Credit Card Fees for Tax Payment Deductible
IRS changes its position
By Kaye A. Thomas
Posted April 13, 2009
Deduction is subject to limits.
If you use a credit card or debit card to pay your federal income tax you're likely to be hit with a fee imposed by the credit card company. The IRS previously took the position that such fees are not deductible because they are not incurred in the process of figuring your tax liability. The agency has now announced a change of heart.
Who benefits
Not everyone who pays these fees will be able to claim a tax benefit. The deduction is allowed only if you itemize your deductions. A majority of taxpayers claim the standard deduction rather than itemizing, and those people won't get the deduction.
Furthermore, this is considered a "miscellaneous" itemized deduction, and you don't benefit from deductions in that category until the total of all such items (which also include tax return preparation fees and job search expenses among other items) exceed 2% of your adjusted gross income.
The new IRS position doesn't apply to all credit card fees. The cost of a cash advance used for some other purpose won't qualify. Also, this announcement deals with the fee imposed at the time of the payment, not any interest charges you might incur subsequently.
Fees paid this year
These fees are deductible in the year paid, not the year to which the tax payment relates. If you're incurring a fee now to pay your 2008 income tax, you can't claim the fee on your 2008 return. Instead, you'll deduct it when you file your 2009 income tax return a year from now.
Fees paid in earlier years
The announcement represents a change in the way the IRS interprets the law, rather than a change in the law itself. In its announcement, the IRS didn't say anything about amending returns that were filed in the past based on the agency's earlier position. Yet there would be no apparent basis for the IRS to say this deduction is allowed only prospectively. It appears that people who paid these fees in earlier years can claim the deduction on amended returns if they otherwise qualify.
Better to avoid the fee
Generally it's better to avoid these fees in the first place. The fee goes to the credit card company, not the IRS, but it's still a lot like a self-imposed tax increase. The fee varies according to the policies of the credit card company, but the average is around 2.5%. You can have the IRS take the payment directly from your checking account, an option that typically doesn't involve any fee.
That won't work if you don't have the money in the account, of course, and a credit card fee can be less costly than a penalty for underpayment of tax.
