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It’s tax time again, and as we all prepare our annual statements (that is, if you don’t do it quarterly like many small businesses do), chances are you’re wondering if there are any opportunities to earn points on all those dollars you’re forced to fork over to Uncle Sam.
One of the questions I get every year is whether paying taxes with a credit card is a good way to rack up points and miles. The question comes up because many services through which you can pay taxes using a credit card will charge you fees that offset the value of the points you would earn by doing so. In general, earning points on your taxes and paying these fees is still cheaper than buying points or miles directly from airlines, but they are still expensive.
However, there are a few situations where using a credit card might make sense, though:
1. When you can write off the cost of the processing fees as a business expense.
2. To hit a spending requirement or threshold on your credit card and the additional benefits you receive outweigh the cost of making the charge.
3. You have a cashback card with a rate of return at 2% or more, though depending on fees, you could be losing a bit of money on this.
As I said, apart from the fees, there are other things to consider, like whether this might be a quick and easy way to meet minimum spending requirements on a new credit card in order to get a bonus – as I plan to do thanks to earn the 230,000 possible bonus points on my four new credit cards – or whether paying your taxes with a credit card will earn you some sort of bonus spending threshold where you earn even more bonus points (like with the Premier Rewards Gold from American Express), or something like Starwood Gold status at hitting $30,000 on either the personal or business SPG Amex.
Because of the high fees, which are generally a percentage of the total charges you make, I usually don’t use credit cards to pay taxes unless it’s to score valuable bonuses. However, you also have the option to use a points-earning debit card like the Delta SunTrust cards since the fees on using debit cards are usually a much lower flat rate, meaning those miles you earn are a lot cheaper.
Payment Services and Fees
Here is the official government list of approved tax payment vendors, and here are the rates they charge for using a credit card versus a debit card to pay taxes:
PayUSATax.com: 1.89% for credit cards or only $3.49 for debit cards. They accept Mastercard, Visa, Discover, BillMeLater, Star, NYCE, Pulse and Accel cards.
OfficialPayments.com: Generally 2.35% when using American Express, Mastercard, Discover or Visa , or a $3.95 convenience fee per transaction with debit cards including Accel, NYCE, Pulse and Star. So a $1,000 tax bill will net you 1,000 miles and cost you $23.50 on your Visa, and just 2.1% when using an Amex to pay a federal tax of $100,000 or more. You can also use your Amex Membership Rewards points to pay your taxes and convenience fee at the rate of 2,000 points per $10.
ChoicePay: 1.88% fee for credit card tax payments versus only $3.48 flat fee for debit card payments.
Pay1040.com: 2.35% when using credit cards including American Express, Discover, Mastercard and Visa. A $3.89 flat fee per transaction using NYCE, Pulse and Star debit cards.
Business Tax Payment: 2.35% fee when using credit cards or a flat fee of $2.99 when using a debit card.
Value Tax Payment: 1.87% on credit cards, $2.49 flat fee on debit cards.
Minimum Spending Requirements
I recently applied for four new credit cards: the Citi AAdvantage Executive World Elite Mastercard, the Chase Ink Plus , the Barclaycard Arrival Plus World Elite Mastercard and the Alaska Airlines Visa Signature credit card.
All that means I have to spend $28,000 in the coming months to earn the full bonuses on each. I haven’t gotten my tax bill sorted out yet, but I have a feeling that I’m going to owe some small business taxes that might put me within that range. At best if I were to put all that on credit cards, I’d be paying an additional $526 through ChoicePay (the service with the lowest fees). That works out to 0.23 cents per point – a rate low enough that I’m willing to consider it.
Calendar Year/Annual Spending Threshold Bonuses
Many points-earning credit cards offer calendar year spending bonuses as well, where if you hit a certain spending threshold, you can earn potentially valuable extra perks and benefits. Here are a few of the best.
Amex Premier Rewards Gold: Spend $30,000 in a calendar year and earn 15,000 bonus points.
Citi AAdvantage Executive World Elite Mastercard: Earn 10,000 elite-qualifying miles when they spend $40,000 in a calendar year.
Citi AAdvantage Platinum Select World Elite Mastercard and Visa: Earn a $100 American Airlines Flight Discount every year when you spend $30,000.
Southwest Rapid Rewards Premier Credit Card: Earn 1,500 Tier Qualifying Points for every $10,000 in purchases. Get up to 15,000 Tier Qualifying Points annually.
Hawaiian Airlines World Elite Mastercard: Earn a 5,000 bonus miles every membership year when you spend $10,000 or more.
Delta Reserve® Credit Card from American Express: Spend $30,000 in a calendar year and you can earn 15,000 miles plus a Miles Boost of 15,000 MQMs. Spend $60,000 in that same year and you can earn an additional 15,000 miles and 15,000 more MQMs. Those 30,000 MQMs are not only for Medallion status but can be used as redeemable miles as well.
Platinum Delta SkyMiles® Credit Card from American Express: Earn 10,000 miles and a Miles Boost of 10,000 Medallion® Qualification Miles when you reach $25,000 in eligible purchases during a calendar year. Earn an additional 10,000 miles and another Miles Boost of 10,000 MQMs when you reach $50,000 in eligible purchases the same calendar year.
United MileagePlus Explorer Card: You can earn 10,000 bonus award miles each calendar year you spend at least $25,000 on this card.
Virgin Atlantic American Express: Earn 15,000 bonus miles on every cardmembership anniversary upon spending $25,000 annually.
Virgin America Visa: Earn up to 15,000 status points every calendar year and carry forward any additional status points – 5,000 points per $10,000 you spend
Citi Hilton HHonors Reserve: This card actually has two spending bonuses. Cardholders who spend at least $10,000 on the card in a cardmember year (so not a calendar year) get a free weekend night certificate good at any Hilton property. The calendar year spending bonus on this card is Hilton Diamond status when you spend $40,000.
American Express Hilton HHonors Surpass Card: Enjoy an automatic upgrade to HHonors Diamond Elite status when your total eligible spend reaches $40,000 or more during a calendar year.
Marriott Rewards Premier Credit Card: Earn 1 elite night credit for every $3,000 spent. There is no limit to the number of elite nights that you can earn.
Fairmont Visa Signature: Earn one free night every anniversary with $12,000 in annual spending.
Starwood Preferred Guest Credit Card from American Express and Starwood Preferred Guest Business Card: Spend $30,000 in a calendar year and receive complimentary SPG Gold status.
US Bank FlexPerks Visa Signature: Earn 3,500 bonus FlexPoints each year when you spend $24,000 in net purchases per cardmember year.
So depending on the value you get out of these points, miles, elite-qualifying miles, companion tickets and free nights, paying the extra fees could be worth it to you.
Using Bluebird from American Express
Amex Bluebird is a checking/debit alternative, and has quickly become one of the best ways to rack up points and miles on expenses you cannot otherwise use credit cards for. Once you sign up for Bluebird and activate your account, you can fund it by purchasing Vanilla Reloads at a retailer like CVS that will let you buy them using points-earning credit cards in denominations up to $500 for $3.95 per card.
Then once you have loaded the value of the Vanilla Reload into your Bluebird account, you can cut checks from there either through the electronic bill pay service or by writing a physical check, just as you would with a normal checking account for expenses like rent, car leases, insurance premiums and more.
There are a few limits to the Bluebird to be aware of. You cannot use the Bill Pay feature to pay your taxes – that is explicitly stated when you log into your Bluebird account. However, you can order Bluebird checks and write them to pay your taxes.
When using Vanilla Reloads to fund your account, you’re limited to loading $5,000 per calendar month onto the card; and let’s say you’re using a checking or savings account to fund it, you’re also limited to $10,000 per calendar month while debit cards can only be used to load up to $100 per transaction and per day up to $1,000 per calendar month and there’s a $2 fee for each transaction, so that’s not a good deal.
Your total account balance limit is $100,000, and the total balance of funds added by methods other than check by mail and direct deposit is still capped at $10,000 – so that’s pretty much the limit of the check you’ll be able to write for your taxes here.
Account holders can get actual physical checks in books of 50 ($19.94 + $5.94 shipping) or 100 ($26.94 + $6.94 shipping) – though fees are being waived through April 1, 2014 at this point. You can order these checks by logging into your account – click the “Settings” tab and select “Order Checks” and pick your amount. Just keep in mind that you are limited to spending $100,000 per year, including via Bluebird checks.
There is a little bit of a process to writing a check from Bluebird which includes pre-authorizing the amount online in your account and getting an authorization code which you need to write onto the check itself, and when you spend $2,000 or more that authorization can take about 2 business days, so don’t wait until April 14 to start!
Despite these limits, Bluebird checks can still be a great way to earn some extra points on your taxes, especially if your tax bill is under $10,000 and you have a place where you can buy Vanilla Reloads using a points-earning card.
Let’s say you want to pay $10,000 of your tax bill through your Bluebird account. That would require you to buy 20 Vanilla Reloads in the maximum denomination of $500 plus a $3.95 fee per card, spending a total of $10,079. So if you’re using a credit card like the Starwood Amex to rack up extra points, you’d earn 10,079 points for $79, so you’re paying 0.78 cents per SPG point – a pretty good deal in my estimation. Just remember that you’re limited to $5,000 in Vanilla Reloads per calendar month (not rolling month), so start loading some into your account ASAP.
Those are some of my personal strategies and the reasoning behind them for maximizing taxes, but if you have some of your own, please feel free to share in the comments below.
For more information, see these posts:
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