Paying your taxes on your credit card? Not in Canada - but 2.6M Americans will use one - the IRS even promotes it -
It’s tax time. Will that be cash or charge? Millions of Americans will being doing just that this tax season -- paying their bill to Uncle Sam with a credit card.
It sounds crazy but 2.6 million Americans will use their credits to pay third-party processors who submit tax bills to the U.S. federal government on behalf of clients, says Bill Hardekopf, chief executive of Birmingham, Ala.-based lowcards.com.
He says the Internal Revenue Service even promotes the use of credit cards for paying tax bills, noting the IRS say on its web site it is “convenient, safe and secure,” and reminds taxpayers using cards with a reward program can earn points.
And people still wonder how the U.S. got in into a credit problem.
“Heck, you can pay for everything with a credit card. They’ll let you pay for your casket if you want,” says Mr. Hardekopf, whose web site does not take advertising but makes money when people sign up for credit cards through lowcards.com,
Aside from the potential for interest charges, paying for your credit card to get points makes absolutely no sense. Third party filers in the U.S. charge a processing fee ranging from 2.35% to 3.93% to put a tax bill on a credit card. Most reward programs offer the equivalent of maybe 1% to 2% back, depending on how you calculate the reward.
Why do people love points so much?
“I don’t think you should be using your credit card unless you are in a dire emergency,” says Mr. Hardekopf. “If you need a couple of weeks, I guess you could do that. But the risk is costly, if you forget to pay, because [of interest].”
Maybe we should be thankful that Canada Revenue Agency doesn’t allow us to use credit cards in any form. You can pay your tax bill online or at the bank but it has to be from an account with actual money in it.
“You wonder why they have a debt problem,” said Cleo Hamel, senior tax analyst with H&R Block Canada.
There is a way a Canadian could conceivably use their credit card to pay off a tax bill but it would mean taking out a cash advance, which not only won’t earn you points, but usually means interest charged from the day of the transaction.
There is really not much of an argument for Canadians to use credit to pay their tax bill off by the May 2 deadline. The interest the government charges is far less than you’ll pay on most cards.
“Our interest rate is pretty low right now,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, adding it is 5% today based on prevailing rates. It varies by quarter.
The biggest mistake you can make if you owe taxes is to not file a return at all. If you are late it is 5% of the amount owing and 1% for every month your are late to maximum of 12 months. And that’s for a first-time offence. The penalties double if you are late paying in any of the prior three years.
Ms. Hamel says H&R Block’s general advice is if you owe money, go ahead and file your taxes right away if you have all your information ready. Between now and the tax season deadline you could pay it down and your balance won’t be as high.
As for using debt, you could use a line of credit to pay your tax bill if your rate is lower than the government of Canada’s. “A line of credit might make more sense if you are looking for the cheapest borrowing method,” says Ms. Hamel.
Tax bills are one of the things that can lead Canadians into more debt problems, says Patricia White, executive director of Credit Counselling Canada.
“We don’t see it as a major issue so maybe it’s a good thing that in Canada we don’t have the ability to put our taxes onto our credit,” she says.
I’ll take the CRA approach on this over the IRS. The last thing we need is more credit card debt, even if it is to pay off the government.