3 Little-Known Perks of Paying Your Tax Bill With a Credit Card -- and 1 Major Drawback to Watch For

More than 95 million Americans got tax refunds when they filed their 2022 tax returns, with an average refund of $3,033 per person. But with over 144 million tax returns filed, that still leaves plenty of people who owed the IRS.

In a way, that's a good thing. If you get a refund, it essentially means you gave the IRS an interest-free loan during the year. But it can still be stressful if you weren't prepared for a tax bill. There are several ways you can pay it off, and one of the easiest is using a credit card. Here's a look at some of the benefits of paying this way -- and why you might not want to.

Three perks of paying your tax bill with a credit card

Here are some of the best reasons to pay your tax bill with a credit card this year.

1. You could earn a lot of rewards

Paying your tax bill with a rewards credit card is a way to get some of that money back in time. You'll earn either rewards points or miles for doing so, and you can later redeem that for cash back, gift cards, flights, or hotel stays, among other things. You could also just put it toward your future credit card balance to reduce your bill.

How much you'll earn depends on the card you use and the size of your tax bill. If you owe $1,000 and you get 1 reward point per dollar spent, that's 1,000 reward points right there.

2. It could help you earn a credit card's sign-up bonus

Many credit cards offer sign-up bonuses to draw in new customers. To earn this, you must usually spend a certain amount within the first few months of account opening.

The requirements are pretty steep on some cards. For example, the American Express® Gold Card offers a whopping 60,000 rewards points as its sign-up bonus, but to earn it, you must spend at least $6,000 within the first 6 months of account opening (terms apply). Paying your tax bill, especially if it's substantial, could go a long way toward helping you meet this sign-up bonus.

3. It could help you avoid late filing fees or interest charges

Those who fail to file their tax returns or fail to pay what they owe face costly penalties. Paying with a credit card can help you avoid these fees, even if you don't have the cash on hand to pay the full bill upfront.

Using a card with a 0% introductory annual percentage rate (APR) could help you avoid interest charges you'd face with other cards, too. If you're able to pay back the full amount you owe before the 0% APR period ends, you won't owe any extra.

The problem with paying your tax bill with a credit card

Using a credit card to pay your tax bill could help you avoid some of the tax penalties discussed above, but it could cost you more in the long run. For one, there's a processing fee for using a credit card. It ranges from 1.82% to 1.98% of your payment amount, depending on the provider you use.

But the real danger is that you could wind up paying costly interest charges on your credit card bill that hurt your financial security over the long term. If you paid a $1,000 tax bill with a card that had an 18% interest rate and you made the minimum payment every month, it would take you 113 months to pay it off and you'd pay $923.18 in interest overall. That's almost double what you initially owed.

For this reason, it's best not to pay your taxes with a credit card unless you're confident you can pay the full amount off when your bill comes due or before your 0% APR period ends, as discussed above. If that's not possible, you have other options.

Other ways to pay your tax bill

If using a credit card isn't right for you and you don't have the cash to pay the IRS directly, one of these options might be a better fit for you.

• Short-term payment plans: This gives you up to 180 days to pay your tax bill in full, but your balance may still accrue interest or late payment penalties during this time. You can apply for one of these plans by filling out the Online Payment Agreement or calling the IRS.
• Installment agreements: This is a longer-term payment plan that enables you to pay your balance off over more than 180 days. This is only available to those who owe $50,000 or less. You can apply for it by filling out the Online Payment Agreement linked above.
• Offer in compromise: An offer in compromise is where you tell the IRS what you can afford to pay. It will consider your offer and, if it agrees, you'll pay that much upfront or within an agreed-upon timeframe. The IRS will then forgive your remaining debt.

Explore all your options before deciding what's best for you. And if you have any questions, reach out to the IRS for clarification. You don't want to guess on anything to do with your taxes or you could find yourself in a lot of hot water.