CREDIT CARDS AND TAX DEBT

Posted on 04 18,2012

Well, it’s tax day.

Today is the filing deadline for federal income tax returns, and for some filers, it’s also the day they have to pay up and fork over some money to Uncle Sam. Some may be tempted to pay their tax debt with credit cards and then turn around and file bankruptcy on those same credit cards. Be careful, as this “strategy” can backfire.


Income taxes owed for this year cannot be eliminated (discharged) in a bankruptcy. There are several rules that determine what taxes can be discharged, but one of those is that the taxes have to be more than three years old. Clearly, taxes for this year are not three years old–they’re due today.

If you use your credit cards to pay the taxes, since the taxes cannot be eliminated, you won’t be able to get rid of the credit card debt used to pay them. The downside to this is that, while you may not owe the IRS, you will have this revolving, probably high-interest credit card debt that will never seem to go down. You will likely be better off making payment arrangements with the IRS.

Of course, if you are an employee (paid by paycheck and get a W-2 at the end of the year), you should work with your payroll department and adjust your withholding so that you don’t end up owing money next year, and any extra refund can be taken to pay off whatever is left of this year’s tax debt.

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