April 15 is pressing down, and the government, as always, wants its share, fair or not. Yet the blistering economy has thousands of affected taxpayers scrambling for ways to pay Uncle Sam’s tab without incurring his wrath in the form of dreaded interest and penalties.
“This is an interesting problem year to have a tax liability,” said Vickie Bajtelsmit, chairman of the finance and real-estate department at Colorado State University. “With people out of work or not having enough withheld from their pay, there well could be many people in a bind who can’t pay their taxes.”
That puts taxpayers in a quandary, deciding how to pay the Internal Revenue Service. Credit cards, bank loans, IRS installment plans and IRS extensions are all options.
The question then becomes: Which is the better debt?
Though the IRS recommends that taxpayers turn to personal credit cards — even suggesting a card’s cash-advance option — most financial experts shriek at the fiscal havoc that could wreak.
“There’s really no cheap way to borrow to pay your taxes,” said Ben Woolsey, spokesman for .
Experts agree that turning to your credit card is likely one of the worst ways to pay the IRS — even if your credit is stellar. The fees you’ll pay will outstrip any benefit you might receive, such as a card’s reward programs.
“I put it on my card, paid it the next month and figured it was worth it,” said Bajtelsmit, who had the $5,000 but went for the points.
This year, however, that’s not likely to work out so well, as credit-card companies strain for information that could mean higher interest rates. How you use your card can hurt you, especially if it’s to pay your taxes.
“They’d likely see it as a bigger red flag, as more dangerous behavior than if you were shopping at a discount store,” Woolsey said of card companies mining data to reveal user habits.
Too, the IRS options for paying by card charge a 2.49 percent convenience fee — that’s $24.90 on every $1,000 in taxes you owe.
The IRS does have its own installment plans, but they cost: $105 to sign up, 4 percent interest and 0.5 percent in monthly penalties for being late. Pay in 120 days, and you’ll avoid the fee but not the interest and penalty.
Get an extension to file? No problem, the IRS says.
“But that’s not an extension to pay your taxes,” IRS spokesman David Stell says. “You can get six months to file, but the time to pay is still April 15.”
Delaying payment will cost
A $1,000 income-tax bill will cost more if you can’t pay it right away. Here’s how it breaks down using a few options, all paid within six months, presuming equal installments:
CREDIT CARD
Average card rate: 13.08 percent
Convenience fee: 2.49 percent
Total charged: $1,025
Total paid: $1,068
Total cost: $68
CREDIT-CARD CASH ADVANCE
Average rate: 21 percent
Convenience fee: $3.95
Total charged: $1,004
Total paid: $1,068
Total cost: $68
PERSONAL LOAN
Average rate: 15 percent (with excellent credit score)
Total charged: $1,000
Total paid: $1,050
Total cost: $50 (plus any bank fees)
IRS PLAN (must apply via Form 9465 or online)
Signup fee: $105*
Interest rate: 4 percent (compounded daily)
Late penalty: 0.5 percent monthly
Total charged: $1,105
Total paid: $1,155
Total cost: $155
* Direct debit fee drops to $52. Low-income drops to $43. Fee waived if plan is 120 days or less.
Source: ; IRS; Denver Post research
