Should You Pay Your Taxes by Plastic?

Going into debt (or maybe deeper into debt) to pay your taxes may not be the wisest call in the financial playbook, but during desperate economic times, some people may not have much choice.

If you're one of those people, this is how it works:

The ever-helpful folks at the Internal Revenue Service have made it fairly easy for you to settle your tax debt by whipping out the plastic. All you need is an Internet connection or a telephone -- and, of course, a valid credit, debit or ATM card that is loaded up with sufficient firepower.

Several intermediaries handle the payments and all accept major credit cards such as Visa, MasterCard, American Express and Discover. Be careful: They all charge "convenience fees" -- in some cases, a flat fee of $3.95; in other cases, between 2 percent and 2.5 percent of the tax payment. These fees are subject to change, so be sure to pay careful attention as you move through the process. The IRS on April 7, 2009, announced a rule change that makes paying this fee a little less painful, at least for some: It made the fee for paying taxes by credit card deductible, if you meet certain conditions.

The IRS says it does not harvest your credit card information, and any information you provide is not disclosed to the tax man by the intermediary except for information required to process and deliver your tax payment.

In addition, most of these intermediary services can handle tax payments to a variety of state and local governments, along with payments to utilities, courts or traffic-citation agencies, schools, etc. But again, be careful: The convenience fees can add up.

How do you find these intermediaries? Easy.

The IRS provides a handy and informative online guide to making any of these payments via credit, debit or ATM cards. The guide includes links to the various services.

Before you begin, give that Web page a good look. It provides a great deal of information about how the system works, how payments arrive to the taxing agency, how confirmations are delivered to you and precisely what flavors of federal tax payments (i.e., which IRS forms) lend themselves to this service.

The IRS also notes, accurately, that using your credit card for this purpose can earn you miles, points or modest refunds, depending on what -- if any -- rewards program your credit card might feature.

But also keep in mind that any time you use a credit card, you are adding to your debt levels. So prudent thought should be given to availing yourself of this service at tax time.