You know that Uncle Sam is expecting your tax payment shortly. And if you want to make that payment by using your credit card, you can actually do so free of charge and avoid IRS trouble. If you’re lucky, you might even be able to scoop up some airline miles for yourself too. Have I captured your attention yet?
First, let’s talk about what you shouldn’t do. You don’t want to simply call up the IRS and give them your credit card number. While they’ll be only too happy to accept payment, the credit card company is going to charge you about 2.5% for processing. Terrible idea. If you do it that way, it may help you maximize credit card reward points, but the 2.5% expense costs you more than those points are worth.
Typically, you can figure on the value of your points to come in around 1% of the amount of your charge. So if you use your card to pay the $10,000 you owe Uncle Sam, you’ll pay about $250 in processing costs and receive only about $100 worth of miles.
The other problem with using your credit card to pay your IRS tax debt is that besides the 2.5% ding, you’ll have to pay Godfatheresque interest rates to the credit card company that even Sonny would be ashamed to demand.
No…there is a much better way to use your credit card to pay your IRS tax debt. In fact, there are a few ways to do this.
Better Alternatives to Pay Uncle Sam
The best way is to simply call the credit card company and ask them to increase your credit limit. Assuming you have a decent credit score, this shouldn’t be a problem. The next step is to just tell them you want a cash advance. Most companies are only too happy to give you a cash advance (again, assuming you have good credit). To sweeten the deal, many companies will offer you this cash advance without charging you interest for a number of months.
Now that you’ve used your credit card to pay your taxes for free, the next question is, how are you going to pay off your credit card debt fast? After all, those credit card companies aren’t in business to give money away. Sooner or later those super-high interest rates are going to kick in. You need to get that debt paid off immediately.
You need a short-term and long-term solution.
The short-term solution is to take advantage of credit card alternatives. There are many that can save you up to 50% from the rate you’re paying on your credit cards. One of my favorite alternatives is peer-to-peer lending with a company like Lending Club (for more information, see my Lending Club review).
They do take a little time to set up—that’s why you might use your card to take care of your immediate problem and then come back with an even less expensive alternative.
The long-term solution is of course to budget better. If you owe Uncle Sam tax money and don’t have the cash to pay it, this simply means you haven’t set aside money during the year. If you’ve had an unusual year in terms of income, my suggestion is to be in touch with your tax preparer during the year so this doesn’t catch you off-guard. But if you constantly find yourself short come tax time, start thinking about using a budget tracking system so you can solve this problem in the future.
My favorite tracking program is YNAB (You Need A Budget), but there are several alternatives. You can even use a spreadsheet as a budgeting calculator. Whatever method you use, if you find yourself struggling to pay your tax bill (or any bill for that matter), use it as a wake-up call. Take decisive action to make sure this problem doesn’t keep repeating itself.