Dora Chen has determined that her minimum tax instalments for 2020 are $8,000 per quarter. She also owes $30,000 on her credit card, which carries an interest rate of 20%. She has destroyed her credit card, so no more can be put on it. Dora is unable to pay both the entire instalment amounts and her credit card balance, but she does have $8,000 in cash each quarter for her debts. Which of the following would be the best choice for Dora from a financial planning perspective?
A)Dora should pay off her credit card balance before making instalment payments.
B)Dora must make all her instalment payments, even if it means she cannot pay anything off on her credit card this year.
C)Dora should split her payments equally between the credit card balance and the instalment liability, in order to show the CRA that she is trying her best to meet her obligations to them.
D)Dora should pay her first two instalments and then make payments on her credit card balance.

Question

Quizplus · Accepted Answer

Paying off the credit card balance first is financially beneficial due to the high interest rate of 20%, which is likely much higher than any penalties or interest on late tax instalments.

Dora Chen Has Determined That Her Minimum Tax Instalments for 2020