Weigh options before charging tax bill
By Sandra Block
USA Today
In its advertising, Visa proclaims it's "everywhere you want to be." But in the past, there was one place Visa wouldn't go: the Internal Revenue Service.
That changed this month, when Visa said card holders could charge their federal income taxes. MasterCard, American Express and Discover have offered card holders that option for several years.
Visa said it was responding to customer demand. Surveys showed card holders wanted the convenience of being able to charge their taxes, said Armen Khachadourian, senior vice president of Visa USA.
But convenience carries a price:
• Fees. When you pay taxes with a credit card, you'll be charged a "convenience fee" equal to 2.5 percent of your tax bill. You must pay this fee even if you pay off your balance when your credit card bill arrives.
Ordinarily when you use a credit card to buy a product or service, the merchant pays the fee. But federal law prohibits the IRS from paying convenience fees, Khachadourian said. The bigger your tax bill, the larger your fee. On a $5,000 tax bill, you'll pay $125.
To pay taxes by credit card, you can go through one of two companies: • Official Payments, (800) 272-9829 or officialpayments.com. Accepts MasterCard, Discover, Visa and American Express • PhoneCharge, (888) 255-8299 or www.1888alltaxx.com. Accepts MasterCard, Discover and American Express
The convenience fees can thwart a popular strategy: running up charges to win rebates and frequent-flier miles. Most reward programs pay back 1 to 2 percent of the transaction amount in cash, rebates or air miles, said Robert McKinley, president of CardWeb.com, a publisher of credit card data. A 2.5 percent convenience fee would wipe out the value of most credit card rewards and rebates.
How to charge your tax bill
• High interest rates. Many credit cards charge interest of 15 percent or more. Interest on cards with variable rates could rise this summer if the Federal Reserve Board boosts short-term rates.
You might fare better by setting up a monthly installment plan with the IRS, which charges a 6 percent annual interest rate, compounded daily. It costs $43 to set up the plan. The IRS adjusts its interest rate every quarter, but "chances are it's not going to skyrocket," said Brenda Schafer, tax researcher for H&R Block.
Setting up an installment plan with the IRS is fairly simple. Request an agreement on Form 9465, which you can find at www.irs.gov or by calling (800) 829-3676. Explain why you can't pay in full and tell the IRS how much you can afford to pay monthly.
Most reasonable offers are accepted, Schafer said. The IRS will usually accept or reject a proposed installment agreement in 30 days, although it may take longer if you file your request after March 31.
Here's the catch: Once you set up an agreement, you must stick with it. Fall behind, and the IRS may consider you in default and assess you for the entire amount. So when proposing an agreement, "make sure it's a payment you can live with," Schafer said.
Despite the drawbacks, more than 280,000 filers used credit cards to pay their taxes last year. On the first day Visa added the option, 140 customers took advantage of it, Khachadourian said.
There are valid reasons to use a credit card to pay your tax bill:
• Flexible payments. Fulfilling a monthly installment agreement established with the IRS can be a real problem if you get laid off or hit with unexpected bills. A credit card gives you the option of making minimum payments if money gets tight.
Frankly, a lot of people are more comfortable owing money to a credit card company than to the IRS.
• Cash management. The self-employed, along with other taxpayers who earn a lot of income not subject to withholding, are required to pay estimated taxes every quarter. You can use your credit card to make those payments.
You'll still have to pay the convenience fee. But if you're juggling bills or waiting for a payment, using a credit card to cover estimated taxes will buy you time, Schafer said.
