Credit cards and taxes: key dos and don’ts
Did you beat last night’s deadline for filing your tax return? The huge majority of Americans should have, but if you’re one of the minority, it would be a good idea to sort things out as soon as you can. You really don’t want to mess with the Internal Revenue Service (IRS), which has a whole range of eye-watering penalties that could cost you dear. Indeed, habitual tax dodgers face a $25,000 fine along with prison time.
Credit cards for tax payments
If you don’t have the money to pay your taxes right now, the IRS has payment options. Using a credit card to settle is an alternative. And, contrary to what you may have read elsewhere, this isn’t always a bad move.
According to a Lansing State Journal report, credit card use for tax bills is only advisable under three circumstances:
- You owe no greater than $3,000.
- The credit card you use has a rate below 10 percent.
- You’re certain to pay down your balance to zero within a few months.
Even then, don’t expect this credit card use to come cheap. The IRS doesn’t pay “interchange” (also known as “swipe”) fees to American Express, Discover, MasterCard or Visa so you have to pay them. That’s likely to add more than 2 percent to the amount you charge. That that could cost you $70 on a $3,000 bill, and $940 on one of $40,000, according to a CBS MoneyWatch report. It’s highly unlikely that those sorts of sums are going to be balanced out by any credit card rewards you might pick up.
Credit card debt reduction using tax refund
The average federal tax refund this year is going to be $2,952, according to a Philadelphia Inquirer report. And, if you’re carrying forward credit card debt each month, it’s probable that using your refund to pay down your card balances is your best move.
The average credit card rates at the time of writing are running at 16.89 percent, according to IndexCreditCards. For most people (those who’ve avoided payday loans and–worse yet–lenders who collect with thugs who carry baseball bats), that’s likely to be the most expensive debt they have.
Credit card calculators and calculations
The Inquirer provided an example of someone paying a modest 15-percent APR on a $5,000 credit card balance. To bring that balance down to zero in one year would require monthly payments of $451. If a consumer were to reduce that $5,000 with a one-time payment of $2,952, the average tax refund amount, a more manageable $185 a month is required to be free and clear this time next year. In addition, your credit score should improve as a result of a declining credit utilization ratio.
Want a good post tax day recommendation? Play with the credit card calculators on this site to see how using your tax refund to pay down credit card debt affects your personal finances.
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