The point of this post: don’t pay your taxes with your credit card. Ever.
The big news today (for money nerds who read every scrap of money-related news, that is) is that through the online payment system Plastiq, you can put your income tax payment on your credit card.
There is no conceivable situation where this is a good idea.
If you’re trying to be smart and collect points or rewards on your credit card…
You’re not, because you’ll have to pay a 2% fee on top your payment. To get 2% cash back on the CIBC Dividend World Elite card (for example), you have to have spent $35,000 on it first just to break even on the fee you paid for paying your taxes with the card, let alone thinking about breaking even on the annual fee of the card. If you have a no fee rewards card, your point tiers are even lower, and therefore more impossible to use to your advantage.
Now, if all the conditions are right – as in, your fee is waived for the year, or you’re in the middle of a promotional points bonus period – then you might choose to trade off the 2% fee for the extra points you’ll get on the tax balance you owe, to which I say: be careful.
Not only do you have to be diligent in knowing the conditions of your card so that you don’t end up paying interest, you also have to know the value of the points you’re receiving. If, as in this example (paying $2000 in taxes and $40 in fees to get 2040 points) you actually redeem your points regularly, and your points have a redemption value of more than the $40 you’re spending to get them, then by all means, pay your taxes with your credit card.
If You Don’t Have the Money in Cash When Your Taxes Are Due (and are surprised that you owe).
Hopefully this is a one-off situation. You prepare your taxes, and find out that for any one of many possible scenarios your taxes weren’t deducted properly and now you owe the tax man, you’re much (much) better off to pay interest to Revenue Canada than to any credit card.
As long as you file your taxes on time, you won’t be charged with a penalty. Until you’re paid up, you’ll be charged a compounding rate of 5% on the outstanding balance, which means that any interest you owe in May is added to your total, and interest is charged on it too the next month.
Guess what? If you put it on your credit card and don’t pay it off in full within 21 days, or – and this is important, so pay attention – you are already carrying a balance from last month – you’re going to be charged a compounding rate of whatever your credit card balance interest rate is, usually somewhere around 19%, because if you’re carrying a balance over you’ve lost your interest free grace period.
Your next job is to figure out why you owed taxes for last year and how you can plan better for this year so you either don’t owe again, or have enough money set aside when the time comes to pay.
If You Don’t Have the Money in Cash When Your Taxes Are Due (and knew you were going to owe)
Oh my. What can I say to you that won’t make you feel bad?
If you consistently have a tax balance to pay every year – small business owners, I’m looking at you here – and don’t have an annual plan to save that money up, then you’re just asking for trouble, so stop it.
Get a plan in place. Pay your income taxes in installments throughout the year, or set money aside in a separate, untouchable income tax account, and talk to an accountant to look for ways to decrease the amount of income tax you have to pay at all.
By putting your income taxes on your credit card, you’re voluntarily stepping onto the hamster wheel of perpetual debt.