Should You Pay Your Taxes with Plastic?

The IRS is happy to take credit cards, but it'll cost you

In our credit-crazed economy, you can pay for just about anything with plastic -- including your income taxes. But while "put it on the card" might be your typical response when presented with a bill for goods and services, it's not usually a great idea for taxes.

The charge-it option is convenient, though. Last year, 313,385 taxpayers whipped out their credit cards, according to the Internal Revenue Service, which has accepted such payments since 1999. The ease comes at a cost: You'll remit 2.25% to 3% of what you owe, plus finance charges if you pay the card company in installments.

The IRS has designated LINK2GOV and Official Payments Corp. to process tax payments you make online or by telephone with American Express (AXP ), Discover Card, MasterCard, or Visa. For their service, these companies charge a "convenience" fee -- 2.49% in most cases. Official Payments also handles card payments for 21 states and the District of Columbia for a fee of up to 2.5%.

The main reason to pay with plastic is to cope with a cash shortage when your taxes comes due. (For details, go to www.irs.gov and type "credit card" in the search box.) If your alternative is make an early withdrawal, subject to taxes and penalty, from a retirement account, it's cheaper just to accept the credit-card fee -- especially if you can pay off the balance within months. Charging your taxes is often preferable to writing a check against your credit card account, since that may have its own fee and a higher interest rate than the one on the card.

More economical options might be to tap your home equity line or work out an installment arrangement with the IRS. But you may still want to use a credit card if it's tied to a lucrative rewards program. Some American Express co-branded cards, such as those issued with Delta Air Lines (DAL ) and Starwood Hotels & Resorts (HOT ), are giving double or triple rewards points for your tax payments. The other card companies say you'll have to check with the individual bank issuers to see if they are offering similar incentives. If they are, the bonus might lessen the sting of your tax bill.

Corrections and Clarifications In "Should you pay with plastic?" (BusinessWeek Investor, Mar. 31), Official Payments Corp. is the company that processes tax payments by credit card for 21 states and the District of Columbia.

By Ellen Hoffman

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