What You Should Know About Credit Cards and Taxes

You may know the old adage about death and taxes but many of us don’t know that credit cards and taxes may be more apt. For many, just hearing the words credit cards or taxes can send a chill up your spine. But proper use of credit cards and their relationship with taxes can be useful in order a secure a strong financial future. Understanding how to utilize credit cards at tax time can save you thousands of dollars in interest rates, help avoid back tax debt and possible future tax leans, which may be levied against personal property due to unpaid or past due taxes.

The IRS understands that many people use credit cards to pay their taxes and have decided that these people need a break. As such, the IRS has made revisions to their tax codes to help on the fees that card companies charge when processing tax payments. The charges credit card companies charge is not a set fee shared by every card company, but the IRS states the average percentage charged is around 2.5 percent of your tax bill. In order to deduct some of the fees levied with credit cards and tax payments, you may file the expense as a miscellaneous deduction.

According to creditcards.com, “Itemize and include the charge in the job expenses and certain miscellaneous deductions section of your Schedule A.” You are able to deduct up to 2 percent of your adjusted gross income, after that cap is reached only the amount over that percentage counts.This deduction is considered a Schedule A and included as a part of the cost of tax preparation. Yes for all of those of you who do not know you can deduct some of the cost of filing taxes. Expenses like your accounting fees, any tax prep software you needed, the price of tax guide books, and yes even the cost of actually paying your taxes by credit card. There are some pros and cons to paying your taxes with a credit card and it is important to understand each before you decide to make this your go to option.

Understanding and calculating the cost.

With credit cards costs averaging around 1.87 percent to 2.35, the fees associated with paying your taxes with a credit card can add up. If you owe around $4,000 dollars you could end up paying around $100 dollars, give or take $20, in credit card fees for the transaction. As stated above, you can deduct that amount in your next year’s tax return and get that money back. But with most credit cards averaging around 15% in monthly interest rates those taxes may end up costing a lot more if you don’t pay off the credit debt with in the first month.

Before you decide to pay your taxes with a credit card, be sure to check the interest rates offered by the IRS and see which is higher. In most cases, if you owe less then $25,000 in back taxes the IRS can offer better rates and a payment plans which are often 60 month term agreements. Michael Rozbruch, founder and CEO of tax negotiation company Tax Resolution Services, states “Of course, you’ll still have to pay interest and late penalties. If you fail to file on time, the IRS charges 5 percent of the amount owed for each month that your return is late up to five months. Once you file, you still have to pay one-half of 1 percent of the amount owed for each month that the payment is late. Once you set up an installment agreement, you get somewhat of a break, as the late penalty drops to one-quarter of a percent per month.”

There are also additional cost associated with late or non-payment. The IRS can and in most cases will charge an additional interest rate, which equals the federal short-term rate plus 3 percent, set quarterly. The IRS also can take ownership of possessions or place leans on assets in the case of default or non-payment. Credit cards often do not posses the same powers of the federal government so in a worst case scenario it maybe best to declare bankruptcy and deal with the bad credit over having the IRS take you home.

Secure credit cards with 0% interest rates, and with a 0% APR.

Obtaining a 0% introductory interest rate credit card is your best option. Credit cards can be for savvy debtors too via a 0% balance transfer. Many companies are beginning to offer special introductory incentives for new card owners, like 0% interest rates and 0% APRs. This can be a great option when deciding to pay your taxes with a credit card. As long as you pay the remaining balance of the card before these incentives end you can save a large amount of money in interest rates saving you thousands of dollars. Many people will be tempted to use their credit cards to pay off their taxes in order to receive additional rewards offered through reward programs. This can be tricky and often not very beneficial as most rewords cap-out around 1% and most fees associated with using your credit card to pay your taxes will be around 2% and that is a losing proposition. If you are getting close to the end of your 0% offer, it is possible to apply and receive a new credit card with the same 0% offer and do a no cost full transfer extending your no interest rate benefit.

Alternative Ways to Invest with ETFs

When I have a little extra money to invest, I like the idea of trying something a little different. While most of my investments are very boring (think index ETFs and dividend aristocrats), I do have a few somewhat alternative investments in my portfolio — just for fun.

ETFs make it a little easier to get a bit out of your comfort zone and mix it up in your investment portfolio. If you have a little play money, and you are looking for some alternatives to stocks and bonds, exotic ETFs and alternatives can be one way to go.

Adding Commodities and Currencies to Your Portfolio

This year, I’ve been participating in an investment challenge with several other bloggers. It’s been a lot of fun, and I’ve been able to play around a little bit, trying things I wouldn’t normally do. One of the things I did was to buy shares of a commodity ETF.

Not only does this commodity ETF provide me with portfolio exposure to precious metals, but it also pays dividends. It’s been kind of a fun way to go about things. Unfortunately, it hasn’t been doing all that well, thanks to the fact that a relatively strong U.S. dollar has meant that commodities aren’t seeing a lot of gains. But it was a fun experiment on hedging, just in case things went south.

You can use ETFs to easily gain exposure to asset classes you wouldn’t normally trade, and do it with relative ease, since ETFs are traded like stocks on exchanges.

Another possibility is trading currencies using ETFs. There are a number of currency ETFs that allow you to add this bit of diversity (and volatility) to your portfolio. Boosting your inclusion of these somewhat alternative asset classes has the potential to add growth to your overall portfolio. It can be one way to further diversify, and step a little outside what’s considered “normal” with today’s investing portfolios.

However, it’s important to be careful when investing in commodities and currencies using ETFs. It’s important to understand that you aren’t actually investing in the commodities and currencies themselves. These ETFs follow certain investments, but they are derivatives and not direct investments. Additionally, it’s important to understand that you can run into trouble through something called contango.

Because commodities are futures-based, there is a chance that near-month futures end up being less expensive than futures that expire later on. This can mean that, during a roll in the ETF, there is a chance to sell low and then buy high. This is one of the risks you run into when you get a little more into these exotic ETFs that go beyond stocks and bonds.

If you decide to go this route, it’s important to understand the possibility of contango, and be prepared for it. You also need to be prepared for the fact that the underlying assets, especially currencies, are often viewed as more volatile than “standard” investments like stocks and bonds. You need the risk tolerance to handle these swings, which is why it makes sense to use money that you can afford to lose. It’s why I used “fun” money as part of the challenge, rather than committing funds that I’m planning to use to build my retirement future.

Real Estate ETFs

It’s also possible to add real estate to your portfolio through ETFs. Even if you don’t want to buy the property yourself, it’s possible to get exposure to real estate — including real estate in other countries — with the help of real estate ETFs. It’s even possible to find real estate ETFs based on REITs, allowing you access to a diverse set of real estate investments.

As with commodity and currency ETFs, though, it’s important to understand that you aren’t actually buying real estate. ETFs might following the underlying investments, and you might be getting exposure to real estate companies, but you aren’t actually buying real estate. It’s important to make that distinction.

ETFs make it easier to diversify your portfolio through exposure to asset classes that you might not normally gain exposure to. Because they are easy to buy and sell, there aren’t the same barriers to entry that you might see if you were actually investing in commodities or real estate. But there are still risks, and it’s important to understand them before you move forward. Rather than putting a large portion of your portfolio in these assets, it might make sense to limit your exposure to 10 to 15 percent devoted to alternative ETFs.