What Method Should You Use to Pay Taxes?
Weigh Your Options
This article originally appeared on LearnVest.com.
It’s more than a little annoying that everyone around you is talking about how to spend a tax refund check, since you actually owe Uncle Sam a little money. On top of the fact that you have to pay out, you’re also faced with the nuisance of deciding how. There are more options than ever to pay your taxes, and they all have their pros and cons. We’ve laid them out for you.
Use a Check
Pros: The old-fashioned way gets your taxes paid and out of the way in one easy shot.
Cons: If you were really caught off guard by your tax bill, paying it outright could deplete your cash reserve. So long, summer vacation…
Use A Debit Card
Pros: The same as paying by check, but with the possibility of at least earning points for this nuisance bill (if your card offers them).
Cons: The IRS hires outside firms to process these payments and they charge a fee for their services, typically just under $4. Plus, you have to sign up to do it, adding yet another website to the list of places with your personal information.
Use Credit Card Points
American Express is allowing cardholders to put their reward points toward taxes at a rate of about 200 points for every tax dollar (so a $200 tax will cost 40,000 points).
Pros: You can pay your tax bill without having to lay out cash (or, at least, you can lay out less cash).
Cons: AmEx uses the IRS’s credit card processors to handle the transaction, so you’ll have to a pay a “convenience fee” (about $23.50 for every $1,000 you owe). That will either eat up more points or add a charge to your credit card bill. Plus, using points for taxes isn’t nearly as fun or rewarding as using them for tickets to a concert.
Use A Credit Card
Pros: If you’re short on cash, you can still settle with the IRS all at once. And you might earn points toward those concert tickets.
Cons: Plenty. First, there’s that convenience fee, ranging from just under 2% to nearly 4% of the amount you owe. Plus, if you don’t pay your credit card bill right away, you’ll also have to pay interest on top of your tax payment. Moreover, Joel Ohman, a certified financial planner and the founder of the website CreditCardChaser.com, warns that you need to check with your credit card company to make sure it will treat the charge like a purchase and not a cash advance, which will likely carry an even higher interest and yet another fee…and it might fail to accumulate points for you. That doesn’t even address the potential negative impact to your credit score.
Use A Payment Plan
Pros: You can pay a big tax bill over time, typically 36 months, without racking up credit card debt. Plus, you can set up a direct payment from your employer, so you’ll be less likely to miss the money you’ve never seen. If your financial situation improves, you can pay the balance ahead of time to avoid additional interest fees.
Cons: Uncle Sam charges 5% a month in interest, plus 1% per month if you’re late. Plus, you’ll have to fork over an additional $105 to set up an installment plan ($52 if you set up an electronic payment from your checking account). Finally, you have to keep paying taxes for the current year; should you wind up being owed a refund in the next three years, the government will put it toward the tax bill you’re paying down.
Is the issue less about what method to use when you pay and more about the fact that you simply don’t have the money? We hear you. Here’s our article on what to do if you can’t pay your taxes.