When Does It Make Sense To Pay Taxes With a Credit Card?

August 23, 2021CreditBy toptierfinancial

As the 2021 tax filing season wraps up, now seems to be as good of a time as any to take a look at a commonly asked question: Should you pay taxes with a credit card?

We will discuss some of the nuances in this post, but for now let’s cut to the chase. For many people, the answer is “no.” Credit card debt is a major financial hurdle for millions of people. Why take it on if it’s avoidable?

When it comes to your income taxes, credit card debt is usually avoidable, and you’ll be better off paying interest and fees to the IRS than paying interest to a credit card company.

However, there are some scenarios in which it might make sense to use a credit card. Again, those are the exceptions to the rule.

In General, Skip the Credit Card

If you have tax liability (meaning you owe money rather than being owed a refund when you submit your return), then ideally you would make the payment required to cover the full tax liability. However, sometimes that is not possible. If you can’t pay the balance you owe, first make sure you still file your return. The IRS has separate penalties for failure to file and failure to pay. By filing, you avoid late filing penalties. Yes, you will be subject to late payment fees and interest, but at least you can avoid some penalties by filing.

Second, you could consider an IRS Payment Plan (also known as Installment Agreements in the case of long-term repayment plans). A Repayment Plan or Installment Agreement helps provide a formal repayment program. It can also save a small amount of money.

In general, when you do not pay your taxes on time you are subject to two additional costs: a failure to pay penalty, and interest. The default penalty is 0.5% for each month you are late, up to 25%. On top of this penalty, you will also be charged interest at a percentage set by the IRS (right now three percent).

If you are on a repayment plan, the penalty drops 0.25%. That may not be a huge savings, but it is better than nothing. Most importantly, whether you are on a formal repayment plan or not, you will likely spend much less in fees or interest when dealing directly with the IRS than you would with a credit card company. If you paid with a credit card, you would be subject to a processing fee (more on that below) and interest rates above 15 percent, and maybe even above 20 percent, depending on your card.

When does it make sense to use a credit card?

There are a few scenarios in which using a credit card for taxes may make sense. Again, these are not common, and we would encourage anyone to think carefully before choosing one of these options.

First: be aware of the fees! At the outset, you should know that paying taxes with a credit card will incur fees. The IRS does not accept credit cards directly, but instead you would make the payment through a third-party processor. The lowest processing fee currently is 1.96%. You can see the processors and their fees here. This is important, because to the extent that you use a credit card to avoid fees or penalties, you will need to remember that this particular cost is unavoidable should you use a credit card. That said, here are some situations in which you may decide to use a card anyway.

When you cannot pay your taxes but know you can soon

If you’re in a pinch and can’t pay your taxes as soon as they are due, but you know you can pay them in a short time (say just a few weeks), then putting the balance on a credit card and paying it off in full within a few weeks (i.e. before interest accrues) may make sense.

“Balance transfer” or Zero-Percent Promotions

If you are struggling to pay your tax bill and have good enough credit to qualify for a zero-interest credit card (promotion), then this could be a viable option. This method may allow you to pay less in overall fees and interest by taking advantage of favorable, short-term credit terms instead of paying the IRS fees and penalties. Keep in mind, all the usual disadvantages and caveats of debt consolidation apply if you go this route.

When you can earn rewards greater than the fees

If you can make your tax payment but would like to earn credit card rewards, you might be able to do so by paying taxes with a credit card. The trick here will be to ensure that the rewards you earn outweigh the fees you will pay to use a credit card.

Bottom Line

We think that for most people, it does not make sense to use a credit card for taxes. If you can pay what you owe, it is very simple to pay the IRS directly and avoid any hassle by using a credit card and paying fees. If you are having difficulty making the payment, then the IRS offers quite reasonable repayment terms. If you skip the IRS’ terms and opt for a credit card instead, you may end up paying much more in interest and fees and may create a long-term debt problem that could have been avoided.

If you have more questions about tax debt, other debt, or your financial plan in general, connect with an NFCC counselor for a free counseling session today.

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Update on Unemployment Programs: What You Should Know about the American Rescue Plan Act of 2021

May 1, 2021CreditBy toptierfinancial

Unemployment programs have been incredibly important throughout the COVID-19 pandemic. When the global health crisis first began, many businesses shut down and the unemployment rate spiked almost immediately. Now, over a year since the initial outbreak, many businesses have been able to adjust to the “new normal” and hiring is picking back up. However, many people are still out of work, and thankfully there is still relief. Here is a quick look at some of the important updates you should know.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law (also known as ARPA). This law is the most recent in a line of pandemic-related legislation going back to early last year. The CARES Act was the first legislation. It was followed by the Consolidated Appropriations Act, 2021 (which included the Continued Assistance for Unemployed Workers Act), and now ARPA. ARPA arrived just in time and extended provisions in the previous Continued Assistance for Unemployed Workers Act which expired March 14. Here is a closer look at some of the important provisions regarding unemployment benefits under this new law.

Unemployment Benefits

Legislation during the pandemic has created a robust framework of various unemployment programs. Here are some of the most important ways ARPA affects the different programs:

Pandemic Emergency Unemployment Compensation (PEUC). This program provides unemployment benefits even after you exhaust state your state unemployment compensation benefits. You can think of this program as essentially extending the period of time you can collect unemployment. Though the money comes from the federal government, this program is designed to essentially work like an extension of your usual state benefits, and the program is administered by each state.  ARPA extends PEUC benefits up to a maximum of 53 weeks and through September 6, 2021.

Pandemic Unemployment Assistance (PUA). This program temporarily provides unemployment insurance to freelancers, self-employed individuals, and other workers who would usually not be eligible. ARPA provides for a maximum duration of PUA benefits of 79 weeks (up to 86 weeks for individuals in those states with high levels of unemployment) and it extended the program through September 6, 2021.

Federal Pandemic Unemployment Compensation (FPUC): This program originally provided an extra $600 per week in unemployment benefits in addition to state benefits. The program was extended by the Consolidated Appropriations Act through March 14, 2021, but at a reduced benefit level of $300 per week. ARPA extended the program through September 6, 2021, and the amount remains at $300.

Mixed Earner Unemployment Compensation (MEUC). This program was not part of the CARES Act. Instead, it was created by the Continued Assistance for Unemployed Workers Act. This program is designed to help workers who have self-employment income and traditional income (i.e. reported on a W-2). It provides assistance to eligible workers who earn at least $5,000 in self-employment income, are not in the PUA program, and who are eligible to receive state unemployment. The MEUC program is extended through September 6, 2021, under ARPA.

Income Tax Waiver

One of the big “gotchas” with unemployment benefits (both before and during COVID-19) has been that the benefits are considered taxable income. ARPA has provided some relief on this issue. ARPA provides a tax break by waiving federal tax on $10,200 of unemployment benefits collected in 2020. This applies to each taxpayer who earns less than $150,000. Many, but not all, states are offering similar tax waivers for state taxes.

Moving Forward

As you can see, ARPA has brought about many important changes. Perhaps most importantly, key unemployment programs have been extended, and there is a tax break for the benefits received last year. Gig workers may also find some additional assistance as they now have PUA and MEUC as potential relief options.

If you are unemployed, you not only need to determine the right benefits options, but you also need a structured budget and financial plan. The NFCC can help. Contact an NFCC-certified credit counselor to get started.

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