If you think tax refunds are something to relish, just imagine taking a holiday vacation paid for by Uncle Sam even when you owe.
That’s just what happened last year to a handful of taxpayers who were able to settle their tax bills with a credit card as part of experiments by the Internal Revenue Service. Indeed, things went so smoothly the agencies have swung open the door this year, delighting taxpayers eager to accumulate airline points they can redeem for free tickets and seating upgrades.
Is it worth it to pay your tax bill with plastic? Usually not. Beware of those “free” miles, because they come with a service fee tacked on by the company that handles credit-card payments for the tax collectors. But as with so many other tax matters, there are exceptions that a savvy consumer can exploit.
“It works. It’s the greatest thing going,” said Robert B. McKinley, chief executive of CardWeb.com Inc., a credit-card information service. But he added, “You have to sift through this thing and do the math.”
This is the second year taxpayers have had this opportunity. But last year’s pilot programs allowed only certain classes of taxpayers to say, “Charge it.” This year, the IRS will let anyone pay their 1999 taxes, as well as the bills they project when they file for an extension and their estimated tax payments for 2000.
Last year, nearly 45,000 federal taxpayers charged almost $175 million under the pilot program. Nearly 150 taxpayers charged at least $100,000, with one going as high as $5.4 million. Those high-rollers aside, the average charge was about $2,700.
Consumer advocates and debt counselors warn that the main risk of charging your tax bills is the same as with any other big credit purchase: If you’re undisciplined or short on cash, you can spiral deeper into debt carrying interest rates of 18 percent or higher. And that’s on top of the credit vendor’s service fee that adds about 2.5 to 3 percent to the bill.
As counterintuitive as it sounds, arranging an installment plan with the IRS is actually a bargain by comparison. The agency charges an effective interest rate of about 14 percent–a rate that belies the paranoia that gnaws at some taxpayers weighing whether to charge their tax bills.
“These are the people who feel they don’t want to owe the IRS, they’re afraid of the IRS,” said Sharon Kreider, a CPA and tax lecturer. “They’re actually better off owing the IRS.”
But air-mile collectors are in a different class–probably business or first class. For them, air mileage is a currency unto its own, with rules dictated by fine print that can make Form 1040 instructions seem like a potboiler.
For starters, it’s important to understand that credit-card companies typically charge merchants a fee of about 2 percent of each transaction. By law, however, the IRS cannot swallow such fees, so their intermediary, Official Payments Corp. of San Ramon, Calif., instead levies a “convenience fee” that adds about 2.5 to 3 percent to each tax bill. For example, it costs $87 to charge that $2,700 bill, a fee of 3.2 percent.
In contrast, most MasterCard, American Express and Discover reward programs kick back points or mileage worth about 0.5 to 2 percent of a transaction, McKinley said. Clearly, that’s no bargain.
But there are compelling exceptions, McKinley says. For starters, General Motors’ MasterCard doles out a 5 percent credit that can be applied toward the price of a new or leased GM vehicle. Official Payments levies a $262 fee to charge the $10,000 tax bill that would earn GM’s annual $500 credit. That’s a savings of $238, assuming you follow through and buy GM wheels.
In general, the economics of charging your taxes to accumulate air mileage for domestic tickets is suspect. Most cards rebate only one mile per dollar charged, and you must redeem about 25,000 miles to get free air fare. That size tax charge triggers a $699 fee, while bargain-hunting travelers can zip cross-country for $250 or so.
Clever air travelers can do better, however. The value of an air mile can jet from 2 to 3 cents to well over $1 if you redeem your miles to upgrade your seat on an international flight.
McKinley speaks from experience. Last year, he charged an $882 round-trip ticket to London on his United Airlines Mileage Plus MasterCard, then redeemed 20,000 miles to step up to a business-class seat that could have set him back $5,300.
Charging a $20,000 tax bill to upgrade his seat would have cost him $699, but it saved him $3,719 overall.
“The secret is paying the base fare and then upgrading,” McKinley said.
But he actually saved far more than that. Because he paid a portion of the fare and was enrolled in United’s frequent-flier program, he earned back 7,500 miles. And as a “premier executive” frequent flier, he got to double that to 15,000 miles.
And Official Payments tracked down one New York man who charged $452,000 in taxes last year so he could cash in the miles to fly his family of four to Australia. His fee was $11,300, but the first-class tickets were priced at $42,000, saving him $30,700.
It almost makes you wish they’d raise taxes.
HERE’S HOW IT WORKS
Q–Can I charge my tax bill on any credit card?
A–No, only MasterCard, American Express and Discover participate. Visa is sitting out.
Q–How do I do it?
A–You may charge your federal bills over the phone through Official Payments Corp. Using a touch-tone phone, call 888-2PAY-TAX (888-272-9829). Be prepared with information such as your Social Security number, amount of payment and your credit card number. You’ll be given a confirmation number you should jot on your return or stow with your tax records.
Q–Is it free?
A–No. Official Payments charges a “convenience” fee that adds about 2.5 to 3 percent to each tax bill. The fee schedules in tax publications and on the Web site are truncated, but there is no cap on how much you can charge.
“If you owe Uncle Sam and you’ve got the available credit, we will take the payment,” said Official Payments spokesman Bruce J. Zanka, noting that one taxpayer rang up a $5 million charge last season.
The total fee on smaller charges is obviously lower, but the fee rate is higher. A $100 charge would cost $6–or 6 percent, for example. In addition, watch your pennies. There can be significant bumps in fees as you step up the fee scale. For instance, it costs $109 to charge $3,500 to $4,399.99. But if you charge $4,400–that extra cent will bump up your fee $24.
Q–Do I have to file a paper return to qualify?
A–No.
Q–Are there restrictions on who is eligible?
A–The IRS has opened up the service significantly since last year’s pilot programs. You cannot charge your tax bill, however, if this is the first year you’re filing a tax return. You also are ineligible if you file a joint return but you’re not the primary filer–meaning your spouse is listed first on the return package or postcard that the IRS mailed you.
You also can charge federal bills associated only with these forms: 1040, 4868 (the extension form) and 1040ES (estimated payments). You must wait until March 1 to charge estimated payments, however.
Q–May I make just a partial payment?
A–Yes, but you’re responsible for the unpaid balance and face penalties and interest charges if you pay the rest off late.
Q–Will the IRS get my credit-card number?
A–No, they just want your money.
— Knight-Ridder/Tribune
