Q: Many credit card issuers promote credit cards as a way to pay your taxes. Is this a good idea?
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A: With one exception, it's a bad idea. The convenience isn't free. To process credit card payments, the IRS uses third-party service providers, which typically charge 2.49 percent. If you pay the IRS $10,000 through one of these providers, your fee will be at least $249.
If you carry a balance, you'll owe more. For example, if you use your credit card to pay $10,249 (your IRS payment plus your fee) and your interest rate is 14 percent, and you pay just the minimum each month, then you will pay an additional $8,760 in interest payments and it will take nearly 25 years to pay it off.
Q: What if you receive rewards for your payment, then is it a good idea to pay your taxes with a credit card?A: No. The rewards are not worth the fee. Typically, they're 1 percent of the purchase amount, well below the 2.49 percent fee. American Express suggests you use Membership Rewards to pay the convenience fee. This is a terrible idea. It will take 49,800 reward points to pay for the $249 fee.
Q: You mentioned one exception. What's that?A: The Citi CashReturns credit card. It currently offers 5 percent cash back for three months and there is no limit to the cash you can earn. So you'll make an extra 2.63 percent on the amount you owe. If your tax bill is $10,249, you will receive $512.45 cash back. After the $249 fee, you will make $263.45. It is a good idea to apply now and start paying as soon as possible to take advantage of your three-month window. The clock starts when you apply for the card, and Citi at any time could end this offer or change the terms.
Q: As far as identity theft, is it risky to pay your taxes by credit card?A: It is, if you don't pay correctly. Do not forward your credit card information into the IRS and do not write the credit card number on the form. The IRS has contracts with two companies to accept credit card charges: Official Payments Corp. and LINK2GOV. You may pay by phone or online.
Business Writer Paula Burkes
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