Now you can put tax payments to the federal government and the State of OHIO on plastic, perhaps earning enough air miles for

Owe money to the IRS? Charge it

Now you can put tax payments to the federal government and the State of OHIO on plastic, perhaps earning enough air miles for a relaxing trip. But be careful.

If you’re starting to think about tax season and how you’re going to pay your income taxes, take comfort. You now have options on to how to pay the Internal Revenue Service (IRS) and maybe your state, too. It’s no longer just write the check and scramble to get the cash into the account before that check clears. In fact, you can have the IRS hit your bank account with automatic withdrawals. And, now, you can charge your tax payment.

But does charging the tax payment make sense? Maybe.

The ins and outs of credit cards—and your trip to Hawaii
For several years, you’ve been able to charge your taxes on your American Express, MasterCard, Visa or Discover card. In 2002, Americans charged roughly $1 billion in tax payments.

There are currently two service providers through which you can charge your tax payments, on all four major credit cards:

Official Payments Corp.
1-800-2PAY-TAX (1-800-272-9829)

LINK2GOV Corp.
1-888-PAY-1040 (1-888-729-1040)

Both of these service providers (whose Web sites you can access by clicking on the links at left) charge a fee based on the amount you’re paying. Currently, the fee is 2.49% of your payment. So, if you’re paying $1,000 in owed taxes, interest and penalties, the total charge would be $1,024.90 -- the $1,000 payment plus the $24.90 service fee.

This convenience fee isn’t interest. It’s a cost of getting your taxes paid. Like all costs relating to tax planning and preparation, the fee should be allowed as a miscellaneous itemized deduction. The total of all your miscellaneous deductions, reduced by 2% of your adjusted gross income, is allowed if you itemize.

If you’re in the 35% bracket, that reduces your cost to only 1.62% (65% of 2.49%).

Here’s the fun part. Sign up for a credit card that offers mileage on your charges. If you owe the IRS enough money, you can, in effect, purchase a “free” airline trip (or whatever benefits you can get from your card’s mileage arrangement).

Let’s say I’m in the 35% tax bracket and I owe the IRS $25,000. I can get an airline ticket to Hawaii for the equivalent of $405 (25,000 miles at 1.62 cents per mile). Alternatively, I could use the mileage to bump up from coach to first class.

You can charge any tax that’s due, not just your April 15 bill. If you’re making estimated payments, those also can be charged. I’ve yet to see W-2 withholdings paid through a credit card. But I see no reason why they can’t be charged. However, your employer, not you, would get the mileage and pay any fees.

You also can charge your income taxes if you live in the State of OHIO.

Is charging your tax debt the right option for you? That depends on several things, including:

Your habits with credit cards. Will you pay off your credit card promptly? If not, you will be paying 18% a year interest or more. It may be cheaper to pay interest and penalties to the IRS.

Your tax planning. I’m not a fan of big refunds. You’re just lending the money to the government at 0% interest. But neither am I a fan of making a big payment at tax season.

The costs. Your cost could range from a high of 2.49 cents per dollar of tax paid if you take the standard deduction, to a low of 1.62 cents if you itemize and are in the top bracket.

Checks and money orders still are accepted
Most people still write checks or buy money orders, and the IRS still accepts either. It’s straightforward. But here’s a couple of tips. Don’t make out a check or money order to the “IRS.” There’s a history of checks made out to the “IRS” with the “I” changed to an “M” and a name added. To avoid this kind of fraud, make out checks and money orders to the “United States Treasury.”

I also put my Social Security number on any check I mail to the IRS. It reduces the possibility of it being credited to the wrong account.

Automatic withdrawal
You also can file electronically and pay in a single step by authorizing an electronic funds withdrawal from your checking or savings account. You’ll need your account number, your bank’s routing transit number and the type of account (checking or saving).

You could even file electronically in January and schedule the withdrawal for your due date—April 15. The IRS prefers this method because it minimizes their costs to process your payment. As long as you input the right numbers, this also eliminates the possibility of lost or misapplied checks. And, there’s no charge for this service.

Options if charging doesn’t make sense
If you don’t have the money, charging may be your only option to pay. But there are other ways to solve the problem.

Take out a home equity loan. If you own a home, you could borrow against your home equity and, if you itemize, deduct the interest. Plus the interest rate is lower.

Work out an installment agreement with the IRS. This lets you pay off your tax your liability over time. Check out the IRS Web site for an interactive feature designed to help you determine your eligibility for an installment agreement and to download the related forms. You’d start with Form 9465, the Installment Agreement Request.

If the IRS approves your request, you’ll be charged a $43 fee. Your installment payments also could be charged, if appropriate.

Finally, let’s say you negotiate an Offer in Compromise. That’s where you and the IRS agree on what you really can pay. If you qualify for an Offer in Compromise (and pay a $150 fee), you can charge those payments, too.

_____________________________________________________________________________________

This article is by Jeff Schnepper, the author of the best-selling, "How to Pay Zero Taxes," which is in its 15th edition. He has written several other books on finance and taxation including "TurboTax Deluxe," "How Much is it Worth? Asset and Business Valuation," "The New Bankruptcy Law: A Professional Handbook," and "Inside the IRS, How it Works (You Over)." A former professor of taxation, accounting and finance, Schnepper has argued before the U.S. Supreme Court and has appeared on numerous national and local television programs. He lives in New Jersey.