Why You Should Pay Your Taxes By Credit Card

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Tax season is in full swing in the US, with federal income taxes being due in a bit over a month. No one likes paying taxes, though at a minimum we should do what we can to get the most out of our contributions to Uncle Sam.

While a vast majority of people pay their federal income taxes in cash, you can (and in most cases, should) also pay by credit card.

How to pay taxes by credit card

There are several third party websites which will allow you to make tax payments by credit card. The service fees for doing so are constantly changing, and the services I recommended last year are no longer the best option.

Right now the best option for paying taxes by credit card is Pay1040.com, which charges a 1.87% convenience fee for using a credit card.

Taxes-Credit-Card

Which credit card should you pay taxes with?

The most obvious answer is that you should use a card on which you have a minimum spend to reach. Many people struggle with reaching the minimum spend on new credit cards, so if you have a big tax bill, this is an easy way to knock $3,000+ of spend out in one swoop.

For example, if you recently picked up the Starwood Preferred Guest® Credit Card from American Express or Starwood Preferred Guest® Business Credit Card from American Express and have $3,000-5,000 of spend to knock out, this is a great opportunity.

But beyond that there are cards where it can make sense to generate everyday spend at a cost of 1.87%.

Using a cashback card

You can come out marginally ahead by paying your taxes with a cashback card.

For example, the Citi® Double Cash Card offers 1% cashback when you make your purchase, and another 1% cashback when you pay for that purchase. So you’d come out 0.13% ahead after you pay off your bill, which is marginally worth it.

Citi-Double-Cash

You’ll do slightly better on a card like the Barclaycard Arrival Plus™ World Elite Mastercard®, which accrues the equivalent of ~2.1% cashback towards travel. So you’d be coming out a bit more ahead, though you’d have to spend that money on travel. Some people will find cashback cards like this to be worthwhile, while personally it’s not how I’d choose to pay taxes by credit card.

Cash back

Using a points earning card

If I’m paying taxes by credit card I’d rather use a card which accrues points that I value at more than ~1.87 cents per dollar spent.

The first card which comes to mind is the Starwood Preferred Guest® Credit Card from American Express. If Starwood sold Starpoints for 1.87 cents each, I’d buy them in a heartbeat, so there’s no reason not to pay taxes on them.

Starpoints convert into airline miles at a 1:1 ratio, with a 5,000 point bonus for every 20,000 points transferred. So you basically earn 1.25 airline miles per Starpoints. At 1.87 cents per Starpoints, that’s like paying under 1.5 cents per airline mile. That’s a heck of a deal for Alaska Mileage Plan miles, for example.

Emirates-A380-Cabin
Transfer Starpoints to Alaska Mileage Plan for tickets in Emirates first class

Alternatively, the Amex EveryDay® Preferred Credit Card is another fantastic option. The card earns one Membership Rewards point per dollar spent, and when you have at least 30 transactions per billing cycle you get a 50% points bonus. That means you’re earning 1.5 Membership Rewards points per dollar spent. At a rate of 1.87 cents per dollar spent, that’s like picking up Membership Rewards points for ~1.25 cents each. Deal!

Singapore-Suites-1
Redeem Membership Rewards points for Singapore Airlines Suites Class

Bottom line

While no one likes paying taxes, you might as well maximize the return you get out of that spend. At a cost of 1.87 cents per dollar paid in taxes, I’d say that can be a great option.

Your best bet is to reach the minimum spend on a credit card when paying your taxes, but otherwise I’d use a card which accrues a great return on spend, like the Starwood Preferred Guest® Credit Card from American Express or the Amex EveryDay® Preferred Credit Card.

Do you plan on paying your taxes by credit card, and if so, which card do you plan on using?


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Comments

  1. Or, if you have a business, you can pay business-related taxes (such as rental real estate property taxes) with a credit card, and deduct the bank fee. That makes using a credit card a no-brainer.

  2. Actually a large number of people end up overpaying taxes during the year in order to get a refund (which is insane math by financial standards anyway), so they won’t have anything to pay come April 15. It’s much better if you have the financial discipline to just make all tax payments yourself and pay ALL income taxes with a credit card, not just any balance due. I have my employer and my wife’s take out zero federal taxes from our payroll, and make quarterly estimated payments instead.

  3. Thanks for the post!

    I only do it with an immediate need, but since I’m out of SPG points, and I need some for Cat 2 awards for a trip to India. So this works well for me.

  4. The 1.87 % is real money. The 2.2 cents is funny number, meaningful only for people that love the feel of satin bedsheets under their asses when they sleep and would pay for it from their own pocket anyway.

    I would stay/travel much cheaper if I was paying money from my pocket. Your comparison doesn’t make sense for people like me.

  5. @UAPhil

    Why is it being deductible a no brainier? I would rather not pay the fee then to get a % back at tax time since it is deductible. It is still real money out of your pocket.

  6. @UAPhil
    Property tax is paid to the local government. The payment processing fee there varies, but is in general much higher than 1.87%. How do you make it work?

  7. “The 1.87 % is real money.”

    Of course it is. As Lucky is fond of saying, “free” mileage award tickets aren’t free. This is one of the costs of getting them. If you don’t need the miles for an award, it makes no sense to spend 1.87% extra to make a payment that you could make for free by writing a check instead,

    But for the ~$50 fee, I’m going to be able to meet the minimum spend requirements for a credit card that gets me 50,000 airline miles, which is a bit less than 1/4 of the total miles cost of a first class ticket that will take me a distance of more than 24,000 miles. $200 to fly first class around the world? Well, actually it will be more because of airline fuel surcharges – more like $1,000 to $1,500 total. That’s still a good use of my “real money” – essentially, I’m getting first class for less than the price of economy.

  8. Let’s take this to the extreme. Let’s say you have an income of $100k and you set things up for zero withholding with your employer and pay estimated quarterly payments instead. Your effective tax rate will be ~20%, so you will owe $20,000 or $5k each quarter. If you use a 2% cash back card and make a 0.13% profit, you will earn….drumroll…..$26 in net rewards for the year. Hardly worth the effort.

    If you value SPG points at 2.2c and therefore get a 0.33% spread, you earn a net of $66. Again, probably not worth it.

    If you have a signup bonus to meet, paying the tax fee rather than doing time consuming MS may be worth it, but if you are just trying to use taxes to MS on a nonbonused card, it is just not worth it.

  9. Personally I think it makes more sense to MS a gift card on the INK at office stores or on the freedom at grocery stores and use those gift cards to pay the taxes… 5x is much better return than anything you mentioned. And you can easily liquidate the GCs for cash and use that instead, if so inclined

  10. @Credit
    I agree that collecting travel points is funny money if you don’t have an immediate use so take cash like me instead. My tax bill is ~11k so I just picked up Cap One Spark for me and wife with the $500 bonus for $4,500 spend. We’ll both pay half the tax bill. I’ll eat the 1.87%, but pick up $1K in cash/real money. Add in the fact that I’ll also get 2% on the money spent, I come profit a little over $1K for doing something I had to do anyway.

    @FreeTravelGuy
    That’s a good idea. I’m going to look into withholding zero and making the quarterly payments too. I’ll just pick up a few CCs as needed and come out even more ahead. Thanks

  11. People talking about net rewards are thinking about this the wrong way. If I owed $100,000 in taxes, the fee would be $1,870. If I used Chase Freedom at 1.5 points per dollar, I would gain 150,000 points. In effect, I paid $1,870 for 150,000 UR points. These points used wisely, would be more than enough for 1 round trip business class on Lufthansa/Singapore to Europe and these flights typically cost several thousand dollars. If you value business or first class flights (or alternatively speaking, despise economy), then this is a small price to pay for better travel. And while I don’t disagree with someone saying MS is better, paying taxes is easy and can be done in 30 seconds as opposed to going to buy thousands in gift cards.

  12. @moe, “easily liquidate gc to cash?!” That’s news to me, and I expect to most readers.
    @tom, why not worth it? If it was any trouble, sure, but it’s not.

  13. This worked for me. I owed $629. I paid a convenience fee of $11.76. This will help with the $3,000 minimum spend on the SPG. Thanks Lucky.

  14. I would assume that a vast majority of people pay their taxes by having it deducted from their income by their employers. I would be interested in seeing the statistics indicating that the “vast majority” or people pay their income taxes with cash. Are you talking about a payroll deduction, or something else?

  15. Can services like pay1040.com be used to distribute a tax balance across multiple cards? In other words, if there’s a $5K tax balance due, can this be used to meet a $3K minimum spend on one card and a $2K minimum spend on another card?

  16. I am intrigued. Definitely would help take the sting out of probably paying at the end of the year. I am probably too lazy to do the quarterly estimated taxes thing, but doing it once a year to get a random sign-up bonus that accrues comparable value on top of that (spark card) would be nice.

  17. Looks like my followup info was deleted because it included a link, so reposting without it:

    Following up on my question about multiple cards: it looks like with pay1040.com you can use two separate payments per year for personal 1040 filings. The number of payments for other types vary, outlined on question #17 on the pay1040 FAQ page.

    So it looks like yes, you could distribute a personal tax payment across two cards, but not more.

  18. I just bought $4000 worth of paypal my cash cards at cvs for $3.95 per $500, and used paypal debit mastercard (with payusatax.com fee of ~$2.69 for a debit card transaction) – so no cost to me after getting 1% back from PP

  19. Thanks for doing the calculations! This is something I’m going to be taking advantage of… I have $23,800 due in taxes this year and quarterly estimated payments of $7200, making my one year total $52,600. Putting this on my Amex Starwood will get me 65,750 AA miles for a cost of $984 or .01496 each. I always use these for business saver to Buenos Aires, so even at the new rate of 57,500 miles that’s only $860 one-way. I’ll take it!

  20. One thing to keep in mind is that some credit cards earn 3% on all purchases. So it’s worth it to pay the tax with one of those (3% – 1.87% = 1.13%).

  21. Andrew, ORDHome – here is my reasoning.

    -I’m usually in the 42% marginal tax bracket (Federal + State combined). This means that, for every dollar I can deduct, Uncle Sam de facto pays 42 cents, and I am out of pocket the remaining 58 cents.

    -As noted, local tax authorities normally charge about 2.3% to pay property taxes with a credit card. This means my out of pocket cost is about (2.3)*(0.58) = 1.33%. (Your marginal tax rate may be different from mine, so your out of pocket cost may be different as well.)

    -So if I pay property taxes with my SPG Amex, I’m effectively purchasing Starpoints for 1.33 cents each. I can usually get much better value than that using them to pay for hotel stays (example – Cat 4 hotels at $133/night; Cat 5/12,000 points at $161/night – way below the cash rate I would usually need to pay to stay at the same hotels. For example, Cat 5 hotels in Manhattan often retail for $300-$400/night, so this is a huge savings if I want to stay at those hotels). Or,if I transfer them to airline miles with the 25% bonus, I am effectively purchasing the miles at 1.07 cents/mile (as a straightforward example, if I transfer 20,000 SPG points to Southwest, I am buying miles at 1.07 cents each that I can typically redeem for 1.5-1.6 cents each.).

    Some local jurisdictions do not take Amex. In that case, I might pay with my CSP, earning Ultimate Rewards points that are worth at least 1.5 cents each (admittedly not as compelling a deal as earning SPG points). Or, earlier this year, I paid property taxes with my Southwest Visa, earning points that helped me re-qualify for Companion Pass on January 9.

    Of course, there may be a cash flow issue. I’m paying the fees in early 2016; I won’t see the tax savings until later (possibly until after I file my 2016 return in early 2017).

    Tom – I’d recommend moderation. You’re supposed to have your tax withholding set up to approximately cover the taxes owed on your salary. There may be consequences if the IRS finds out you have deliberately under-withheld by tens of thousands of dollars.

  22. @DaVe — I thought PayPal debit card was eliminating the 1% cash back on non-swiped transactions. Has that not happened yet?

  23. Please read IRS publication 505, chapter 1, Penalties. There may be IRS and criminal penalties for falsifying your W-4 so that taxes are under withheld, even if you make quarterly payments.

  24. May I ask how to pay property tax with credit card if the only option via the official website is an “e-check”?

  25. Even before I got sucked into the FF game, I used rewards credit cards to pay my taxes. If paying by card gets you more miles and a chance to book a trip you wouldn’t normally pay for out of pocket, that $50 real money fee or whatever the 1.87% adds up to is negligible. Let your money make you money or save you money.

  26. Loveairborne – it’s possible your particular tax jurisdiction does not accept credit cards. You can call the assessor’s office to find out for sure.

  27. @loveairborne: “May I ask how to pay property tax with credit card if the only option via the official website is an “e-check”?”

    Google “Plastiq”. 2.5% fee to pay any legitimate expense with a credit card. They charge your card and send the payee a check.

    @Ryan: “I am probably too lazy to do the quarterly estimated taxes thing, but doing it once a year to get a random sign-up bonus that accrues comparable value on top of that (spark card) would be nice.”

    Be careful – if you underpay your taxes during the year, you could be subject to hefty penalties even if you intend to (and do) pay your entire tax bill when you file your return! Estimated payments are a must, and as someone pointed out above, even if you make estimated payments, you might still get in trouble if you under-withhold from your paycheck.

  28. @Marty, requesting zero withholding on your W-4 is perfectly legal, and most certainly not a criminal offense. If you underpay taxes the worse that happens is you pay a penalty. Criminal offenses (prison time) are things like tax evasion, knowingly falsifying a return, etc.
    To avoid underpayment penalties, take last year’s tax return’s tax liability and pay at least that amount in quarterly estimated taxes for the current year within each quarter’s deadline, unless your AGI is more than $150,000 for married couples, in which case you must pay at least 110%. There is nothing remotely illegal or criminal with this method and is perfectly within the tax code.

  29. @FreeTravelGuys. Let’s go to IRS publication 505 and let everyone decide for themselves. Here is the section I referenced, word for word.

    Penalties
    You may have to pay a penalty of $500 if both of the following apply.
    * You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.
    * You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.

    There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.

    These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes.

    The text seems very clear to me. Did you increase your withholding allowances on your W-4 that reduce the amount of taxes withheld? You have indicated you have. Did you have a reasonable basis for those allowances at the time you prepared that W-4? I’m going to guess no since you are also making quarterly payments. Are you willingly failing to supply information that would increase the amount withheld? Yes, you are. You know you need more withheld from your salary.

    Note that the IRS at no point says it is ok to do this as long as you make quarterly payments, Because it’s not. The quarterly payments are irrelevant to the fraud of the W-4, and do not allow you to file a fraudulent W-4 with your employer.

    You can do what you are comfortable with. I looked into it last night because I wanted to do the same. But, I wasn’t going to try it blindly due to a comment from someone. That is why I found and read publication 505. And there is more to it if you actually read the publication. The quarterly payments are more complex than they would seem at first.

    Now, whether you get caught or not is a different story. Just because you have not been caught does not make it legal.

  30. This is perfect for me. I accidentally got a couple extra cards approved (forgot I’d applied for one, and then thought another application was going to be declined, so applied for a third — then they all arrived the same week with the clock ticking for minimum spends). And I owe taxes this year, so this will take care of the spend on two cards. Just in the nick of time!

  31. This is great thanks. I pay almost $100,000 per year in my employee payroll 941 taxes. The service charge for using card is a business expense.

    Hello SPG Amex

  32. @snic
    Thanks for your concern. I have a typical 9-5 job, and I normally withhold at a 1/0 rate, way below what I could designate and normally it is more than enough to get a refund, but for some reason, after getting married, we keep hitting the edge of needing to pay a penalty, which annoys the heck out of me. I don’t know if I am doing my taxes wrong or what, but my wife with-holds at the same levels, so you would think we would be OK in terms of refunds, but for some reason, it keeps on making things stressful leading up to April 15. Knowing how annoyed I get at paying taxes at filing time, I don’t think I could handle purposely increasing that amount, in spite of the signup bonuses. 🙂

  33. @Marty, are you a tax professional or stating your interpretation after reading a document? If you’re a tax pro great, but otherwise…

    I picked up my taxes from my CPA today and asked about adjusting employer withholds and quarterly payments. His take is that it makes no difference to the IRS if it’s paycheck withholdings vs quarterly payments. If the IRS had an issue with people paying quarterly, then they wouldn’t offer it. He did state that they do care about making regular payments. He has seen people pay a huge lump sum in Q4, to the point they would get a refund, and they still received a penalty for not making regular payments.

    My best tax advice to any and everyone concerning taxes is to consult a tax professional.

  34. @Marty I think you’re reading too much into the language on the form. The tax code is intentionally vague for a reason. The tax code allows you to make quarterly payments, and all that matters to the IRS is that you’re making regular payments, either via payroll deductions or through quarterly payments (not just occasionally). The taxes are still being paid to the IRS throughout the year, and setting up the amount of withholding you want with your employer is not fraud by any stretch of the imagination. Fraud is defined as criminal intent, and it’s done by people who make false pretenses to get out of paying taxes. You’re never going to get a tax court to prosecute someone paying the correct and fair amount of taxes on time every quarter. By the way, W4s aren’t sent to the IRS. It’s just a vehicle to set up deductions with your employer.

    An accountant.

  35. @Not a tax pro, If I told you I am a tax pro, would it change anything?

    My interpretation after reading a document? I can point to the law. I’ve read that too. Would you prefer I just tell you what someone told me? Seems it is good enough for you. Have you bothered to read a damn thing or think for yourself? All you are doing is telling a story. So and so said this and that!

    My interpretation of publication 505? There is not a lot there that needs interpretation. It is very clear. How do YOU interpret it?

    My advice to everyone is to inform themselves. Make your own decision. It’s not always difficult. You’ll be better prepared for the dialogue with a professional.

    My advice to YOU is to read US Code Title 26, Subtitle F, Chapter 75, Subchapter A, Part I, Section 7205 (Just search “IRS 7205”. It’s only two small paragraphs. Read paragraph (a) as many times as necessary.) and US Code Title 26, Subtitle C, Chapter 24, Section 3402(f)(2)(A). (Just search “IRS 3402” and scroll down the statute.)

    Screw it. I doubt you’ll look it up. I’ll copy and paste it here for you.

    Section 7205:
    (a) Withholding on wages
    Any individual required to supply information to his employer under section 3402 who willfully supplies false or fraudulent information, or who willfully fails to supply information thereunder which would require an increase in the tax to be withheld under section 3402, shall, in addition to any other penalty provided by law, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both.

    Section 3402(f)(2)(A):
    (A) On commencement of employment
    On or before the date of the commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the number of withholding exemptions which he claims, which shall in no event exceed the number to which he is entitled.

    My BEST advice to YOU is go back to your CPA and ask him if it is a crime to give your employer a W-4 with more exceptions than to which you are entitled. Remember, the only thing I claim is that it is illegal to file a fraudulent W-4. Also, ask him if he is familiar with the IRS Tax Crimes Handbook, specifically the section on Fraudulent Withholding Exemption or Failure To Supply Information – Internal Revenue Code Section 7205. Read the documents with him. Then you can report back another interpretation. Finally, ask him if you are charged and convicted of violating I.R.C. Section 7205, will he pay the fine, and/or do the jail time, on your behalf?

    You can also go here: http://lewistaxlaw.com/tax-crimes/fraudulent-withholding-exemption-or-failure-to-supply-information/

    Bookmark it. Just in case…

  36. FreeTravelGuys – if you claim more than 10 exemptions on your W-4, isn’t this reported to the IRS?

  37. @FreeTravelGuys, Wow. I don’t even know where to start. I guess at the beginning, though I suspect there will be no changing your mind.

    “I think you’re reading too much into the language on the form.”
    You mean the publication? IRS publication 505? It’s quite clear. Not vague. Not ambiguous. Not grey. Here is the law you MAY be breaking, IRC 7205. (Innocent until proven guilty!) I’ll cut out the extra, unnecessary words for you, since you think I read too much into the layman’s publication. Any individual required to supply information to his employer who willfully supplies false or fraudulent information shall be fined not more than $1,000, or imprisoned not more than 1 year, or both. IRC 3402(f)(2)(A) is the law that requires you to supply your employer with your withholding exemptions.

    “The tax code is intentionally vague for a reason.”
    No it is not. The tax code and laws CAN be complex. The IRS issues publications and notices to help the public understand and follow the laws. The IRS publications are written in clear terms. Further, statute 7205 is clear and easy to understand.

    “The tax code allows you to make quarterly payments,…”
    The federal income tax is a pay-as-you-go tax. Read IRC 3402. Please show me any IRS documents that allow you to choose quarterly payments over withholding.

    “The taxes are still being paid to the IRS throughout the year, and setting up the amount of withholding you want with your employer is not fraud by any stretch of the imagination.”
    You couldn’t be more wrong. IRC 3402 specifies how to calculate withholding. The IRS provides publication 505 to explain it more clearly. Giving your employer a W-4 with more allowances than you
    are entitled to is fraud. That you pay amounts quarterly does not change the fact you have given your employer a W-4 you know to be incorrect. Quarterly payments is how you justify your fraudulent W-4 to yourself.

    “Fraud is defined as criminal intent, and it’s done by people who make false pretenses to get out of paying taxes.”
    Fraud is deception for personal gain. You deceived your employer with false information for personal, financial gain and you did so willfully. I understand you intend to pay your taxes. I have never once said you didn’t.

    “You’re never going to get a tax court to prosecute someone paying the correct and fair amount of taxes on time every quarter.”
    I’ve never said anything about this. There ARE trial and convictions for violating IRC 7205(a), and they are easy to find.

    “By the way, W4s aren’t sent to the IRS. It’s just a vehicle to set up deductions with your employer.”
    Sent or not sent to the IRS is irrelevant. IRS may review the W-4 at any time. IRC 3402 requires you to complete one. IRC 7205 says it is a crime to supply a false one. Look at the W-4. You have to sign and date it. Read what it says where you have to sign it. “Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete.”

    “An accountant.”
    Are you saying you are an accountant? Hmm…

    Is this a very big deal? Probably not. Will you get caught? Maybe. You and your employer will most likely receive a lock-in letter and your employer will be forced to withhold from your salary. I am OK with what you are doing. I assume you are a big boy, yet naive. But please do not post that requesting zero withholding on your W-4 is perfectly legal and not a criminal offense. If that were true you would be able to show me the law that says so. But you cannot. Instead, I can show you the opposite. The law. The cases. Everything. Easily.

    Read these posts with your wife. Read the laws with her, and publication 505 too. If you both feel confident that you are fine then go to your nearest IRS criminal tax division, present your identification, sign in, and tell an agent what you are doing. How does the thought of that make you feel?

  38. Just wanted to say the discussion about regular withholding vs. quarterly credit card payments is really fascinating. Both sides make good points, and it’s nice to see comments being used to argue passionately about something substantive without too much vitriol. Thanks.

  39. Well I tried making a regular 941 employer deposit for Q1/2016.
    This isn’t allowed. All current deposits have to be made through the electronic portal directly.

    You can only use this service for late payments, penalties etc on 941 taxes, so not a points/mileage windfall that I was hoping for. 🙁

  40. Alert – I tried to use pay1040.com to pay my taxes. The web site said my transaction failed (twice), then within minutes someone had stolen my personal information and tried to open two credit cards in my name. I spent today on the phone with the credit bureaus and the credit card companies trying to prevent more problems.

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