Are you one of the unfortunate Americans who aren’t getting a tax refund, but instead have to pay? The IRS has many options for how to pay your taxes, and you may not be sure which the best is. First, figure out what works and what doesn’t with each method, and how it applies to your situation.
Check
Paying by check gets your tax bill cleaned up quickly and easy. It’s a tried and true method and has lasted through time. The biggest issue with paying by check is that if your tax bill came an s a surprise, you may deplete your savings by paying for it outright.
Debit Card
Just like paying by a check, the money is debited from your bank account. One pro of using this method is that if your card offers reward points, you may be able you may rack some up by paying your tax bill. However, your debit card payment is processed by a third party, and it costs a fee to use. You’ll also have to sign up and add personal information to the outside firm’s website, so if you’re concerned about security this may be an issue.
Credit Card Points
Some companies, like American Express allow cardholders to use reward points at a rate of around 200 points per dollar to pay their tax bill. This means a tax bill of $100 will cost 20,000 points. This is great for those with large amounts of reward points and a little bill, as you may not have to shell out any cash. While this may not be the most entertaining use of your points, it can save you. Though be aware that like debit cards, your subject to the same convenience charges and third party processors.
Credit Card
You can quickly settle your bill without having to have all the cash up front if you use a credit card. And you may even earn reward points, though you need to check with the company to ensure. There’s a convenience charge of anywhere from 2% to 4% of the amount you owe, and you’ll be subject to interest rates through your credit card company, as it will add a balance. Ensure that the company isn’t using the transaction as a cash advance, because then the interest rate (as well as additional fees) can go up. And don’t forget about the potential credit report ramifications as well.
Payment Plan
You can contact the IRS to set up a payment plan, which generally lasts around 36 months. You won’t rack up debt of credit cards, and you can have the money direct debited from your paycheck. You’re also able to pay the balance ahead of time if possible, which helps avoid interest fees.
Unfortunately, this method has its downside. The IRS imposes a 5% a month interest rate, with an additional 1% if you’re late on paying. The cost to set this up is also $105, but can be reduced to $52 if you allow the agency to electronically deduct funds from your checking account. For the next three years, any additional taxes you owe will be applied to the current bill you’re paying.
