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| The Basics | Owe money to the IRS? Charge it
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Now you can put tax payments to the federal government and 26 states on plastic, perhaps earning enough air miles for a relaxing trip. But be careful.
By Jeff Schnepper
Youre starting to think about your 2005 income taxes, due on April 17, and, worse, how youre going to pay your tax bill.
Well, take comfort.
You now have options on to how to pay the Internal Revenue Service (IRS) and maybe your state, too. Its no longer just write the check and scramble to get the cash into the account before that check clears. In fact, you can have the IRS hit your bank account with automatic withdrawals. And, now, you can charge your tax payment on Visa, Master Card, Discover and American Express cards.
But does charging the tax payment make sense? Maybe. And more taxpayers are choosing the options. The Internal Revenue Service said more than 928,000 taxpayers paid by credit card in the 2005 tax season, up 57% from 2004. (2004 returns were processed in the 2005 tax season.)
The ins and outs of credit cards -- and your trip to Hawaii
There are currently two service providers through which you can charge your tax payments, on all four major credit cards:
Both of these service providers (whose Web sites you can access by clicking on the links at left) charge a fee based on the amount youre paying. Currently, the fee is 2.49% of your payment. So, if you're paying $1,000 in owed taxes, interest and penalties, the total charge would be $1,024.90 -- the $1,000 payment plus the $24.90 service fee.
Turbo Tax charges $29.90 to file state and local returns, $14.95 for each. Jackson Hewitt, a big tax preparation chain, includes e-filing if they prepare your taxes. Tax Cut includes the fee if you use their software.
This convenience fee isnt interest. Its a cost of getting your taxes paid. Like all costs relating to tax planning and preparation, the fee should be allowed as a miscellaneous itemized deduction. The total of all your miscellaneous deductions, reduced by 2% of your adjusted gross income, is allowed if you itemize.
If youre in the 35% bracket, that reduces your cost to only 1.62% (65% of 2.49%).
Heres the fun part. Sign up for a credit card that offers mileage on your charges. If you owe the IRS enough money, you can, in effect, purchase a free airline trip (or whatever benefits you can get from your cards mileage arrangement).
Lets say Im in the 35% tax bracket and I owe the IRS $25,000. I can get an airline ticket to Hawaii for the equivalent of $405 (25,000 miles at 1.62 cents per mile). Alternatively, I could use the mileage to bump up from coach to first class.
You can charge any tax thats due, not just your April 15 bill. If youre making estimated payments, those also can be charged. Ive yet to see W-2 withholdings paid through a credit card. But I see no reason why they cant be charged. However, your employer, not you, would get the mileage and pay any fees.
You also can charge your income taxes if you live in the District of Columbia or one of these 26 states:
| States that let taxpayers charge income tax payments | | | | | | Alabama | Illinois | Nebraska | Pennsylvania | | Arizona | Indiana | New Jersey | Rhode Island | | Arkansas | Kansas | New York | Virginia | | California | Louisiana | Ohio | Washington | | Connecticut | Maryland | Oklahoma | West Virginia | | Georgia | Minnesota | Oregon | Wisconsin | | Iowa | Mississippi | | |
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Is charging your tax debt the right option for you? That depends on several things, including:
- Your habits with credit cards. Will you pay off your credit card promptly? If not, you will be paying 18% a year interest or more. It may be cheaper to pay interest and penalties to the IRS.
- Your tax planning. Im not a fan of big refunds. Youre just lending the money to the government at 0% interest. But neither am I a fan of making a big payment at tax season.
- The costs. Your cost could range from a high of 2.49 cents per dollar of tax paid if you take the standard deduction, to a low of 1.62 cents if you itemize and are in the top bracket.
Checks and money orders still are accepted
Most people still write checks or buy money orders, and the IRS still accepts both. Its straightforward. But here are a couple of tips. Dont make out a check or money order to the IRS. Theres a history of checks made out to the IRS with the I changed to an M and a name added. To avoid this kind of fraud, make out checks and money orders to the United States Treasury.
I also put my Social Security number on any check I mail to the IRS. It reduces the possibility of it being credited to the wrong account.
Automatic withdrawal
You also can file electronically and pay in a single step by authorizing an electronic funds withdrawal from your checking or savings account. Youll need your account number, your banks routing transit number and the type of account (checking or saving).
You could even file electronically in January and schedule the withdrawal for your due date -- April 17 for this year and April 16 in 2007. The IRS prefers this method because it minimizes their costs to process your payment. As long as you input the right numbers, this also eliminates the possibility of lost or misapplied checks. And, theres no charge for this service.
Options if charging doesnt make sense
If you dont have the money, charging may be your only option to pay. But there are other ways to solve the problem.
Take out a home equity loan. If you own a home, you could borrow against your home equity and, if you itemize, deduct the interest. Plus the interest rate is lower.
Work out an installment agreement with the IRS. This lets you pay off your tax bill over time. Check out the IRS Web site for an interactive feature designed to help you determine your eligibility for an installment agreement and to download the related forms. Youd start with Form 9465, the Installment Agreement Request.
If the IRS approves your request, youll be charged a $43 fee. Your installment payments also could be charged, if appropriate.
Finally, lets say you negotiate an Offer in Compromise. Thats where you and the IRS agree on what you really can pay. If you qualify for an Offer in Compromise (and pay a $150 fee), you can charge those payments, too.
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