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Tax season is in full swing in the U.S., with federal income taxes due in a bit over a month. Of course people have different ways they pay taxes, so not everyone still has taxes to pay next month. If that’s the case, maybe you can apply this strategy towards a future tax payment.
While a vast majority of people pay their federal income taxes in cash, does it make sense to pay your taxes by credit card instead? I pay all my taxes by credit card, and think it makes sense for a lot of people to do so. In this post I wanted to outline how that works in general?
What’s the fee to pay taxes by credit card?
There are several third party websites that will allow you to make tax payments by credit card. 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. They let you pay by American Express, Mastercard, Visa, etc.
Which credit cards should you use to pay taxes?
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. That should be the top priority if paying taxes by credit card.
However, there are plenty of other cards where you could come out way ahead by paying taxes for a 1.87% fee.
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.
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.
Personally I don’t think either of those options is worth the hassle, so it’s not something I’d do. Points cards are a different, story, though.
Using a points earning card
If I’m paying taxes by credit card I’d rather use a card that accrues points, where I value the return at greater than 1.87 cents per dollar spent. Which cards come to mind?
- The Starwood Preferred Guest® Credit Card from American Express and Starwood Preferred Guest® Business Credit Card from American Express offer one Starpoint per dollar spent
- The Amex EveryDay® Preferred Credit Card from American Express offers 1.5 Membership Rewards points per dollar spent when you make at least 30 purchases per billing cycle
- The Business Platinum® Card from American Express OPEN offers 1.5 Membership Rewards points per dollar spent when you make a purchase of $5,000+
- The Chase Freedom Unlimited® offers 1.5x points per dollar spent; in conjunction with a card accruing Ultimate Rewards points, like the Chase Sapphire Preferred® Card or Ink Business Preferred℠ Credit Card, those points can be converted into Ultimate Rewards points as well
At a minimum, I value the return on The Amex EveryDay® Preferred Credit Card from American Express and the Chase Freedom Unlimited® at 2.55%, since I value Membership Rewards and Ultimate Rewards points at 1.7 cents each (which is a conservative valuation, in my opinion).
This is essentially an opportunity to pick up Membership Rewards or Ultimate Rewards points for ~1.25 cents each, which I’d consider to be a very good deal.
A more concrete return — how you can earn a ~60% “profit”
While I think many will agree with me that picking up Membership Rewards or Ultimate Rewards points for ~1.25 cents each is a great deal, there’s potentially a more concrete return you can achieve, if you’re not yet convinced.
Keep in mind that The Business Platinum® Card from American Express OPEN gives you a 35% refund when you redeem points through the “Pay with Points” option. This is essentially an opportunity to redeem Membership Rewards points for 1.35 cents of airfare each (either on your designated airline in economy, or on any available airline in business or first class).
When you consider that you’re earning 1.5 Membership Rewards points per dollar spent, that means you’re getting over two cents of airfare per 1.87 cents of fees. That’s a very nice “profit.”
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 paying taxes by credit card can be a great deal.
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 Amex EveryDay® Preferred Credit Card from American Express, The Business Platinum® Card from American Express OPEN, or the Chase Freedom Unlimited®.
Those are the cards I’ve been using to pay my taxes, and I think others will find it equally worthwhile.
Do you pay your taxes by credit card, and if so, which card do you use?
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