Income Taxes: When You Should (and Should NOT) Use a Credit Card!

Income Taxes:  When You Should (and Should NOT) Use a Credit Card!

Million Mile SecretsIncome Taxes:  When You Should (and Should NOT) Use a Credit Card!Million Mile Secrets Team

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It’s that time of year again!  April 15, 2015, is the IRS tax filing deadline, and readers often ask if it’s worth paying taxes with a credit card to earn miles and points.

I’ve written about paying income taxes with a credit card, and whether doing so will code as a cash advance (it won’t).

But because you’ll pay processing fees of up to 2.35%, it’s generally not worth it except under specific circumstances.

Income Taxes When You Should And Should NOT Use A Credit Card
Paying Taxes With a Credit Card Might Make Sense in Certain Situations

Here’s how to pay taxes with a credit card and when it might make sense for you.

How Does This Work?

Link:   IRS Pay Taxes With a Credit or Debit Card

The IRS allows you to pay taxes with a credit card but you must use a 3rd party payment processor.  The government does NOT accept credit card payments directly.

These payment processors charge 1.87% to 2.35% of your bill.  And some now charge more for certain types of credit cards (like Visa).

Income Taxes When You Should And Should NOT Use A Credit Card
Third-Party Payment Processors, Like, Add a Fee of 1.87% to 2.35% of Your Bill

If you pay by debit card, you’ll be charged a flat fee of ~$3 to ~$4.

Here’s a list of approved IRS payment processors and their fees.

Payment ProcessorCards AcceptedCredit Card FeeDebit Card Fee
Pay USA Tax Visa, MasterCard, American Express, Discover1.99% (Minimum Fee $2.69)$2.69
Official Payments Visa, MasterCard, American Express, Discover2.25% (Minimum Fee $2.50)$2.50
Pay 1040Visa, MasterCard, American Express, Discover1.87% (Minimum Fee $2.59)$2.59
Business Tax PaymentVisa, MasterCard, American Express, Discover1.87% (Minimum fee $2.59)$2.59

There doesn’t seem to be an advantage to using 1 processor over another, except for reduced fees.  The least expensive is Pay 1040, which charges 1.87% for credit card payments, and a flat fee of $2.59 for debit card payments.

For example, on a $5,000 tax payment, you’d pay:

  • $5,093.50 with a credit card ($5,000 x 1.87% = $93.50)
  • $5,002.59 with a debit card ($5,000 + $2.59 flat fee)

Note:   Not all debit (or gift) cards are accepted.  In the past, some gift cards have worked, but I haven’t tried this year!

Note:  You will NOT be charged cash advance fees when you pay with a credit card.  The FAQs for all payment processors say:

Your tax payment will be treated like a retail purchase and not a cash advance

That said, paying taxes with a credit card definitely does NOT make sense if you can’t pay your account off in full.  If you carry a balance, the interest you’ll pay will negate the value of the miles and points you’d earn.

When Does It Make Sense to Pay Taxes With a Credit Card?

1.   The Fees Generally Negate the Value of Miles and Points Earned

Let’s look at our previous example.  Suppose you used a card like the Chase Sapphire Preferred to pay your $5,000 tax bill.  You’d pay a total of $5,093.50 ($5,000 x 1.87% = $93.50) and earn 1 point per $1, or ~5,094 Chase Ultimate Rewards points.

You could convert those points to cash at a rate of 1 point = 1 cent, so ~5,094 points is worth ~$51.  You won’t break even!

Income Taxes When You Should And Should NOT Use A Credit Card
You’ll Lose Money If You Get a Value of 1 Cent per Point Paying Taxes With a Credit Card

If you used those points to pay for travel through the Chase Ultimate Rewards travel portal, they’re worth 1.25 cents each.  So you’d get ~$64 worth of travel (5,094 points x 1.25 cents per point) from the transaction.  That’s still not a good deal.

You could potentially do better by transferring the points to travel partners like British Airways, IHG hotels, or Hyatt.  For example, 5,000 Chase Ultimate Rewards points transferred to these partners could get you:

Using our example of a $5,000 tax bill, it’s possible to get more than ~$94 in value from these redemptions (often last minute, short-haul flights on American Airlines  can cost $200+).

But I wouldn’t do this unless I had a very specific use in mind for the points!

2.   Meeting Minimum Spending Requirements

Paying taxes with a credit card could make sense if you have a substantial minimum spending requirement to meet on a card.  That said, there are lots of other (free or cheap) ways to meet minimum spending!

For example, the Citi AAdvantage Platinum Select World Elite Mastercard has a sign-up bonus of 50,000 American Airlines miles after you spend $3,000 in purchases within the 1st 3 months of opening your account.

You could get the spending done in ONE transaction if you paid a $3,000 tax bill.  With the 1.87% fee, you’d pay a total of ~$56 on top of the $3,000 bill.

Some might consider this a small price to pay for 50,000 quick American Airlines miles.  That’s enough for a 1-way Business Class ticket to Europe, which could cost almost $8,000!

Income Taxes When You Should And Should NOT Use A Credit Card
It Could Be Worth $56 in Fees to Get Enough Points for a Ticket Worth Almost $8,000

That said, if you can meet credit card spending requirements for free, this isn’t the best deal.  In effect, you’re paying for the convenience of getting the minimum spending done fairly easily in 1 transaction.

I’d only use this method if I had a lot of minimum spending to meet in a short amount of time.

3.   Big Spending for Elite Status or Bonus Points

It might make sense to pay your tax bill with a credit card if it will put you over the spending threshold to earn elite status, elite qualifying miles, or bonus points.

You can check out my Big Spender series for an overview of which cards offer perks for spending tens of thousands of dollars per year.

That series was written several years ago, so here’s a table with some of my favorite cards that currently have big spending bonuses.

Card NameSpending RequirementBonusNotes
Gold Delta SkyMiles® Credit Card from American Express$25,000 per calendar yearMedallion Qualifying Dollars (MQD) requirement waived to earn elite status
American Express Platinum Delta Skymiles$25,000 per calendar yearMedallion Qualifying Dollars (MQD) requirement waived to earn elite status
American Express Delta Reserve$25,000 per calendar year

$30,000 per calendar year

$60,000 per calendar year
Medallion Qualifying Dollars (MQD) requirement waived to earn elite status

15,000 Medallion Qualifying Miles, 15,000 Bonus Miles

Another 15,000 Medallion Qualifying Miles, 15,000 Bonus Miles
Hilton Honors Surpass Card from American Express$40,000 per calendar yearHilton Diamond status until end of next calendar year
Starwood Preferred Guest® Credit Card from American Express$30,000 per calendar yearStarwood Gold status for 12 months
Bank of America Virgin Atlantic$15,000 per card anniversary year
$25,000 per card anniversary year
7,500 Virgin Atlantic points

7,500 Virgin Atlantic points
Bank of America Virgin America Premium Signature $10,0005,000 Virgin America status pointsMaximum 15,000 points per calendar year
Barclaycard Hawaiian Airlines$10,000 per card anniversary year5,000 Hawaiian Airlines miles
Chase British Airways Visa Signature Card$30,000 per calendar yearTravel Together Companion Ticket
The Hyatt Credit Card$20,000 per calendar year

$40,000 per calendar year
2 stay / 5 night credits toward Diamond status

3 stay / 5 night credits toward Diamond status
Marriott Rewards® Premier Credit Card$3,0001 elite creditNo limit to the number of elite credits you can earn
Southwest Rapid Rewards® Premier Credit Card$10,0001,500 Tier Qualifying PointsMaximum 15,000 Tier Qualifying Points per year
Chase Ritz Carlton Rewards$10,000 per card anniversary year

$75,000 per card anniversary year
Maintain Gold Elite status after 1st year of having card

Platinum Elite status through December 31 of following year
Chase United MileagePlus® Explorer Card$25,000 per calendar year10,000 bonus United Airlines miles
Citi® / AAdvantage® Executive World Elite™ Mastercard®$40,000 per calendar year10,000 Elite Qualifying Miles (EQMs)
Citi® Hilton HHonors™ Reserve Card$10,000 per card anniversary year

$40,000 per calendar year
1 free weekend night at almost any Hilton

Hilton Diamond Elite status until end of next calendar year

4.   Some Cash Back Cards Could Be (Barely!) Worth It

If you use a cash back card that pays more than 1.87%, you could break even or turn a (marginal!) profit by using a credit card to pay taxes.

Again, this is probably most useful if you need to meet a minimum spending requirement.  Unless your tax bill is in the tens or hundreds of thousands of dollars, your net gain will be negligible.

Income Taxes When You Should And Should NOT Use A Credit Card
You Might Only Fill Your Piggy Bank With Pennies If You Use a Cash Back Card to Pay Taxes

For example, the Citi Double Cash Card pays 1% cash back when you make a purchase, and another 1% when you pay it off.

While you won’t usually make a lot of money using a cash back card to pay your taxes, it’s better than earning nothing by paying directly from your bank account.

And your card issuer will see lots of spending and on-time payment activity on your card, which builds your history with the bank.  Banks like Barclays like to see you using their cards before they issue you more credit!

Bottom Line

You can pay your IRS tax bill with a credit card, but it will cost you 1.87% to 2.35% in fees.

This is usually NOT worth it, unless you need to quickly meet a lot of credit card minimum spending requirements.  Or are close to meeting a bonus spending requirement to earn extra miles, points, or perks on certain cards.

It’s definitely NOT worth it if you can’t pay your balance off in full.  You won’t get ahead paying interest on credit cards!

Will you be paying your taxes with a credit card?

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I got hit with some unexpected taxes this year and had to sign up for an installment plan. First time dealing with this and it is a headache. The tax guy doesn't understand exactly what I'll have to pay, and the IRS doesn't answer their phone. At this point, I wonder if it's better to at the very least get a low interest credit card (one that has 0% for 15-20 months) and just pay it all off (once I figure out exactly what I owe). The only issue I can see is if the card doesn't approve me for enough to pay the taxes. Most of the low interest cards don't have great reward programs, but may still be worth it?

This is the second year in a row I haven't had to pay taxes, so I wasn't able to use my method to get 5%-8% cash back. Every November, for the past 5 years I have paid my property taxes though and use this method. This past November I saved/earned almost $400! There are ways if you learn to think outside the box.

Barclay Arrival offers 2 points for every dollar of spend and 20% rebate on points used, effectively getting you 2.2% back on spend. That more than covers the 1.87% fee, right? What am I missing?

@UAPhil, Darius: Can you overpay on your taxes and get a refund later? I am expecting a refund this year. Wondering if I can overpay to get a fee Hilton weekend night?

For me, paying taxes with my Club Carlson Visa card is definitely worth it. For each $10,000 in tax spend (which incurs a $187 fee), with "last night free" I get two award nights at a nice, well located London (or other European) hotel. The SPG Amex is also a net win for hotel stays, but by a smaller margin.

(Also, for rental property owners, the credit card processing fee incurred paying property taxes is a deductible expense on Schedule E.)

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