You owe federal taxes, and you also have a credit card that will pay rewards on anything you use it for. When you run the numbers, are the rewards worth the cost?
Generally, no. Although it might be tempting to rid yourself of that pesky tax debt right away, there are usually better options than paying with a credit card, regardless of the perks.
For one thing, notes Consumer Reports, the IRS has only authorized a few credit card companies to process tax payments, and all of them will charge you a processing fee. The fees run from a minimum of $2.50 to 1.99% of your entire tax bill. That means you'd pay $39 on a $2,000 tax bill -- and that could wipe out any benefit you get from your rewards program. You would need to be sure your reward pays at least 2%, and that it will apply to a tax payment, before you would do more than break even.
It's important to realize that paying anything with a credit card means taking a risk. If you can't pay it off immediately, you will pay interest. As of July 3, the average annual percentage rate on credit cards was at an all-time high of 17.76%. And, even a single late payment would likely wipe out the value of any rewards you received.
The one situation in which using a credit card might be advantageous is when it offers a 0% introductory interest rate -- IF you can be certain you'll be able to pay off the whole balance before the introductory rate expires.
Cheaper options for paying off IRS tax debt
As long as you owe less than $50,000, you can request an installment plan from the IRS. This is relatively easy to do. You file IRS Form 9465, "installment agreement request," with your tax return or separately. However, a tax attorney may be able to help you get a plan you can afford. You can take up to six years to pay.
There is generally a setup fee of between about $31 to $225, depending on the amount in taxes owed. However, the fee is much lower if you authorize direct payments.
Other payment options include a home equity line of credit or a personal loan from a bank or credit union. In either case, the interest rate is likely to be much lower than what you would pay on a credit card. Currently, the average 15-year home equity line of credit rate is between 5 and 6%. The average rate for an unsecured personal loan is harder to predict, but it could easily be lower than the average credit card interest rate of 17.76%.