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You
Can Pay Taxes By Credit Card; Here's Why
You Shouldn't
Thinking of racking up airline miles or getting cash back by
paying your taxes with a rewards credit card? You could, but
think again, because you'll pay more in fees than you'll earn
in rewards.
While
the Internal Revenue Service will accept credit card payments
for taxes due, the actual payment is made to one of several
third-party service providers contracted by the IRS. These service
providers generally charge a 2.49% fee for processing the transaction.
(IRS credit card payments can be made by phone, online or when
e-filing.)
Say
you owe $4000 in taxes and want to pay by credit card. Given
the service charge, you would actually pay $4099.60. So, if
your goal was to earn rewards, you'd be paying almost $100 extra
to gain only about $40 worth of rewards.
Why
is the IRS charging a premium for credit card tax payments?
They're not, really -- but to understand why, you need to know
how a normal credit card transaction works and how an IRS payment
is different.
Say
you go into a store and buy something that costs $100 with your
credit card. Although you're paying $100, the store you're buying
from might only get $97 or $98 of that money -- they're paying
two or three percent to the credit card processor and your card's
issuing bank for the convenience of accepting your credit card.
In other words, the store is willing to eat a small chunk of
the sale in order to allow credit card purchases. They do this
because they know you're likely to buy more where credit cards
are accepted.
The
IRS, on the other hand, is not interested in paying fees to
accept credit cards as if it was a retail merchant. In fact,
it can't. As stated on the IRS Web site: "The Taxpayer
Relief Act of 1997 authorizes the Treasury to accept credit
card payments for federal taxes but prohibits the IRS from paying
a fee or consideration to credit card companies for processing
these transactions."
So
the IRS farms out the credit card transactions to third-party
merchant processors. However, since the IRS won't pay the credit
card companies that two or three percent that a retailer pays,
guess who does? You -- in the form of the 2.49% fee.
Of
course, that extra fee isn't the only reason to avoid putting
tax payments on your credit cards. If you're not prepared to
pay off your tax bill when it shows up on next month's credit
card statement, you'll be paying a whole lot more when the credit
card interest kicks in.
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