Don’t Pay Taxes with a Credit Card

[vanillabean]

It's the same thing your whole life: Sit up straight. Pick up your feet. Be nice to your sister. Oh yeah, and don’t pay taxes with a credit card. The latest reminder that I have come across is:

This Week in Credit Card News: Fees, Taxes and Eternal Debt
http://blogs.forbes.com/moneybuilder/2011/03/21/this-week-in-credit-card-news-fees-taxes-and-eternal...

Let's say the convenience fee for charging your taxes is 2.3%. And let's say you use a card with a 2% cashback or a card whose earned mileage points would be equivalent to 2% cashback.

If you pay say $4,000 in taxes, (2.3 - 2.0)% of $4,000 is $12. That's ok for almost one month of credit (pay before statement cutoff) or almost two months (pay by due date).

If you don't need the credit and put the $4,000 in your 401(k), it'll earn about 8% / 12 of $4,000 is $26 in one month and $52 in two. That looks ok to me.

The above assumes of course you have the needed cash and pay the credit card bill on time.

[cdtotten]

Your post is a little puzzling.

You are telling people that they shouldn't pay their taxes on their CC because of the fee, which is correct. A 2.3% fee to file your taxes is silly, even if you are earning 1-2% back on your CC. I agree with this 100%.

I dont understand your point about the 401(k). If you are paying your taxes in cash, the funds aren't going to your 401(k). Maybe I missed something but that doesn't make any sense. Even if it did make sense, the average return on a 401(k) is currently in the 3-5% range, not 8% (that's long term), not to mention that money cannot be pulled back out.

I'm just not sure what the point of that comment was.

[vanillabean]

My point is that people shouldn't let a convenience fee dictate their lives. Do whatever works best for you.

There are times I need some extra points to redeem a frequent flyer ticket, so the convenience fee may be cheaper than buying miles. Yes, the fee by itself is absurdly high, but some other stuff is even worse.

As for the 8% (correct, long-term), Liz Weston has written that "According to Ibbotson Associates, the stock market has returned at least 8% on average annually in every 30-year period, starting in 1928."

eta: Just because you don't need the credit doesn't mean you can't use it. So if now is a good day to buy some stocks, you may want to use the cash for that and charge the taxes. Nothing short-term about it by the way, as there is generally considerable time between 401(k) contributions (working) and distributions (retired).

[JagerBombs89]

Unfortunately for me, I had to pay my Taxes with either a Debit or Credit Card.  I tried calling the IRS and see how I could pay and they gave me a phone number which didn't seem to work.  So after looking at the IRS website, they had a bunch of different websites that would pay your taxes.  Only problem was that they charged a convenience fee on credit AND debit cards.  The only way to get a lower fee was to use a Visa card, which for me, I unfortunately do not have.  Had to eat up a 1.9% Con. Fee.

[laz98]

i paid the fee.  it was worth it to me to know that they got the darn payment.

[JagerBombs89]

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@laz98 wrote:

i paid the fee.  it was worth it to me to know that they got the darn payment.

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+1