The Checkout

Paying Taxes with Plastic May Not Be Rewarding

This tax season, credit-card issuers want to make it rewarding for people to pay their taxes by just saying "charge it." Many are offering extra miles or cash back rewards for every tax dollar paid by plastic.

This may sound tempting, but IndexCreditCards.com--a Web site that offers credit card news and information-- says don't do it. The reason: Unlike stores, which usually pay the 2-3% transaction fee on every purchase made with plastic, the IRS doesn't absorb that cost. You do--and that could cost way more than any rewards you may receive.

IndexCreditCards.com does the math: Say you owe $4,000 in taxes and you want to pay by credit card. Given the service charge [usually 2.49 percent], you would actually pay $4,099.60. So, if your goal was to earn rewards, and your cash back was 1% of the transaction, you'd be paying almost $100 to gain only about $40 worth of rewards.

Of course, there may be some other deals that still make it attractive to use plastic to pay your taxes. (According to Cardweb.com, a Web site that publishes all sorts of valuable information about all kinds of payment cards, 1.4 million Americans paid their taxes by credit cards last year.) This year, Cardweb notes, there are ways consumers can pay without incurring a service charge--or at least a reduced one. H&R Block, for example, has made arrangements with Visa and MasterCard so its customers don't have to pay the fee, or at least the usual amount.

So, do your math carefully before you decide to pay your taxes with plastic.

Also, in case you missed it over the weekend, check out my story on the IRS warnings on phony e-mails. Plus, washingtonpost.com's guide to preparing and filing your taxes is live and available whenever you need it between now and mid-April.

By  |  February 27, 2006; 6:00 AM ET Consumer Tips
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Comments

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Wait, it gets worse. I just did my taxes and Turbotax offered to use my refund to pay for the electronic transmission fees. Seems like a good idea, no? However, turns out that you have to pay a bank a fee equal to the electronic transmission fees to do this. No thanks.

Less annoying but still pretty stupid was the offer to convert some of my refund into money cards for use at Starbucks, Red Lobster etc. They offered a discount that was quickly eaten up by the shipping and handling fees unless you spent well over $100. This wouldn't be hard to do but no thanks, I can get these cards for free elsewhere.

Posted by: lpdrjk | February 27, 2006 8:59 AM

I intend to pay my taxes via a convenience check from my Visa Company because they offer "no interest" for the life of the amount.Now thats a deal.

Posted by: Joseph Harrison | February 27, 2006 9:05 AM

Ms. Mayer,

Thanks for the mention of IndexCreditCards.com on your blog.

To follow up on this item, some credit cards are offering double rewards on income tax payments with their cards. While this might take some of the sting out of the fee for IRS credit card payments, at best it is a wash in terms of fee vs. reward. And, what's better, frequent flyer miles in an account or money in your pocket?

Posted by: Justin McHenry, IndexCreditCards.com | February 27, 2006 9:52 AM

I was excited to see that I could pay my tax via credit card, but when I saw the fee -- no thank you! Why would I want 1% cashback when service fee is 2%? What a waste. I think the entire tax preparation industry is a scheme--tax preparation software must be offered by the IRS for FREE. Paper forms are available for free, but try and do your taxes yourself on paper! I tried (and I have MBA!), but then shelled out $35 for turbotax software.

Posted by: Elle | February 27, 2006 12:23 PM

Thanks for blogging this. My credit card offered double miles, a tempting offer since I have to make a hefty payment this year and I can pay the bill off immediately. But if I have to pay a fee on top of it, forget it. I havent been using the miles in the first place.

Posted by: WMA | February 27, 2006 2:33 PM

Finally a program where I can pay my taxes without a convenience fee and get my rewards (www.hrblock.com/goto/taxpayment/ or www.pay1040.com/rewards.aspx).

Posted by: scott | February 27, 2006 5:27 PM

H&R Block to Reduce or Eliminate Credit Card 'Convenience Fees' to Help Taxpayers Pay Balances Quickly and Save Money
Friday February 17, 10:00 am ET

Collaboration with LINK2GOV Means Low-Cost and No-Cost Options When Paying Federal Taxes in Full
KANSAS CITY, Mo.--(BUSINESS WIRE)--Feb. 17, 2006--H&R Block (NYSE:HRB - News) announced that its clients can now use their credit and debit cards to pay their federal income tax bill, many without being charged additional "convenience fees" by the payment processor. Through the use of specific credit and debit cards, some fees will be eliminated, and others will be discounted or rebated. These convenience fee offers will assist the taxpayer in H&R Block offices and online.
In 2005, almost 15 percent of American taxpayers owed a balance upon filing their tax return(1).The use of credit and debit cards to pay the IRS is growing; the IRS received 1.4 million credit card payments last year(2). However, when taxpayers use a credit or debit card to pay a balance due, card processors typically charge an additional 2.49 percent convenience fee.
When H&R Block clients visit an office to file their tax return and find they have a balance due, the standard card-company convenience fee is eliminated if they choose to pay by a Visa® check card. If clients choose to pay with a Visa credit card, the standard fee is reduced to 1.99 percent.
Low-cost and no-cost options are also available for online federal tax payments, thanks to the arrangement among PAY1040.com, powered by LINK2GOV, H&R Block and the payment card associations. The same Visa offers are available to clients who use H&R Block's TaxCut Online programs through special links arranged with Visa(3). In addition, for TaxCut Online clients who pay their balances using a MasterCard® debit card, the 2.49 percent convenience fee is eliminated. If a client uses a MasterCard credit card, the taxpayer will receive a convenience fee rebate on the first $350 of the tax payment. The MasterCard offers are available to H&R Block's TaxCut Online clients only(4). More information about the special offers for TaxCut Online is available at www.hrblock.com/goto/taxpayment.
"While every taxpayer obviously prefers a refund, the reality is that many Americans owe taxes at the end of the year, so it's important that we help make paying in full as efficient and low-cost as possible," said Tim Gokey, president of Tax Services for H&R Block. "Our collaboration with the credit card companies and LINK2GOV, an IRS-approved payment processor, helps our clients reduce or eliminate fees that would add costs. We're proud to offer our clients a more convenient, less expensive way to pay in full."
H&R Block encourages taxpayers to pay balances timely, and there are many incentives for paying by credit or debit card. Tax payments can be processed while the client is in the H&R Block office, or when logged onto the Internet using TaxCut Online. The process eliminates worries about late fees or penalties resulting from lost or delayed checks. Depending on the card, taxpayers may be able to earn miles, points or other rewards by paying with a credit or debit card. With their credit cards, they can pay their taxes on a schedule that is right for them, spreading out payments and better managing their cash flow.
Tax payments paid by credit or debit card are processed by LINK2GOV Corp., an IRS-approved payment processor. The payments are processed immediately, and payers are issued a confirmation number upon receipt. In addition to Visa and MasterCard, H&R Block clients can also make tax payments using their American Express® and Discover® cards.
Interested clients should discuss the low-cost or no-cost payment options with their H&R Block tax professional, or visit www.hrblock.com/goto/taxpayment.

Posted by: bill | February 27, 2006 5:29 PM

Ms. Mayer,

Greetings! Just wanted to say that this is a great article and good info. Interestingly enough, we just published our own news article on this topic earlier this week, which may be of interest to your readers:

http://www.cardratings.com/creditcardnews/2006/02/credit-card-issuers-ramping-up-income.html

Keep up your great work on behalf of consumers. Always enjoy your articles...

Best Regards,
Curtis Arnold
Founder
U.S. Citizens for Fair Credit Card Terms, Inc.
http://www.cardratings.com
Phone: (501) 663-0314 x3
Fax: (501) 374-8887


Posted by: Curtis Arnold | March 1, 2006 5:18 PM

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