Pay Your Taxes with Plastic!

Several years ago I received one of those credit card offers that seemed too good to be true ... zero percent interest for 12 months and no cash advance fee if I promptly used the handy convenience checks they included. I had a fairly large credit limit on the card so I quickly took advantage of the offer and bought $20,000 of EE US Savings bonds with the advance. After a year, I cashed in the bonds, paid off the credit card and ended up netting $600 from the deal even after the 3 month interest penalty. Thank you Visa!

A lot has changed in just a few years. I haven't seen a similar credit card offer come my way since then. The US Treasury doesn't accept credit card payments for savings bond purchases any longer. Effective January 1, 2008, an individual is limited to only $5,000 a year in bond purchases, down from the previous limit of $30,000 per social security number. They took away all my fun.

Then American Express mailed me a letter that got my immediate attention. The letter explains that I can pay my income taxes with the credit card. As a matter of fact I can pay my quarterly estimates, state taxes and even property taxes with my card. I always pay off my balances monthly but this sounds great because I pay a lot in taxes and I have a cash back credit card. The letter from American Express says that using the card is "the smart way to pay taxes". Super! I can always use some more cash back. The good old days are back!

Well hold on ... there is some fine print on the back of the letter. Let me get out the high powered magnifying glass. "All federal tax payments made with the card are subject to a 2.49% convenience fee". Gee if I pay that fee and get my 1 percent back from using the card that isn't so smart after all.

For a few people it may make sense to pay taxes with a credit card because of a short-term cash crunch. Of course it's best to use a card with a low rate or even better ... a nice low teaser rate as long as you have the ability to pay off the balance before the promotional period ends. The IRS will accept both debit and credit cards and has a section on their web site outlining the features of the program. Next time I get a credit card offer that appears to be a nice deal I'll head to the fine print first.