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Paying the IRS is never fun. But, if you do it right, it presents a fantastic opportunity to earn points and miles by paying taxes with a credit card.
Most Americans only deal with paying taxes once per year on April 15th. However, self-employed and contract workers generally make estimated quarterly tax payments throughout the year. And the next payment for these taxpayers is coming up on September 15, 2020.
In this post, we’ll cover everything you need to know about paying taxes with a credit card so you can build up those points balances.
- What is the Fee for Paying Taxes with a Credit Card?
- Maximizing Rewards with an IRS Credit Card Payment
- Other Benefits of IRS Credit Card Payments
- Should I Pay Taxes with a Credit Card?
What is the Fee for Paying Taxes with a Credit Card?
As outlined on the IRS website, there are three options to pay the IRS online with a credit card. Each one of these payment processors charges a different fee for paying federal income taxes depending on the type of card you use.
- PayUSAtax — 1.96% fee with a $2.69 minimum
- Pay1040 — 1.87% fee with a $2.59 minimum
- OfficialPayments — 1.99% fee with a $2.50 minimum
The IRS website also offers a table comparing debit and credit card payment processing fees assessed by each processor at various dollar amounts:
Watch out for the minimum processing fees. If you're paying a balance of $125 or less, you're sure to pay a higher processing fee rate than the 1.87% to 1.99% rate listed. To pay the lowest rate of 1.87% through Pay1040, you'll need to pay at least $139.
Generally, you can expect two charges to show up on your credit card statement. The tax payment may show up as “United States Treasury Tax Payment” while the processing fee may be charged as “Tax Payment Convenience Fee”.
All three payment processors (PayUSAtax, Pay1040, OfficialPayments) confirm that the charge will process as a purchase and not a cash advance. So, you don't have to worry about getting hit with extra fees.
Maximizing Rewards with an IRS Credit Card Payment
The size of your federal tax obligation and the credit cards you have are two key components of how to approach your tax payment. Taxpayers looking to maximize the rewards from their federal tax payment should consider the following strategies:
Earn a Sign-Up Bonus When You Pay the IRS with a Credit Card
In recent years, credit card sign-up bonuses have swelled in size. But so have spending requirements. Previously unheard-of 100,000-point sign-up bonuses are much more commonplace. However, these bonuses generally require up to $15,000 in spending across a three-month time frame.
The Ink Business Preferred® Credit Card offers exactly that: 100,000 points after you spend $15,000 on purchases in the first 3 months from account opening. Cardholders might not typically spend that much in a three month period. However, a large income tax bill might boost spending enough to meet the bonus threshold.
For instance, putting a $15,000 tax payment on a credit card will cost $280.50 through Pay1040. However, it can net 100,000 bonus Chase points for new cardholders. The total points earned from such a purchase would be 15,000 + 281 + 100,000 = 115,281 points. Even if you redeem these points for just 1 cent each, that's $1,152.81 in value. That's much more than the $280.50 processing fee paid. And, you can get much more in value from these points by redeeming them through an Ultimate Rewards transfer partner.
Hit a Spending Threshold by Paying Taxes with a Credit Card
For those not looking to sign up for a new credit card, there are still potential milestone spend levels that earn notable travel perks. For example, Hilton Honors American Express Surpass® Card cardholders earn a Weekend Night Reward after spending $15,000 on purchases on your card in a calendar year.
As with the example above, you can pay just $280.50 in fees to make a $15,000 tax payment. The ability to earn a free weekend night at any Hilton portfolio property worldwide at this price can be an absolute steal. Without even leaving the United States, many of Hilton's luxury hotel properties charge rates twice or even three times as high as the processing fee.
Even better, Amex announced that all free weekend night certificates earned between May 1, 2020 and December 31, 2020 can be used any day of the week. Plus, these certificates are valid for 24 months instead of the standard 12 months. That adds even greater flexibility—and therefore value—of earning a Hilton free weekend night right now.
Additionally, the JetBlue Plus Mastercard® offers cardholders the opportunity to spend their way to Mosaic status. You'll have to spend $50,000 in a calendar year on the JetBlue Plus to earn this elite status. However, JetBlue loyalists may find a great deal of value and convenience from this status. A single federal income tax payment might not be enough to reach this high spend threshold, but it could offer a shortcut to getting there.
Pay Taxes with a Credit Card that Earns More Points
Points and miles enthusiasts with no welcome bonus or spend threshold to meet should look to maximize the rewards from their expenses. Federal tax payments are no exception. Unfortunately, no credit card issuers have a bonus category for paying taxes. Therefore, taxpayers should follow the same rules of thumb they typically follow for any non-bonus spend.
For American Express Membership Rewards enthusiasts, The Blue Business® Plus Credit Card from American Express credit card will earn 2X Membership Rewards points on the first $50,000 of spend in a calendar year, then 1 point per dollar above that.
The Sapphire Reserve allows cardholders to redeem Ultimate Rewards points for 1.5 cents each through Chase's portal. Otherwise, the portal redemption value of Chase points maxes out at 1.25 cents each. Earning 1.5X points redeemable for 1.5 cents each means an overall spend reward of 2.25%. Otherwise, the maximum reward on spending nets to just 1.875%—which is a negligible margin above the lowest processing fee available.
Alternatively, federal tax obligations might offer a great way to top up your points or miles balance. That can be especially helpful if you need to boost a specific preferred hotel or airline program that's not available as a transfer partner of any of the major credit card issuers.
Note: A commenter below mentioned that Citi recently didn't award earnings on a tax payment. We have reached out to Citi for comment. But for now, beware of this data point if you plan to use a Citi card.
Collectors of Citi ThankYou Points who hold both a Citi® Double Cash Card and a Citi Premier℠ Card or Citi Prestige® Card card can earn 2X ThankYou Points paying their taxes with their Citi Double Cash. The Citi Double Cash has no upper limit to how much spend earns 2X points as well.
Earn Cash Back for Paying Taxes with a Credit Card
At a time of travel advisories and restrictions, points and miles may have taken a bit of a backseat. Instead, taxpayers might seek out the best available cashback rewards from credit card spend. Thankfully, there are several credit cards that offer 2% or greater cashback on all purchases.
In addition to the aforementioned Citi Double Cash, the Capital One® Spark® Cash for Business also offers unlimited 2% cashback on all purchases. The American Express Blue Business Cash™ Card also earns 2% cash back on all eligible purchases on up to $50,000 per calendar year, then 1%. Even using the payment processor with the highest fee percentage (OfficialPayments, 1.99%) means those earning 2% cash back will come out ahead from their payment.
Those who hold the Bank of America® Premium Rewards® Credit Card can potentially earn even more than 2% cashback. The card earns 1.5% cashback on general purchases. However, those with significant assets with Bank of America and related accounts earn up to a 75% bonus on these earnings. That means cardholders can earn up to 2.625% on their federal tax payments. Given the high asset requirement to realize that reward level, this option may not be for everyone.
Other Benefits of IRS Credit Card Payments
Tax payments can be split between multiple credit cards. That can be especially helpful for those with high tax obligations. This provides taxpayers the opportunity to earn multiple credit card sign-up bonuses, perhaps one card a piece for those married filing jointly. Or, you can split payments to reach the spend requirement on one sign-up bonus and then work toward a different credit card spend threshold with the remainder of the payment.
You can also pay with a credit card to help manage cash flow. By paying your taxes with a credit card, you can delay the actual payment by a month or longer. For example, imagine a payment is made on the first day of a billing cycle. When the cycle closes a month later, cardholders generally have another month to pay the credit card “on time”. That means the funds are transferred out of your bank account a full two months after the date you made the tax payment.
Should I Pay Taxes with a Credit Card?
Paying taxes with a credit card can provide a (potentially considerable) net gain for taxpayers. But, two conditions need to be met. First, you need to be able to fully pay off the incurred credit card charge when it comes due. Second, the value of the rewards you earn from your payment should outweigh the processing fee.
It doesn't make sense to incur a 1.87% fee if you aren’t getting at least 1.87% worth of credit card rewards on the purchase. If you are smart about which card to use to make a tax payment, you should have no trouble meeting this requirement.
Will you be paying income taxes with a credit card this year?
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