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Paying Taxes by Credit Card
Old 03-27-2014, 07:44 AM   #1
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Paying Taxes by Credit Card

Here's the hypothetical:

You finish your taxes via an online service, on April 14th, and discover that you owe $4,000. Checking your bank accounts, you find that you don't have $4000 at the present time. The best way to pay this amount is to take your recommended IRA withdrawal (70 1/2)... but the only way to transfer money from this account is by using US mail to send in the request for withdrawal. No telephone or fax allowed. The allowed time for this transfer is 14 days. Too late.

Failure to pay the IRS ontime results in a penalty of 5% per month on the unpaid amount. In this case $200.

So, why not pay the amount with a credit card? Calling the Credit card company to ask if the payment will be treated as a regular purchase or as a loan... (If a loan, the credit card loan rates are outrageous.) Answer, no... treated as a regular purchase... paid in 30 days, no penalty.

So far, so good. Now, you finish your taxes and indicate you want to pay by credit card. Good... EXCEPT the government doesn't take credit cards. The only way to do this, is through a third party provider... approved by the government. The minimum service charge for doing this is $2.79 for debit cards. Not so bad... BUT... there is an additional fee of 2.35% interest for credit cards... so 2.35% of $4000... is $94.

Apply the same numbers to a tax bill of $25,000. and you get a charge of $588 for what amounts to a delay of about 10 days... That's better than the
Federal figure of 5% penalty of $1250.

Thimk ahead!
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Old 03-27-2014, 08:11 AM   #2
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As a guilty procrastinator, I know these types of problems well. The wonderful thing is that, once I've jammed myself into the situation, I feel I've accomplished a victory by finding the best way out. Obviously, it would have been better for me to avoid the situation, but I don't dwell on that.

Originally Posted by imoldernu View Post
... but the only way to transfer money from this account is by using US mail to send in the request for withdrawal. No telephone or fax allowed.
This is something I'd probably fix (when the crisis had passed . . . and then I'd put it off).

I'm helping my MIL with her taxes, and Vanguard does not provide an easy mechanism to do the state income tax withholding when the IRA money is withdrawn (they provide this for states with mandatory income tax withholding, but not for others). Estimated tax payments are a PITA, so she's just going to pay the fine--in her state it amounted to $9 for a failure to pre-pay taxes on a moderate income.
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Old 03-27-2014, 08:30 AM   #3
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As they say, "Failure to plan on your part does not constitute an emergency on my part"

But they do offer some options, What if I can’t pay my taxes?
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