Financial Friday - April 2024 Edition: Avoiding Tax Penalties

Welcome to the April edition of?Financial Friday, Oklahoma Money Matters' online personal finance question and answer forum. This month, we're answering a question about avoiding tax penalties.

I owe state and federal taxes this year, but will need more money to pay them by April 15. Should I pay with my credit card to avoid penalties from the Internal Revenue Service and the state tax commission?

During this tax season, approximately 25% of taxpayers may owe the government money. Fortunately, credit cards have been recognized as a valid payment method since the Taxpayer Relief Act of 1997, offering a quick way to dodge penalties for late tax filings and payments. However, while this option allows for meeting the filing deadline, it comes with its own considerations.

• Added costs in the form of interest and processing fees. Although a credit card saves you from direct government fees, you'll be liable for the accruing interest until the balance is settled. Your final balance might be more significant than anticipated depending on the original amount owed, your card's interest rate, and the repayment duration. Additionally, unlike regular credit card transactions where merchants cover processing fees, the IRS passes these fees on to you. This fee, a percentage of the outstanding balance, can significantly increase your overall payment.
• Your credit score might take a hit. FICO considers various factors when calculating credit scores, including payment history, owed amounts, credit history length, new credit, and credit types. Depending on the amount of your tax debt, using a credit card could spike your debt-to-income and credit utilization ratios, impacting your credit score. This could complicate future borrowing for significant purchases or loans.
• Credit cards are one of many solutions.?Remember, you can opt for monthly payment arrangements with the IRS instead of paying your balance all at once.
• File on time.?Filing taxes or extensions on time is crucial to evading further penalties. If you're in a challenging financial situation come tax time, check out the IRS's?"What Ifs" for Struggling Taxpayers page?to get additional guidance.

As always, if you have money-saving tips you'd like to share, send us an email at?[email protected]?or?submit a personal finance question?for a future edition of?Financial Friday.?Thanks for participating in?Financial Friday. It's never too late to take control of your financial future!?

The OKMM Team?