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Think twice before using plastic to pay income taxes

If you're thinking about using your credit card to pay your income taxes, think again.

It could cost you dearly in the long term.

For one thing, the so-called "convenience fee" that you'll pay is way high.

Credit card payments to the Internal Revenue Service are processed by third-party providers. These companies charge a processing fee, which is as low as 1.89 percent and as high as 3.93 percent.

That may not sound like much, but when added to your credit card balance, it can be significant.

"If your tax bill is $8,000, a processing fee of 2.35 percent will cost $188, which is rolled into your credit card's balance," said Bill Hardekopf, chief executive of LowCards.com, a credit card information website.

"If you don't pay off your card's balance in its entirety at the end of the month, you will begin to incur interest rate charges on the $8,188 balance, which, depending on the account's annual percentage rate, can be an extremely costly way to pay your taxes."

Even if you do pay off the balance at the end of the month, Hardekopf said the card must pay cash-back rewards or miles that are greater than the processing fee for this payment method to make sense.

One credit counselor takes a harder line.

"The convenience fee outweighs any benefit provided by cash-back or miles on a loyalty program," said Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas. "You're always going to be paying more via the credit card because of the fees."

One alternative to charging your taxes on a credit card is to make monthly payments to the IRS.

"Before charging your taxes on a credit card, check into installment options from the IRS, especially if your credit card has a high APR," Hardekopf said. "The IRS will charge interest, but it may be less than what you would pay with your credit card."

However, you should know that the government will subtract any taxes you owe from future refunds until you're paid in full.

Also, you should make your monthly payments as large as possible to limit interest and penalty charges. Those charges will continue until your tax bill is paid off.

For more information on installment payments, go to the IRS' website, www.irs.gov.

Of all the creditors in your life, Uncle Sam is the one you want to pay off the soonest. You don't want the federal government on your back for money you owe.

One way to avoid that is to anticipate whether you will owe taxes.

"If you know that you're going to be owing taxes, this is like another periodic obligation, a bill that you should be preparing for during the course of the year," Mark said. "Figure what your bill is going to be and start putting one-twelfth of that into an account each month so you've got the resources to pay in full. Nobody should be surprised on April 15."

Another option is to increase the amount withheld from your paycheck so you don't end up owing taxes.

Using your credit card to pay taxes may be convenient, but it could bring you trouble down the road if you pile that debt on top of debt you already have.