Can’t pay your taxes? Don’t put them on a credit card.

IRS financing may not be cheap but it’s usually cheaper than floating your credit card debt on a credit card.

This question came in from a reader on the blog:

I have really been focusing on paying off debt this last year and I’ve made good progress paying it down with SavvyMoney’s program. I’m doing my taxes and I just realized that since I’ve been putting every cent toward my debts I don’t have enough to pay without changing my payoff plan and maybe putting some of the tax bill on a card. I’ll probably charge a portion of the tax to my Chase card which is at 17.9% APR. That is the only card which has enough limit for me to pay from……

Any suggestions how I can avoid falling back on my progress? I’ve loved logging in my payments and sticking to my ’monthly commitment’ every month so far – I would hate to see my balances go up again!

If you owe taxes, you might be tempted to put it on your credit card like this reader. Don’t!

Putting your taxes on a credit card is like adding insult to injury. According to the IRS fact sheet, if you pay with credit card, you’ll pay a 2% convenience fee just for paying your taxes. Then if you’re already running a balance, you’ll start incurring finance charges at your regular APR which can be up to 30%. What’s worse than paying taxes? Paying lots of interest on your taxes!

You have other options

If you owe less than $10,000 you can take advantage of a low-interest loan from the government. Simply file a Form 9465 along with your tax form to request an Installment Agreement. You can set your own terms for up to 36 months and approval is generally automatic. You’ll be charged a modest setup fee (which is reduced if you agree to automatic withdrawals from your bank account) and will be charged a low interest rate between 6-7% and a monthly failure to pay penalty. Combined, the interest rate and failure-to-pay penalty can add up to about 12% per year, but that’s substantially cheaper than your credit card APR.

Extensions are for filing – not for paying

Just make sure that you don’t let the fact that you owe depress you to the point where you don’t take action. If you don’t file your return or file for an extension, you’ll be charged a failure-to-pay penalty of 5% per month until it reaches 25% of the amount owed and a monthly rate after that (currently .833% per month or about 10% per year). You can avoid this by filing a Form 4868 for a 6-month extension.

With diligence, financing your taxes from the IRS at a lower rate than your credit cards will save you money. Just be sure to pay back the IRS loan within the agreed time frame…you don’t want to start building up tax debt.

Jean Chatzky

Jean Chatzky