Please note: I am not a tax adviser. I have never been a tax adviser and will likely never be a tax adviser. Nothing in this post should be taken as tax advice and you should consult a professional with tax questions, not some guy on the internet.
As the old saying goes, nothing is certain but death and taxes. But suppose that saying were, “Nothing is certain but death, taxes and frequent flyer miles?” With April 15 around the corner, that’s sounding pretty interesting.
Paying Taxes by Credit Card
Consensus would tell you that you can’t pay taxes with a credit card. That’s not entirely true. You can pay your taxes with a credit card, but you usually can’t do it for free.
The IRS partners with a number of companies that will process your taxes for a fee. Debit cards only cost a few dollars to use, but good luck finding a debit card that will give you miles.* So you’re probably stuck with a credit card. Naturally, the processors are not going to eat the credit card fee for you, so they’ll pass it along to you. As the schedule above shows, the fees range from 1.87% to 2%. I’ve used all three options and they are virtually the same. Might as well go with the cheapest one.
Does It Make Sense?
Here are some strategies for using the IRS to your advantage:
- If you have a credit card that only gives you back 1% on your purchases, first, shame on you. Get the Citi Double Cash card and you’ll get 2% back on everything. You might be able to get as much as 2.62% back, depending on your relationship with Bank of America. It won’t earn you much: The Citi card, after fees, at best, will get you $1.30 per $1,000 spent (2% reward minus 1.87% fee, multiplied by what you are paying), while the BofA card will get you $7.50 per $1,000 spent. Still, there is a certain psychic joy to making money by paying your taxes.
- You may not necessarily make money on the transaction, but it might be worth your while if you need to hit minimum spend on a new credit card.** Those who don’t spend a ton of money on their cards might find it worthwhile to take a hit on the fee because the sign-up bonus is so good. For example, the Hilton Honors Surpass Card requires $3,000 in spending in the first three months to earn 100,000 Hilton Honors points. But if you only spend $500 per month on your credit card, you’re going to come up $1,500 short. If you decide to pay taxes with your card to make up the difference, it will cost you $28.05 ($1,500*1.87%). You’ll earn 4,500 Hilton points, which are worth about $18 (3 points per dollar, each point worth about 0.4 cents). You just lost an addition $10, right? Not so fast. The 100,000 points that you get for signing up are worth $400. So you’re now ahead of the game by $390 or so.
The Bottom Line: Paying taxes isn’t fun, but it may be profitable.
*Fun Fact: SunTrust bank used to offer a debit card that gave you one mile for every dollar that you spent on it. One way that people took advantage of it was to pay their taxes, annual or estimated, with the card. The fee was a whopping $2-3 but, depending on the size of your tax bill, it could earn you a ton of miles. Sadly, that opportunity has long-since died.
Beginner’s Hint: Credit cards will generally give you large sign-up bonuses, but only if you spend a certain amount of money, generally $1,000 – $5,000, in the first three months (total, not per month).Want to subscribe? Just enter your email in the box above (and to the right) and click on the confirmation. GMailers, check your Social or Promotions boxes!
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And finally, you can apply for credit cards through the Credit Cards for Charity link above. All card proceeds are donated to charity, so please do well by doing good!