For 2009 (the latest year available for IRS statistics), nearly 22.4 million Americans owed additional income tax when they filed their federal tax return. If you will owe come April 17, 2012, you might be considering how to pay Uncle Sam. The IRS is willing to take what you owe in any form convenient to you: check, money order, electronic funds withdrawal, debit card or credit card.
That last option might pique your interest. Paying by credit card gives you an extra 30 days to pay the debt, assuming you pay your balance in full. You could earn reward points or airline miles. It will also settle your debt with the IRS. Let’s face it; no one really wants to owe the IRS.
Before you charge your tax debt, consider the price of this convenience. The Taxpayer Relief Act of 1997 forbids the IRS from paying credit card transaction fees. This fee ranges from 1.89% to 2.35%, depending on how much you charge and which service provider you use. A $250 tax bill may cost you $4.73 in convenience fees; however, for a $4,000 tax bill, the convenience fee could be nearly $100. If you pay that much for the convenience of using your credit card, find solace in that the fee is deductible on next year’s tax return.
The price for convenience increases if you are using your credit card to finance your tax debt. A credit card with a 0% interest rate might work in this situation. However, if your card’s annual percentage rate is closer to the national average of 14.97% and you finance it over 12 months, you would pay on average $332 in interest.
Other considerations, when using plastic to pay your IRS debt, include its affect on your credit score. A large tax bill could alter your balance-to-limit ratio, thus affecting your credit score. In a worse-case scenario, it is important to know filing for bankruptcy does not discharge credit card debt incurred from taxes.
Depending on the amount you owe, the IRS may have better terms in their installment agreements. The current interest rate for underpayments, which is determined quarterly, is 3%. Penalties may apply if your underpayment is significant. If you can pay your balance within 120 days, no installment agreement is necessary. After 120 days, the fees for setting up an installment agreement range from $52 to $105. Either way, you will end up paying what you owe.
At Henssler Financial we believe you should Live Ready. We advise our clients to have tax projections run throughout the year so they can adjust their withholdings to avoid a large tax bill or large refund come April. If you need help with your taxes, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or e-mail at experts@henssler.com.