Mark Jewell

Steep fees mean paying your tax bill with a credit card should be a last resort

By Mark Jewell
Associated Press / March 8, 2011

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Use a credit card to pay taxes to Uncle Sam, and interest charges aren’t your only worry. Expect to pay fees of at least 2 percent of the tax bill. And that has nothing to do with whether you pay off the balance quickly.

Using a card to pay should be a last resort. Regardless of how big the tax bill is, any convenience from paying by credit card is likely to come at a steep price. That’s important to understand because some card issuers are promoting use of their cards to pay taxes, including offering discounts on electronic tax-filing products.

Here’s a look at the fees:

Why the fees exist: The Internal Revenue Service has contracts with three companies that handle card transaction-processing for tax payments. A 1997 law bars the agency from paying anything to the companies, and the IRS does not receive or charge any fees for card payments. The companies collect fees directly from taxpayers for serving as the middleman.

A similar process occurs with retail credit card purchases. The retailer might get only $9.80 from a $10 purchase. The rest goes to the transaction-processing company and the card issuer. The retailer agrees to the arrangement on the presumption that customers are more likely to buy where paying by credit is an option. With tax payments, the taxpayer directly covers those processing costs.

How much: The charges, called convenience fees, range from 1.95 percent of the amount of taxes paid to 2.35 percent. At the highest rate, a $1,000 tax bill would be $1,023.50 with the fee added in.

The companies that provide the payment services are Link2Gov Corp., RBS WorldPay Inc., and Official Payments Corp. Details on each company’s fees and the tax-payment websites and toll-free phone numbers the companies operate can be found at the following IRS link:

Taxpayers who choose to pay with a debit card are assessed fees per transaction, from $3.89 to $3.95. The card must be a Visa, NYCE, Pulse, or Star debit card.

Other details: The IRS says taxpayers must be informed of the fees before any payment is authorized. The companies’ websites offer online calculators to determine how big the fees will be for a given credit card payment.

Credit card payments can be made by phone and online through the payment-processing companies. Tax preparation software and tax-prep professionals also often are set up to accept credit cards.

Reminder: The balance added to your credit card from a tax payment can trigger interest charges, as with any other expense.

Silver lining: The fees are considered deductible for individuals and businesses.

For an individual expense, taxpayers may deduct the fees as a miscellaneous itemized deduction subject to the 2 percent limit on Form 1040, Schedule A.

Mark Jewell writes for the Associated Press.