Yesterday, we talked about what can happen if you owe the IRS money; today we'll talk about your options to pay them.
You many not want to deal with the IRS, so you decide to put it on your credit card. This really isn't a good idea for several reasons. First, the interest rate you pay on your card is probably more than what the IRS would charge you. Amazing! The average credit card rate is around 15%, and the IRS will charge you around 7% or 8% if you choose the installment method mentioned below. The installment rate will vary, but then so can your credit card rate.
Next, the IRS may not accept your credit card. They don't deal with all of them.
Keep in mind if your credit card is offering a great rate, that may not last forever; if you do decide to put your taxes on a credit card with a great introductory rate, make sure it is less than what the IRS will charge you and you pay it off during the introductory period.
Also, charging your tax bill may lower your credit score, especially if the amount you owe is substantial. It lowers the amount of available credit you have, so it therefore lowers your score. Not to mention the fee you owe if you go over the limit on your credit card.
An alternative would be to get a loan from a bank. The advantage is that it would be fixed, whereas the installment from the IRS won't be fixed, and neither will your credit card rate, unless you have a fixded rate card. It may also be a lower rate than the IRS or the credit card. Make sure the loan is no longer than a year. You certainly don't want to get to April, 2012 and find you owe the IRS for 2011 and you're still paying the loan on your 2010 taxes.
Finally, you may want to consider an installment loan from the IRS. This may be your best bet if you cannot get a loan from a bank that is lower than the IRS rate. If you owe less than $25,000, the IRS will grant you an installment and you determine how much you can pay each month. Like the bank loan, it is in your best interest to pay the installment agreement as soon as possible. Again, the IRS will carge you around 7% to 8%, but that is still less than the average credit card rate at 15%.
Hopefully, you won't end up owing taxes; these are the things you need to keep in mind when choosing your options if you do. Which would you pick?