It’s tax season. That time of the year where part of the population gathers paperwork as soon as possible to file for a refund and the rest of us put off the task until the last minute because we don’t want to see how much money we’ll owe the government. In the past, we had to write a check to the Internal Revenue Service and make sure that it was postmarked by the end of the tax deadline (April 15th, or later due to holidays or weekends). Now that many people choose to eFile their taxes, you can easily add your banking information to have your taxes due removed from your bank account. This is a fee-free option and I’m sure many people take advantage of the ease of doing this. As someone who’s always looking for a place to earn points and miles, I was interested when I saw that you can pay your taxes with a credit card…but with a catch.
Let me start by saying that I’m assuming that you have the money to pay your tax bill and the only reason you’d be using a credit card is to earn the points and miles. If you don’t have the money and you’re going to be carrying a balance and paying interest, there are other options available that will save much more money than the miles or points you’d potentially earn.
The Internal Revenue Service doesn’t directly accept payments with credit or debit cards. You’ll need to use a third party service to make the payment and those companies want to make some money for their trouble.
The IRS lists the companies they deal with to process these payments on their website. Pay1040.com has the lowest rates for credit cards at 1.87% of the payment amount with a minimum fee of $2.59.
PLEASE NOTE: If you e-file, you will be offered to pay with a credit or debit card from within the tax preparation software. Don’t do it. Here’s the fees (from the same companies) if you pay from the program.
I know that going to some external website to pay a large tax bill may seem sketchy and could make you doubt if your payment will ever be received. I’ve used Pay1040 several times with no issues. Just stick to the places listed on the IRS website and you’ll be fine.
I’ve gotten emails in the past from the service Plastiq saying you can pay taxes through their website. While this is true, they charge a flat 2.5% fee for all payments. Unless you have a large amount of fee free payments (earned with referrals), this is a more expensive option and you can do better with the websites above.
Now that you know how to pay your taxes online with a credit card, should you? My answer is a qualified maybe. It’s really a Your Mileage May Vary decision whether the points you’ll earn will be worth more than the money you’ll spend. Anytime you take on an extra expense to earn (more) miles, you are in essence BUYING those miles with cash. In this example, you’ll be buying the miles or points with the 1.87% extra fee you’ll need to pay to use a credit card.
When Does It Make Sense To Pay Taxes With A Credit Card?
It makes the most sense to pay your taxes with a credit card when you’re going to earn a large credit card sign up bonus with the spending.
My current referral link for the Chase Sapphire Reserve card will give you 50,000 Ultimate Rewards points if you spend $4,000 in the first three month of card membership
If you pay 1.87% on that $4,000 of spending, that’s an expenditure of $74.80. You’ll earn 50,000 Ultimate Rewards points for meeting the spending requirement. If you redeem that for travel through the Chase Ultimate Rewards Travel Mall, it’s worth $750. That’s 10x the amount you paid to earn those points. If you transfer those points to a travel partner, like Hyatt, you may be able to redeem them for a stay worth over 2.5 cents per point. That means your bonus would be worth $1,250 in value, just for paying $75 in fees on your taxes.
So it’s pretty obvious if you need to make a tax payment anyway, it would be advantageous to have a credit card with a large sign up bonus that you need to meet. That’s the best way to get value from having to pay the service fee.
When May It Make Sense To Pay Taxes With A Credit Card?
There are other situations when paying the service fee might make sense. I was offered a retention offer on my Citi Prestige card where if I paid $1500 per month, I would receive a $50 statement credit for seven months. If I were to pay $1500 to my taxes, it would cost me $28.05 in fees and I’d get back $50. Not a huge payback but not every offer is large. I’d also get back 1,500 Citi ThankYou points worth at least $18.75. That means I’d only be out $9.30 to earn $50. I’ll take 5x my money back all day, every day.
What if you have a card that offers a bonus if you reach a spending requirement? If you spend $25,000 on the United MileagePlus Explorer Card in a calendar year, you’ll earn a bonus 10,000 MileagePlus miles. Simple math means spending $25,000 will earn you 35,000 miles. In other words, you’ll earn 1.4 miles per dollar spent. In an extreme example, if you have a $25,000 tax bill and pay it all on your card, you’ll pay a fee of $467. 50 to earn 35,000 United miles. That’s buying United miles for 1.33 cents each. Since United just was selling miles for 2.35 cents each, that seems like a bargain. However, The Points Guy’s recent valuation is only 1.4 cents each so buying points at break even isn’t a great deal.
There are some programs where paying tax with a card and buying points for 1.87 cents might not be that bad of a deal. I recently redeemed SPG Starpoints for 4 cents each when we stayed at the Sheraton New York Times Square. You can earn 35,000 bonus miles for spending $7.000 in three months on the SPG AMEX Business card or 25,000 bonus miles for spending $3,000 in three months for the SPG personal card.
Since I value SPG Starpoints over 2 cents each, buying them for 1.87 cents each is a money earning deal for me. Considering that the recent deal of buying them outright for 2.28 cents was hyped as a great offer. I’ve used my SPG AMEX card to pay my taxes in the past as paying the 1.87 percent fee was worth it to buy Starpoints I would eventually redeem at twice the price. You get Starwood Gold status if you spend $30,000 a year on either of these cards (but I get that just by having the AMEX Platinum card so I wouldn’t recommend spending that much just for the status).
There are other cards where spending $30,000 will get you a companion ticket on British Airways or spending $250,000 in a year will exempt you from the MQD for Delta Diamond status. If you are reading this here, there are better sites for you. 🙂
When It Might Pay To Use a Credit Card To Pay Taxes
If you have no other option, using a 2% cash back card like the Citi Double Cash might seem to make sense. However, you’re only making 0.13% on the transaction. $10,000 in tax payments will net you a whopping $13 profit. At that margin, I’m not sure it’s even worth the trouble.
I’d only consider paying taxes with a credit card to get a bonus to meeting a minimum spend on a new card sign up bonus or to earn a valuable points currency like Starpoints. Others might see the spending as way to meet a large spending threshold but those are only valuable on the margins to specific people so I can’t recommend those options to the masses. The demographic is so specific that it doesn’t make sense for most travelers so I’m not going to go down that rabbit hole in this post.
I still haven’t done my taxes this year so I’m still curious if I’m going to have to pay or get a refund. I do have a card I just signed up for that I’ll use to make that payment if I need to 🙂
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