UPDATE: The tax filing deadline for 2020 has been moved to July 15, 2020, due to the coronavirus outbreak. This survey was taken and this article was published before this change.
Tax season is upon us, with the 2020 filing period open from January 27th until July 15th. This time of year commonly comes with confusion and many questions among tax filers across the country.
For instance, what’s the best use of a refund? If you’re planning to owe, what are your payment options? What’s the smartest way for you to pay your taxes?
A new Credit Card Insider survey of 3,114 people provided insights on tax filing trends, including big takeaways such as:
- Credit card debt: Of the respondents that expected to get a refund, 40% had credit card debt that they can’t pay off in full, with 75% of them saying they’d use the refund toward their debts.
- Can I use a credit card?: 14% of respondents who expected to owe this year planned on using a credit card to pay their taxes. 21% of respondents that have owed taxes in the past said they’ve paid with a credit card.
- Why use a credit card?: 58% of respondents who planned on using a credit card to pay taxes this year said the main reason was to earn rewards or introductory bonuses. 49% of people who’ve used a credit card in the past to pay taxes stated the same reason.
These trends suggest that the majority of filers across the country give the government a free loan: They have more taxes than necessary withheld over the course of the year, resulting in refunds.
Still, some taxpayers owe, and many use credit cards to pay. If you take this path, it’s important to consider whether potential credit card rewards or bonuses will actually offset any associated processing fees.
When to File
It’s refreshing to see that 88% of survey respondents said that they filed their taxes before the deadline last year, with 93% saying they planned to do so this year.
The 2020 filing window is open from January 27th through April 15th. While the IRS does allow extensions to file your taxes after April 15th, it clearly states that taxpayers should estimate and pay any owed taxes by the deadline to avoid possible penalties.
Owing Taxes vs. Getting a Refund
The biggest question when filing taxes is whether you’re expecting a refund or will owe money to the government. 72% of survey respondents said that they expected to get a refund in 2020.
While a refund may seem like an additional payday, it’s actually just a reimbursement to taxpayers of excess money paid to federal or state governments. By overpaying on your taxes throughout the year, you’re basically providing the government with an interest-free loan. However, some people intentionally overpay taxes, treating their refund like forced savings.
When asked if they’ve ever owed money on their tax returns in the past, it was almost an even split, with 51% of respondents saying that they have owed taxes at some point.
Tax Refund Plans vs. Credit Card Debt
If you align with the 72% of respondents that said they planned to get a refund after filing their taxes, how do you plan to use it? While you may finally have enough for a shopping spree, vacation, or a large purchase you’ve been eyeing, it might not be your smartest option.
40% of respondents who planned to get a refund said that, at the time of the survey, they had credit card debt that they couldn’t pay off in full. And of that 40%, just under one quarter (24%) said that they didn’t plan to use their refund to pay off their credit card debt.
Unless you have a 0% introductory APR offer on your credit card, interest and potential late fees add up quickly. How much debt you’re carrying accounts for 30% of your FICO scores, with credit card debt impacting that category most. So, if you’re carrying a lot of credit card debt, your scores are likely to take a hit.
It’s smart to use your tax refund directly on any debts you have, especially credit card debt!Read more How to Pay Off Debt: 6 Strategies That Work
For respondents who answered that they expected to owe this year, 69% said that they plan to pay through their bank account, with a check, or with cash.
14% responded that they plan to use a credit card, with 17% saying they plan to use one of the IRS’ payment plan options.
The IRS offers several payment options, such as:
- Pay using your bank account when you e-file your return.
- Pay directly from a checking or savings account for free.
- Pay with debit or credit cards online, by phone, or with a mobile device, for a fee.
- Make a cash payment at a participating retail partner.
- Make monthly payments by applying for an installment agreement through the IRS’ Online Payment Agreement tool.
Note that IRS payment agreements can include interest until payment is complete.
Paying Taxes With a Credit Card
As mentioned above, 14% of respondents that expected to owe taxes in 2020 planned to use a credit card to pay. When asked why:
- 57.5% said they wanted to earn rewards or an introductory bonus.
- 37.5% said that they didn’t have the funds available.
- 5% responded “Other,” with answers around convenience being the most common.
51% of respondents said they’ve owed money on tax returns. Of that percentage, 21% stated that they’ve used a credit card to pay taxes at some point in the past. And of that 21%, people gave different reasons:
- 49% said they wanted to earn rewards or an introductory bonus.
- 47% said that they didn’t have the funds available.
- 4% responded “Other,” with answers around convenience being the most popular.
While using a credit card can be convenient, it may not be the smartest option to pay your taxes if you owe.
The IRS doesn’t offer direct payment options for credit cards. Instead, different payment processors accept credit card payments on the agency’s behalf. These processors charge additional fees, usually just under 2%, on top of your tax bill.
For example, if your tax bill is $1,000, you’ll pay nearly $20 extra just for the convenience of using your credit card. If you’re dead set on using a credit card, you can also use a bill payment service like Plastiq to pay your taxes. Although Plastiq charges up to 2.5% for its services, it occasionally offers no-fee deals.
You’re unlikely to come out ahead in terms of regular credit card rewards, outside of some specific situations. Few cash back credit cards offer 2% or more for non-category purchases such as taxes, meaning the best you’ll do in most cases is offset the credit card payment processing fee while earning a fraction of a percent back. Here are a few examples:
The Citi® Double Cash Card – 18 month BT offer (Review) offers one of the highest flat-rate cash back rates at 2% (it’s actually 1% at the time of purchase and 1% when the purchase is paid back as long as you pay at least the minimum due on time). So, with a $1,000 tax bill, 2% cash back, and a 1.87% fee for paying on a credit card, you would come out about $1.67 ahead as long as you have a grace period and pay your full statement balance by the time it’s due to avoid interest.
The Discover it® Miles (Review) earns 1.5 miles per dollar spent, and each “mile” is redeemable for 1 cent. So, that’s the equivalent of 1.5% back on purchases. However, Discover offers Discover Match, which doubles miles earned in the first year (after that first year). When considering that, with a $1,000 tax bill, 1.87% fee, and the equivalent of 3% cash back, you’d still only be coming out $11.86 ahead. And you wouldn’t be getting half of the rewards until after the first year you’ve had the card.
Want to pay off your taxes over time? The U.S. Bank Visa® Platinum Card (Review) will give you 20 billing cycles on purchases to pay off purchases or balance transfers at 0%* APR. Paying directly with the card would be best, to avoid the balance transfer fee. After the intro rate ends you’ll get a regular rate of 14.49% - 24.49%* Variable.
There are a few other possibilities in which you could come ahead by more, including:
- The best option is if you’re trying to hit a signup bonus on your credit card. A signup bonus usually provides a large return for spending a certain amount of money in a set time. Some of these bonuses have a return on spend of around 20% or much more, and would more than offset the fee.
- Many airline and hotel credit cards earn enough rewards to offset the fees, but plan to redeem your miles or points with the co-branded hotel or airline. This can be a bit tricky, though, since the value you get per point can vary based on a number of factors, so the math is not as straightforward as a flat-rate cash back card.
Some cash back credit cards offer up to 5% back in rotating categories, like the Chase Freedom Unlimited® or Discover it® Cash Back. If either of these cards are offering 5% back for PayPal, you could come out ahead as long as you pay your bill in full to avoid any interest charges. But you’re limited to $1,500 in spending per quarter at the 5% rate, and then you’ll earn 1%, so the value is limited.
Another reason it’s not the smartest idea to use your credit card is because you’re likely to pay interest. Unless you have the funds to pay off your balance in full by the next statement due date, you’ll usually be charged interest. Depending on your card, your APR could be above 20%!
However, if you have a 0% introductory offer and need to pay your taxes off over time, this can be a viable option to avoid interest. You will have to plan for the credit card processing fee on top of your taxes, but many of these interest-free offers can range up to 18 months as long as you pay the monthly minimum due on your bill.
Credit Card Insider commissioned SurveyMonkey to conduct this online survey of 3,114 adults over the age of 18 in the United States. All fieldwork was completed from February 3–5, 2020. This survey employed a non-probability-based sample during collection to provide nationally representative results.