. That’s a lot of taxes! But, if other expenses are charged to the same credit card, a free ticket eventually will be earned. Also note that more miles may be needed to claim a free ticket during certain times of the year.

(2) Amount of the convenience and cash advance fees. The biggest limitation in earning frequent flier miles by charging taxes to a credit card is the cost of doing so. At a minimum, you will need to be pay the “convenience fee.” If you pay by phone, the fee for charging $25,000 will be substantial (close to $1,000)—far more than the cost of a discounted round-trip domestic ticket. If you pay by computer and charge your taxes to a credit card, you will need to check with your credit card company to determine if it imposes a fee, and if so, in what amount.

(3) Credit card interest. The exorbitant interest rates charged by credit card companies is another “cost” that must be considered when deciding whether or not to pay taxes by credit card. If you do not pay your credit card balance immediately, you will begin to incur interest on your balance. Interest payments will skyrocket if you pay the minimum balance on your credit card each month. Some credit card companies charge even higher rates for “cash advances,” and eliminate any “grace period.”

Tip. The credit card payment options will help some taxpayers who don’t have the full balance due when they file their tax return. Such taxpayers have other options available to them, including a bank loan or setting up an installment agreement with the IRS. Taxpayers may use Form 9465 to request an installment agreement. The law gives taxpayers a right to an installment agreement when they are unable to pay if the balance due is not more than $10,000, the tax will be fully paid within three years, and, during the previous five years, the taxpayer has not failed to either file returns or pay taxes and has not had an installment agreement.

In summary, there are both advantages and disadvantages to paying taxes with a credit card. This option clearly appeals to some taxpayers, since more than 129,000 people paid their federal taxes by credit card during 1999.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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