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Update: Some offers mentioned below are no longer available. View the current offers here – Starwood Preferred Guest Credit Card from American Express
Every year around this time, I start getting questions about earning travel rewards from tax payments. Today, TPG Senior Points & Miles Correspondent Jason Steele explains both how to collect those points and miles, and when it makes sense financially.
Earlier this month, the deadline for distributing tax forms arrived, and most Americans are now in a position to file their taxes and pay any necessary liability between now and April 15th. For travel rewards enthusiasts who owe taxes for the 2014 fiscal year, the question now is how to maximize points and miles by paying taxes with a credit card.
How to pay taxes with your credit card
The IRS authorizes third party providers to collect federal tax payments on its behalf. At this time, there are payment companies that accept Visa, MasterCard, American Express, Discover, and several major debit card networks. Funds are accepted for individuals, businesses, estimated quarterly tax payments, and many other types of IRS payments. In addition, these companies can accept tax payments on behalf of some states, although a different fee structure may apply.
Debit cards incur a flat fee of $2.59 to $3.95, depending on which company processes the payment. On the other hand, credit cards incur “convenience fees” of between 1.87% and 2.35% so that they can make a profit while the government collects 100% of what it’s owed. The payment processors can do this because the IRS (and other government entities and publicly regulated utilities) are exempt from state and federal laws restricting credit card fees. So these companies are passing on the merchant fees, and presumably earning a small profit to make it worth their while.
How to earn rewards by paying your taxes
There are two useful ways to pay your taxes and receive benefits despite these convenience fees:
1: Earn rewards that are worth more than the cost of the convenience fee
With convenience fees as low as 1.87%, it’s possible to receive rewards that outweigh the costs. Using TPG’s latest monthly valuations as a guide, the list below indicates which loyalty points are worth enough to exceed the 1.87% cost of paying your taxes with a credit card. Some points also make the list because you earn more than 1 point per $1 spent on a co-branded credit card, even though one point is worth less than 1.87%.
- American Express Membership Rewards are valued at 1.9 cents each; however, Amex Everyday cardholders can earn a 20% bonus for making at least 20 transactions in a statement period, making a tax payment worth 2.28%, and Amex Everyday Preferred cardholders can earn a 50% points bonus for making at least 30 transactions in a statement period, raising the value to 2.85%.
- Chase Ultimate Rewards are valued at 2.1 cents each, so you’ll come out ahead by using the Chase Sapphire Preferred and Chase Ink Plus.
- Barclaycard Arrival Miles are worth 1.1 cents each, but the Barclaycard Arrival Plus offers double miles on each transaction, worth 2.2%.
- Capital One Venture Rewards Miles are worth 1 cent each, but the Capital One Venture Rewards Credit Card offers double miles on each transaction, worth 2%.
- Alaska Mileage Plan miles are valued at 2 cents each.
- British Airways Avios points are valued at 1.7 cents each, but the British Airways Visa Signature Card from Chase earns 1.25 points per dollar, yielding a return of 2.125%.
- Southwest Rapid Rewards are worth 1.4 cents each, however Companion Pass holders can get double the value, making these points worth 2.8 cents each when used strategically.
- United MileagePlus miles are valued at 1.5 cents each, but the United MileagePlus Club card earns 1.5 miles per dollar, yielding a return 2.25%.
- US Airways Dividend miles are valued at 1.9 cents each, putting them just above the break even threshold for a 1.87% fee.
- Club Carlson Rewards points are valued at just 0.6 cents each; however, the Club Carlson Premier Rewards Visa Signature card (and the similar business version) earns 5 points per dollar, equating to a 3% return.
- Starwood points are valued at 2.4 cents each, making the Starwood Preferred Guest card from Amex a strong option with no additional requirements.
- The Citi Double Cash card doesn’t offer travel rewards, but it does offer 1% back on your purchases, plus another 1% back as you pay your balance, for an effective cash back rate that beats the convenience fees and provides a net gain.
With this strategy you’re effectively buying points or miles at a discount. For example, if you pay your $10,000 tax bill with your British Airways Visa, you’ll earn 12,500 miles at a cost of $187 (assuming a 1.87% fee), so you’re buying Avios at just under 1.5 cents apiece. If you can reliably get better value than that out of your points, then using your card to pay the tax bill is profitable.
2: Utilize tax payments to meet minimum spending requirements and other spending thresholds
If you’re having difficulty earning a credit card sign-up bonus, tax payments can be a quick, easy, and relatively cost effective way to make sure you meet the minimum spending requirement. For example, the Starwood Preferred Guest card offers 10,000 Starpoints after you make your first purchase, plus an additional 15,000 Starpoints after you make $5,000 in purchases within the first six months of cardmembership.
For many new account holders, $5,000 is a lofty threshold, but paying a 1.87% fee on $5,000 worth of tax payments equals a cost of just $93.50. Certainly, this is far more than the cost of writing a check and mailing it, but if you consider that 15,000 Starpoints are worth $360 (again, according to TPG’s latest valuations), then that $93.50 in fees is a better bargain, especially if paying the fee means the difference between earning the bonus and coming away with nothing. Furthermore, you’ll earn 5,000 more Starpoints for the payment itself.
Many other credit cards offer perks when you reach a spending threshold, so incurring a convenience fee for paying taxes can also be a worthwhile in that case. Some examples:
- The Delta Reserve Credit Card from American Express. Both the business and personal cards have spending thresholds of $30,000 and $60,000 to earn an additional 15,000 Medallion Qualifying Miles (MQMs) each, for a total of 30,000 MQMs. That’s enough to reach Silver Medallion status before you even step on an aircraft, or you can use these bonuses to propel yourself to the next level of status, which can easily be valuable enough to absorb some convenience fees.
- The Platinum Delta SkyMiles Card from American Express. Both the business and personal cards have spending thresholds of $25,000 and $50,000 to earn an additional 10,000 MQMs each, for a total of 20,000 MQMs that can also help you reach the next status level.
- Citi Hilton HHonors Reserve and Hilton HHonors Surpass Card from American Express. Both of these cards offer Hilton HHonors Diamond elite status to cardholders who spend $40,000 within a calendar year.
- British Airways Visa Signature Card from Chase. This card offers a Travel Together Ticket when you spend $30,000 on the card within a calendar year. This lets you book two award flights for the price of one on British Airways (albeit with the taxes and fuel surcharges for both).
Using gift cards or debit cards to reduce the cost of the convenience fee
The convenience fee for credit card payments is calculated as a percentage of the payment amount, but the fee for debit cards is a flat fee per transaction, making them less costly overall. Unfortunately, the last remaining debit card that offered travel rewards, the SunTrust Delta debit card is no longer available to new applicants. If you already have it, you can make larger tax payments in a single transaction and incur only a single flat fee of under $4. This card only offers one mile for every two dollars spent, but it’s still an easy way to earn at least some miles at a very minimal expense.
Some prepaid gift cards also operate as debit cards, and you can purchase them at merchants that earn a category spending bonus, making a much wider range of travel rewards cards suitable for making tax payments, albeit indirectly.
I’ve been using this technique to pay my taxes for some time:
- Call Official Payments Corporation. All of the other tax payment processors will accept debit card payments, but only from two debit cards at a time. Since the largest debit cards available for purchase with a credit card are $500, this limits online payments to $1,000 per processor. Thankfully, you can call Official Payments Corporation at 800-487-4567 and pay with as many debit cards as you want. Their debit card fee is now $3.50, so the easiest way to pay with a $500 debit card is to request a payment of $496.50, which will equal $500 after the fee is included. In my experience, the operators are friendly and efficient, and you’ll get email confirmations immediately as payments are processed.
- Only use Visa debit cards. I’ve never tried to use an American Express card, but I almost learned the hard way that Official Payments Corporation will only accept Visa debit cards, not MasterCards.
- This method costs 1.7% in fees. The combined cost of the typical $4.95 debit card fee and the $3.50 payment processor convenience equals 1.7% of each $496.50 paid to the IRS. This represents only a slight savings over the 1.87% fees, but the value proposition soars if you can buy $500 gift cards at grocery stores or gas stations using credit cards that offer bonus rewards at these merchants. For example, you could use the Amex Everyday Preferred to get 3x rewards at grocery stores (on up to $6,000 in purchases each calendar year), plus an additional 50% bonus when completing 30 or more transactions in a statement period. At TPG’s valuation of 1.9 cents apiece for Membership Rewards points, you’ll earn $43.17 worth of rewards for only $8.45 in fees. To put it another way, you’re paying 0.37 cents in fees for each Membership Rewards point earned this way, and you can earn 27,000 points per year, per card with the $6,000 annual limit for bonuses at grocery stores.
- Be cautious. I can only share my personal experience dating to my last payment of estimated quarterly taxes earlier this year. Since then, anything could have changed. Before purchasing thousands of dollars worth of gift cards, try buying just one or two cards with smaller amounts, and confirm that you can make multiple payments with the cards you purchased before scaling up this payment strategy. I’d also recommend completing your payments well before the April 15th deadline to avoid the possibility of being unable to reach Official Payments by telephone due to high volume.
Financing your tax liability with a credit card
All of these calculations assume that you’ll avoid interest charges by paying you entire statement balance in full and on time. If you finance your tax liability over time, you’ll pay more in interest charges to your credit card issuer than you would if you worked out an extended payment plan with the IRS, which charges 0.5% per month (6% APR), far less than the standard interest rate of most credit cards. While some credit cards do offer 0% introductory APR financing on new purchases, this can increase your debt-to-credit ratio, which can reduce your credit score.
Paying taxes on a credit card can make sense, but always keep track of the convenience fees. While you can reduce these fees by using your credit card to purchase debit cards, it’s pretty inconvenient.