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A heavy tax bill can hit you like a freight train, but unlike rail transport, there’s simply no dodging the IRS. Once April rolls around, you have to either pay your taxes or face the consequences, which can be really steep penalties. A tough situation like this may force you to resort to your credit card. The IRS accepts credit cards (through third party companies) and your credit line is enough to handle the bill…but should you do it?
Money can get tight, but that doesn’t necessarily mean you should jump to a credit card to pay off your taxes. Here are 4 reasons why you should not use your credit card to pay taxes.
While you may be able to pay off your taxes with your credit card, you’re still on the hook for your new credit card debt. If you make minimum payments on your card, interest can cost you dearly. In addition to your credit card interest, you’ll also face credit card processing fees that average about 2.5% of the tax total. Typically, merchants pay these fees when you use your credit card at the grocery store or the pharmacy, but US Code § 6311 prohibits the government from covering these fees.
Let’s say you use your credit card to pay off your taxes and it takes up 90% of your available credit line. A measure of how much you owe on your card is utilized by credit scoring services when coming up with your credit score—known as your credit utilization ratio. A high credit utilization ratio can lower your credit score and make it harder for you to take out loans or purchase a vehicle in the future.
A big enough tax bill could get you close to hitting your credit card limit. This is something you want to avoid in the case of an emergency like medical bills, car repairs or mortgage payments.
While Chapter 7 and Chapter 13 bankruptcy can help get rid of most credit card debt, it’s a bit more difficult when it comes to credit card debt procured from paying taxes. The only way to have it discharged is by filing for Chapter 7 bankruptcy and meeting all of the following requirements: the debt is from income taxes, you did not commit fraud, the debt is at least 3 years old, you filed a tax return and the IRS assessed your debt at least 240 days before filing for bankruptcy.
Instead of paying for your taxes with a credit card, you can either choose a long repayment period, set up an online installment agreement or simply assess the situation and see if you can pay in cash within a reasonable time. Explore these options before using your credit card to incur tax debt.
Consult with our Northbrook bankruptcy lawyers before making a decision in order to put yourself in a favorable financial position. Contact us today!