Don't give the IRS credit

Q. I've been told that some people paid their 1998 taxes with their airline mileage credit card and received a high number of frequent flier miles as a reward! Should I be doing this as a clever way to recoup something on my 1999 tax bill?

--KIM R. (via e-mail)

Brad: We heard those rumors too, Kim, and after we did a little research, we think the rumors were started by the credit card company! You know the old adage, "if something sounds too good to be true...."

Bob: And that's the case here, Kim. At least for most educators. First, you can only charge to your credit card the taxes you still owe when you file. Because of withholding rules, most educators have paid almost all of their taxes by the end of the year. Most educators do not end up owing thousands of dollars on April 15, unless they have done something very unusual.

Brad: But let's suppose for some reason an educator did end up owing thousands of dollars on April 15. Would it then make sense to use the credit card option? Would it be worth it if one could rack up 5,000 or even 10,000 frequent flier miles?

Bob: Probably not! One reason is that the IRS doesn't actually accept the credit card directly. When Congress let the IRS begin accepting credit cards, the legislators did not permit the IRS to pay the credit card companies a transaction fee, which is one of the ways credit card companies make money. So the IRS negotiated a deal with third-party companies, which actually collect the money and then pass it along to the IRS. In the process, the companies charge the taxpayer a fee of 2.5 percent or more.

Brad: If the reason you want to pay by credit card is that you lack the cash to pay your tax bill, then it would be much less expensive to negotiate an installment agreement with the IRS. It charges $45 to set up the agreement, but the interest rate the IRS charges is less than half what a credit card company might charge you!

Bob: For example, let's say you owe $1,000 in additional taxes and you want to charge it to your credit card. The fee you would incur just to use the credit card would be $25 to $30. Now, because the going interest rate on many credit cards is 18 percent, you will pay $15 per month in interest (18 percent divided by 12 = 1.5 percent per month) for each month you carry the unpaid balance forward.

Brad: The IRS originally planned to extend the credit card option only to those taxpayers who file their returns electronically via the telephone or through an authorized company. But we hear that might be changing. We know that the IRS already is permitting taxpayers to pay estimated 2000 taxes by credit card. So even if it looks as though there might be some opportunities to rack up airline mileage, smart frogs would be wise if they first consider the alternatives to credit cards.

Bob: And here's a last-minute reminder. If you haven't opened a Roth IRA, you should consider doing so before April 15, 2000. You can plunk up to $2,000 before that date into a Roth IRA for 1999. And anytime in 2000, up to April 15, 2001, you can add to that Roth IRA your year 2000 contribution. Not enough educators have taken advantage of this marvelous new type of IRA, and that is a shame!

Brad: Remember that the money placed in the Roth IRA can be withdrawn without incurring penalties or taxes; it is only the earnings that are subject to penalties and taxes if you remove them before age 59½. So, don't park your money in CDs, use a Roth so that the earnings accumulate untaxed until they are withdrawn. And, if you make no withdrawals for five years and you attain age 59½, there will be no penalties or taxes on any withdrawals.

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