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Succes Online Financial Education Newsletter
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Should our love of charging extend to taxes? 

Tax bailout

By Jessica Horton, Copywriter

It’s always good to have options. It’s even better to choose the right option, particularly when it involves paying your federal income tax obligation.

With April 15th fast approaching, many are discovering that they have a tax liability they are not prepared to pay. Consumers who find themselves in this predicament do have some options, but it is critical to select the payment plan that is right for you.

If you cannot pay your tax bill by midnight on April 15, and you make no other arrangements, the IRS will obviously consider your payment, or lack of, as late. Because your balance owed is subject to interest and a monthly late payment penalty, it is in your best interest to pay in full as soon as you can to minimize the additional charges.

Options:

You may consider financing the full payment of your tax liability through loans, such as a home equity or personal loan from a financial institution, or obtaining a cash advance through your credit card. Believe it or not, the interest rate and any applicable fees charged by a bank or credit card can be lower than the combination of interest and penalties imposed by the Internal Revenue Code. Contact the IRS. They offer multiple payment agreements based on your circumstances. Some are short-term, while others are structured to stretch the payments over a longer period of time through an installment payment plan.

If you don’t find these options appealing, you can pay the amount due by credit card. That’s right, Uncle Sam allows you to charge your taxes, and at first glance this might appear to be the best alternative.

Before opting to charge the amount of your tax liability consider the following benefits and drawbacks associated with this option:

Benefits:

  • Paying your taxes by credit card gives you the opportunity to pay Uncle Sam by April 15 even if you don’t have the money available to make the payment. The payment date will be the date the charge was authorized, but you have the flexibility of paying off the debt over time to your card issuer.
  • Even though you can arrange a payment plan through the IRS, when you charge your taxes you do so without the hassle of filling out forms.
  • It’s convenient. Payments can be made by phone, Internet or when e-filing.
  • You might be able to earn rewards by charging the amount due. If you have a cash-back rewards card, or a card through which you can earn miles or points, charging a large amount could reap nice benefits.

Drawbacks:

  • According to the Taxpayer Relief Act of 1997, the IRS is restricted from paying the transaction fee normally associated with credit card charges. Therefore, the IRS outsources the credit card payments to a number of companies which are set up to accept tax liability payments. They pass the transaction fee, now renamed a Convenience Fee, along to consumers. Although the fees vary by service provider, they are all based on the amount of the payment at a rate of between 1.95% and 2.35% of the total charged. For example, if you owe $5,000 in taxes, your fee to charge them to your credit card could be $100 or more. This fee obviously eats into any rewards you might earn.
  • Payments to the IRS may not be eligible to earn rewards. Your issuer may not allow IRS payments as part of their rewards program, or the rewards may be tied to certain categories, one of which is not taxes. Be sure to check with your issuer before you make the charge if earning rewards is part of your reason for charging your taxes.
  • Even if you are allowed to earn rewards through this charge, you need to determine if the rewards are greater than any potential fees assessed. Many cash-back cards cap rewards at 1%. Therefore, in the $5,000 scenario above, you could only earn $50. You’ll have paid $100 in fees, and only earn $50 in rewards, not a winning situation.
  • The IRS charge will be treated like any other charge to your card. Interest can be added on, late fees will apply, and if the charge puts you over your credit limit, an over-limit fee will be tacked on. Thus, the longer you take to pay your credit card balance, the larger your original IRS debt becomes due to the additional interest and fees.
  • If the amount you charge is large, it may utilize a significant amount of your credit line, thus limiting your access to credit for other necessities. Further, if too large a percentage of your credit line is used, it could lower your credit score.
  • Because no one knows what tomorrow holds, be aware that income taxes most often cannot be included in a bankruptcy, even if they’ve been charged to a credit card.
  • Additionally, some creditors are now paying close attention to the charging patterns of their customers, and could consider someone an increased risk if they charge their taxes. This could result in punitive term changes to your account in the form of an increased interest rate or a lowered credit line. Consumers need to weigh the considerable downsides to paying their taxes with their credit card before selecting this option.

This guest post was provided by the National Foundation for Credit Counseling (NFCC). Money Management International is a member of the NFCC. The NFCC is the nation’s largest and longest serving national nonprofit credit counseling organization. NFCC Members annually help over three million consumers through close to 800 community-based offices nationwide.

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Navigating your credit report can be confusing; let us be your guide! 

Good credit is one of the most valuable assets you can have. Do you know why your credit report is important? Do you know how long a late payment stays on your credit report? Do you know how to dispute inaccurate information? These are just a few of the questions MMI’s "Understanding your Credit Report" webinar will cover. Time is running out to sign up — so do it today!

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The goal of our highly trained professionals is to arm you with the knowledge necessary to take control of your financial situation. Our online seminars stress the development of skills that can assure long-term success. You will gain the peace of mind that comes from improved spending habits, increased savings, and the wise use of credit. Take the first step toward financial wellness by enrolling in a Web seminar today!

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Tips to avoid credit card dependence

The allure of plastic can be strong, but it's a habit you can break.

Whether you’ve already quit, or you’re just considering it, cutting credit cards out of your life can be a difficult process.

Perhaps you’ve developed a strong dependence on credit and feel as though you need it to survive, or maybe you simply feel as though your credit card is your safety net and it will be there to catch you when you fall.

Regardless of the level of dependence, credit is a dangerous habit that’s hard to break. Consider the following tips to help wean you from dependence on credit cards:

  • Shelve your credit cards. If you still have open credit card accounts, consider carrying cash or your debit card for daily use instead. Leave credit cards at home and only carry one when you plan to use it for a larger purchase or something that you have already reserved for your credit card.
  • Tighten up your budget. Create a real budget and include even the smallest expenses. Maybe filling up at the station or picking up a few things at the grocery store were once expenses that would previously go unnoticed, but with today's high gas and food prices, even smaller-ticket items add up.
  • Cut back on non-essentials. The easiest way to free up extra cash is to know the difference between needs and wants, and make a conscious effort to do without those things that you don’t need such as eating out, vacationing, and shopping for discretionary items such as furniture and electronics. You may even consider getting rid of cable. With programs such as Hulu and Netflix, it's much easier to cut the cables and maintain access to your favorite shows — and you'll save a nice chunk of change!
  • Create a plan to pay down debt. Sometimes it’s easier to break a habit when you have a goal you are trying to accomplish. Make a commitment to pay down a portion of your debt within a certain timeframe, and make sure to get your family involved in working towards a shared goal — you can help keep each other accountable.
  • Build an emergency fund. One of the biggest credit temptations will come in a time of crisis. This is why it's imperative that you have emergency savings on hand. Many consumers lack an emergency savings fund because they've been focused on putting extra funds toward debt. While this is not a bad thing, remember that feeding your own piggy bank will help you rely less on credit if and when a disaster does strike. If you aren't prepared, you could end up back in the same place you started.

Finally, if your financial obligations become overwhelming, don't be afraid to seek help! MMI has counselors available 24 hours a day, seven days a week to help assess your situation and offer the best options for needs. In addition, your human resource or employee services department could also be a great resource if you're feeling overwhelmed by stress caused by debt.

 


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About Money Management International

Money Management International (MMI) is a nonprofit, full-service credit counseling agency, providing confidential financial guidance, financial education, counseling, and debt management assistance to consumers since 1958. MMI helps consumers trim their expenses, develop a spending plan, and repay debts. Counseling is available by appointment in branch offices and 24 hours a day, 7 days a week by telephone and Internet. Services are available in English or Spanish. To learn more, call
866.530.9869 or visit MoneyManagement.org.

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