If you owe money to the IRS, you may be tempted to charge your payment to a credit card.
Whether you should do that, though, depends on your financial situation. Credit cards come with high interest rates, so if you don’t stay on top of your payments, you may be replacing one form of debt with another high-interest one. Luckily, you can use IRS Direct Pay instead. It’s a free alternative that lets you transfer funds from your bank account and avoid high-interest credit card debt.
Why putting a tax bill on a credit card can backfire
Credit cards are convenient and offer enticing rewards for spending money. However, those same cards have high interest rates that can pull you deep into debt if you aren’t careful. That doesn’t even include processing fees associated with moving IRS debt onto your credit card’s balance.
That extra fee can make a $2,000 tax bill put on a credit card more expensive right away. If you can’t pay off the entire balance right away, interest will accumulate rapidly. That’s why many people turn to IRS Direct Pay, which consists of free transfers from your checking or savings account to the IRS.
How IRS Direct Pay works
IRS Direct Pay is a free and secure payment method that lets taxpayers pay their tax debt directly from their checking or savings account. You can also use it to cover individual taxes, estimated tax payments and certain business tax payments.
The IRS has payment tools that let you schedule payments in advance. That way, you don’t have to manually log into your bank account each time you want to pay the IRS. These payments can be scheduled up to one year in advance.
You will have to provide your bank account number, routing number, payment amount, tax year and payment type before submitting a payment. Then, the IRS will handle the rest, either right away or on the payment date you have selected, depending on your preference.
When Direct Pay is and isn’t the right move
Direct Pay can be the best option for people who have cash in their bank account to cover IRS bills or will have the necessary amount before the deadline. This route lets people avoid credit card fees and high interest rates, but it’s not the right option for someone who cannot afford the bill when the payment is due.
Many people still use credit cards because the entire amount isn’t due right away. You can pay off credit card debt over multiple months, but it’s often better to aggressively tackle your balance than let it linger on a high-interest card. But don’t ignore your tax bill. You may be able to find a zero percent introductory rate credit card, or set up a payment plan with the IRS. The best decision for one person may not be the best decision for another, so carefully consider your debt, savings and other finances before choosing the best route for you.
