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By Tobie Stanger/Consumer Reports
April 10, 2018
Man paying bills
Tetra Images—Getty Images/Tetra images RF

It's tempting to pay your state and federal tax bills by credit card. By doing so, you can delay the actual payment by a month or so and maybe earn rewards points. By there are three good reasons why paying by credit card could backfire.

One is that if you file and pay your bill electronically, you'll owe more. The Internal Revenue Service authorizes just a few companies to process electronic credit and debit card payments, and they'll charge you credit card processing fees that this year are as high as 1.99 percent of your balance, with a minimum fee of $2.50. On a $2,000 tax bill, you'd have to pay an extra $39 if you pay by credit card.

Another reason to avoid this approach is if you can't pay your credit card bill on time and in full. In that case, you'll be subject to the card's annual interest rates. You could end up paying interest of 9.24 percent to 24.99 percent on the balance you carry.

Finally, if you're paying taxes using a rewards card, keep in mind that the typical credit card reward is 1 percent; on a $2,000 tax payment, that's worth $20. If you're late on a payment, you'll likely wipe out that reward with penalties and late fees.

What You Can Do

If you're considering paying by credit card because you're short of cash, the government offers an option that can cost far less.

The IRS automatically accepts requests for payment installment plans (also called installment agreements) for up to $50,000 in combined taxes, penalties, and interest. You'll pay interest as long as you owe, but the IRS's current interest rate of 5 percent is far less than the average credit card rate and isn't likely to jump sharply over time like a credit card teaser rate. (If you choose the installment plan, you still have to file the return by April 17 to avoid penalties. You don't have to pay the tax owed at the time.)

Alternatively, apply for a new credit card that offers a zero-percent introductory rate. Just be sure to pay off your debt before the rate expires.

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