Please Note: I am NOT a tax adviser and any discussion of taxes below is not intended as tax advice. Please consult your tax adviser or attorney for tax advice specific to your situation.
Top Line: You can earn miles & points for most tax transactions, and there are ways to reduce the impact of credit card convenience fees which you have to pay if you use a credit or debit card to pay your taxes. Also, the IRS usually limits use of a credit or debit card to only 2 transactions so you need to have a credit card with a credit limit large enough to pay your taxes.
But you can make paying taxes somewhat pleasurable if you like collecting miles and points! You won’t get the miles and points for free, but you could get them at a low enough cost per mile/point where it may make sense to pay a convenience fee to pay your taxes.
Million Mile Secrets reader Steve writes in to ask:
“I have a question if you don’t mind. Sounds crazy but it’s true, I have to pay a mammoth federal tax bill this month, $1,361,000. Would you be interested in helping me find the best way to make this a miles bonanza?”
I suppose if you have to fund (insert your least-favorite Washington program), you may as well earn miles & points!
One of the easiest ways to earn miles and points is to put all your expenses on credit cards which earn miles or points.
However, you have to pay a transaction fee on some transactions such as tax payments. This transaction fee could range from 2% upwards and usually does not make sense because the value of the miles and points is less than the extra cost of the transaction fee.
You can pay taxes through different payment vendors suggested by the IRS.
Here are the cheapest rates which I found among the different payment vendors.
- MasterCard debit cards – 1.9% of the transaction amount via Choice Pay
- Visa credit cards – 2.29% from Value Tax Payments.
- MasterCard credit cards – 1.9% of the transaction amount via Choice Pay
- American Express credit cards – 2.29% from Value Tax Payments.
I usually value 1 mile or point, on average, at ~1 cent per point. As you can see the transaction fees for credit card payments are high enough where it doesn’t make sense to pay, say, 1.9 cents as a processing fee to earn 1 point which is worth only 1 cent.
Deducting Payment Processing Fees
But you may be able to deduct the cost of the transaction fees for paying taxes which, depending on your situation, could make it lucrative to pay your taxes via credit or debit card.
Again, I am NOT a tax adviser so please don’t interpret this as tax advice. Please contact your tax adviser and ask if you can deduct transaction fees for paying taxes with a credit or debit card.
Per the IRS, you may be able to deduct the transaction fee for tax payments via credit card or debit card.
However, this is almost meaningless to most individuals (in my opinion), because you can only deduct them as a miscellaneous itemized deduction and you must have enough miscellaneous itemized deductions to exceed 2% of your Adjusted Gross Income (AGI).
Miscellaneous itemized deductions include tax preparation costs, job search expenses and reimbursed employee expenses.
For example, if your AGI was $50,000, you would need to have at least $1,000 (2% 0f $50,000) in other miscellaneous deductions before you were able to deduct the cost of the processing fee for paying your taxes with a debit or credit card.
Please see IRS Publication 529 on Miscellaneous Deductions for more information.
Per the IRS, ” The fee is a deductible business and individual expense.”
I’m not sure if this means that the credit/debit card processing fee is 100% deductible or if only a certain percentage is deductible.
If the entire amount is deductable, then you could pay your taxes with a mile earning credit card and earn miles at a low enough rate to justify paying the transaction fee.
Again, check with your tax adviser.
When I first read Steve’s email, I immediately thought of the Bank of America US Air and Alaska Air debit cards.
That’s because they are Visa cards, and Million Mile Secrets reader Cheap Lee had left a comment on the 40+ Powerful Ways To Complete Your Credit Card Minimum Spending that processing companies could NOT charge more than $3.95 per TRANSACTION for tax payments made via Visa debit cards.
This was music to my ears since you could theoretically pay a million dollar tax bill and earn a million miles and points and pay only $3.95 as a transaction fee!
“As mandated under Visa’s Tax Payment Program, the citizen can not be charged more than $3.95 flat “convenience fee” rate when using their Visa Debit Cards to make payments no matter how large the payment is. We charge $3.88. All other cards, including Visa Credit, MasterCard Credit/Debit, Amex and Discover, will be as a percentage rate.”
Most banks have stopped offering miles and points for debit card purchases, because the recent Durbin amendment limits profitability on debit cards for banks with more than $10 billion in assets. But Bank of America still issues debit cards which lets you earn either US Air or Alaska Air miles.
But I soon found out that the terms and conditions of the Bank of America debit cards don’t let you earn miles for tax transactions.
“Mileage credit will not be awarded for federal, state or local tax payments, or similar payments to federal, state and local government agencies.”
0.10% Arbitrage for using Perkstreet debit card
Perkstreet offers a MasterCard debit card which pays unlimited 2% cashback for the 1st 3 months or if you maintain a $5,000 balance, but I don’t know if there is a restriction on earning cashback for tax transactions.
The terms and conditions disqualify gift cards from earning cash back, but I couldn’t find a restriction against earning cash back for paying taxes.
If there isn’t a restriction on earning cash back for using the debit card for tax transactions, you could make money by paying your taxes using your Perkstreet debit card, as long as you pay less than 2% in tax processing fees.
For example, if you pay a 1.9% convenience fee via Choice Pay to use a Perk Street MasterCard debit card to pay your taxes, you would earn 2% cash back.
In that case, you actually earn 0.10% (2% – 1.9%) per $1 spent in taxes so you’d earn $1400 (0.10% X $1,400,000) for paying your taxes.
And if you could deduct some of the tax processing charges, you could get an added saving equal to your marginal tax rate.
But, again, I’m not sure if PerkStreet has restrictions on the maximum you can charge on a debit card and if they will let you earn cash back for tax payments.
However, if you pay a convenience fee of more than 2% you would lose money since you would pay more in convenience fees than in the cash back you received.
I’m curious if readers know of any other debit cards, preferably Visa debit cards because of the $3.89 flat fee for tax transactions, which allow you to earn miles, points, or cash back for tax transactions?
Gift Card from Big Crumbs
I next thought about buying an American Express gift card from Big Crumbs by using a miles earning credit card (Chase Sapphire etc.) and using the American Express gift card to make your tax payments.
For example, you could buy a $5,000 American Express gift card from Big Crumbs and get 1.6% cash back.
If you pay 2.29% in tax transaction fees by using your American Express card, you are effectively earning miles or points for 0.69 cents per mile/point (2.29% tax transaction fee – 1.6% cash back).
0.69 cents per mile or point is a great price for most miles and points!
However, I have NOT tried making a tax payment with an American Express gift card, so don’t know if you will be able to go through with the transaction.
The IRS also limits you to 2 transactions per year with a credit or debit card and since the largest gift card is for $5,000, you could earn miles and points only up to $10,000 per year by using this method.
Fidelity Investment Rewards American Express
The Fidelity Investment Rewards American Express card lets you earn either 2% cash back
or you can turn off the auto-deposit 2% cash back feature and convert points in a 1:1 ratio to Aeroplan (Air Canada’s frequent flyer program).
Now, Aeroplan has devalued their award chart and charges high fuel surcharges on award tickets, but earning cheap Aeroplan miles could make sense for some.
For example, if you pay $1,000 in taxes, you would pay $22.9 (2.29% tax transaction processing fee X $1,000 tax payment) in tax processing fees.
But you’d earn 2,000 Aeroplan points ($1,000 tax payment X 2 points per $1 spent).
That’s 1.145 cent per Aeroplan point ($22.9 tax transaction fee/ 2,000 Aeroplan points earned).
Now 1.145 cents per mile is not an outstandingdeal, but it is a good deal especially if you’d redeem your miles for business or 1st class tickets.
If Steve had a high enough limit on this card, he could earn 2.8 million Aeroplan points for paying his $1.4 million tax bill at a cost of $32,060 (2.29% X $1,400,000).
Aeroplan charges 105,000 miles for a business class ticket to Europe or 130,000 miles for a business class ticket to Asia. So Steve could get lots of business class travel on Air Canada or their Star Alliance partners.
His cost per mile would be even lower if he could deduct the entire tax processing fee as a business expense. Assuming a marginal tax rate of 35%, Steve would eventually pay 1.145 – 35% or 0.744 cents per Aeroplan mile which is a great deal!
But I’m not a tax adviser and don’t know if he will be able to deduct the entire amount as a business expense.
The biggest problem which Steve will run into while paying his tax bill with a credit card, is that he may not have a large enough credit limit (how many readers have a $1.4 million credit limit on a credit card?!) for a $1.4 million tax payment on his regular credit cards.
And since the IRS has a 2 card limit for tax transactions, Steve won’t be able to split his payments into more than 2 transactions.
But charge cards (such as the Chase Ink Bold or American Express Business Gold) typically have higher limits than credit cards since they require the full balance to be paid off each month.
American Express Centurion & Business Gold Charge Card
The American Express Centurion card is a charge card for very high spenders and is by invitation only.
Since this card is for high spenders, they usually give you a high credit limit with the card. 🙂
You also earn American Express Membership Rewards points on this card. But since you only earn 1 point per $1 charged, the cost per mile is not very attractive.
The American Express Business Gold card is another charge card which earns Membership Rewards points. Their is no sign-on bonus for this card currently, so I’d wait for a sign-bonus before applying for this card.
If you do have these charge cards, you could also call American Express and let them know that you have a big tax payment to make and if they could temporarily increase your credit line so that you could make a large tax payment.
I’m not a big fan of Membership Rewards points (I prefer Chase Ultimate Rewards points), but they could be useful especially when you factor in the transfer bonuses which they have.
For example, if you pay $1,000 in taxes, you would pay $22.90 (2.29% tax transaction processing fee X $1,000 tax payment) in tax processing fees.
But you’d earn 1,000 Membership Reward points ($1,000 tax payment X 1 point per $1 spent).
That’s 2.29 cents per Membership Reward point ($22.90 tax transaction fee/ 1,000 Membership Rewards points earned)
That’s a bad rate for Membership Reward points. But, Delta and British Airways have had bonuses for transferring Membership Reward points in to Delta and British Airways miles.
For example, if you get a 40% bonus for transferring Membership Reward points to Delta or British Airways, your cost per mile is 1.63 cents per mile.
1.63 cents per mile is still pretty high since you can get Delta miles for 1.1 cents by transferring miles between accounts.
But it could make sense since buying Delta miles at 1.63 cents per mile means that you could get a Business Class ticket to Europe for 100,000 Delta miles or $1,630. This is much cheaper than paying full price for a business class ticket from Delta or its SkyTeam partners.
But if Steve is comfortable with paying ~$1,600 for a business class ticket to Europe he should consider paying part of his tax bill with his American Express Centurion or Business Gold card and earn Membership Reward points which he could later transfer to Delta or British Airways.
However, since he could potentially earn over 1 million miles, he should be careful to use the miles before they devalue or factor in the risk of his miles devaluing before paying a tax transaction fee to use his credit card.
But the cost per mile could be even further reduced if Steve could deduct the tax transaction fee as a business expense.
Here’s a summary chart (click to enlarge) which lists the different options above.
Bottom Line: Paying a transaction fee to earn miles and points doesn’t usually make sense, since you pay a high amount for the miles and points.
But if you regularly buy business class or first class tickets or see value in paying only $1,600 to $2,500 for international business or first class tickets, this could be a great deal for you!
I won’t be able to get to the comments since I am traveling, but I hope this helps some of you with upcoming tax payments!
Please comment if you know of any way to earn miles and points by using a credit or debit card to pay taxes. And if you know of a Visa debit card which allows you to earn miles and points for tax payments since you only pay a flat fee of $3.89 per transaction.
Disclosure: I don’t get paid any commission for the links to credit cards in this post.