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Update: Some offers mentioned below are no longer available. View the current offers here – The Business Platinum Card from American Express OPEN, The Blue for Business Credit Card from American Express, The Amex EveryDay Preferred Credit Card from American Express, JetBlue Plus Card
It’s that time of year again. Your 1099s, W-2s and other tax forms are starting to arrive, and you may have a tax payment looming in your future. In today’s post, I want to take a fresh look at how you can earn travel rewards by paying your taxes with your credit card.
The Different Ways You Can Pay Your Taxes
If you owe taxes to the federal government, there are several ways to make your payments. The IRS authorizes three different companies to accept payments on its behalf via debit or credit card. However, these companies are permitted to impose “convenience fees” on your payments.
When you pay with a debit card, there’s a flat fee, which is currently between $2.59 and $3.95, depending on the payment processor you choose and — in the case of one company — whether your payment exceeds $1,000. After checks, paying with a debit card is the least expensive option, as the fee will always be less than $4. Another advantage is that you’ll receive an immediate receipt for payment, which can be important if you happen to be applying for a loan when you’ve reported a tax liability. Unfortunately, there aren’t any debit cards remaining that will offer you rewards for this type of transaction (the Delta SkyMiles debit card from SunTrust only offers rewards for PIN or signature-based transactions, which doesn’t apply to online tax payments).
When you use a credit card to pay your taxes, the fee imposed will be a percentage of the amount paid. Currently those fees range from 1.87% to 2%. In the past, these payment processors charged different fees depending on the payment network the card belonged to, with American Express cards being charged a higher fee. But more recently, each of these payment processors began charging the same fee for all cards, regardless of the payment network.
Finally, you can always write a check and put it in the mail. This is the least expensive way to pay the IRS; there’s no fee, other than the cost of your check, the envelope and your postage. Also, the IRS will credit your payment on the date that the envelope is postmarked, regardless of when it’s actually received or cashed. This can give you an extra day or two before the funds are debited from your account, but there’s no way to predict how many. On the other hand, your check could get lost in the mail, and even if it doesn’t, you won’t have a receipt for payment until the check clears.
The Benefits of Paying Taxes With Your Credit Card
Using your credit card will always be the most expensive way to make federal tax payments, but it offers several advantages:
- Earn rewards — Just as with any other charge, you can earn rewards for your tax payments. However, there aren’t any cards that offer bonuses for these types of payments. A few years ago, the fees applied would almost always exceed the value of the rewards earned. But credit cards and loyalty programs have steadily increased the value of the rewards offered, while convenience fees have come down slightly.
- Qualify for a sign-up bonus — Some travel rewards cards have especially high minimum spending requirements for earning a sign-up bonus. For example, for one more day the Business Platinum Card from American Express OPEN is offering 50,000 points after you spend $5,000 within the three months of account opening, and another 50,000 points after spending total of $15,000 in the same three-month period. Of course, spending $15,000 in three months isn’t doable for all cardholders. But if you need to put the last $10,000 on your card to earn the second 50,000-point bonus, you could pay as little as $187 in fees (through Pay1040.com) to receive a total of 60,000 points. That works out to paying 0.31 cents per point, which is a bargain. According to TPG’s latest monthly valuations, American Express Membership Rewards points are worth 1.9 cents each, so it’s well worth it to pay less than a third of a cent in fees.
- Possibly earn a tax deduction for the fees paid — The convenience fees charged by the payment processors are expensive, but they may be tax-deductible. I reached out to Eric J. Nissal, founder of AccountLancer, which specializes in accounting for freelancers. He said, “It is true that convenience fees charged for the processing of credit/debit cards used to make estimated tax payments are deductible.” However, he says, “You must itemize deductions, as these fees are only allowed to be included in the ‘Job Expenses and Certain Miscellaneous Deductions’ on Schedule A of the 1040.” There are other caveats and restrictions that may further limit your ability to claim this deduction, so it’s best to consult your accountant or tax advisor.
- Meet credit card spending thresholds — Many credit cards offer benefits once you reach a particular spending threshold. These might be based on the calendar year, or your cardmember anniversary, and in either case making large tax payments could help you to earn these rewards. Popular examples include the JetBlue Plus Card, which offers Mosaic elite status after cardholders spend $50,000 in a calendar year, and the United MileagePlus Explorer Card, which offers a 10,000-mile bonus when you spend $25,000 in a calendar year.
- Enjoy some free float on your tax payment — One important rule for earning credit card rewards is to always avoid interest charges by paying your entire statement balance in full. When you do so, you’ll receive what amounts to a free loan. Pay just before your statement closes, and you’ll have 21 to 25 days before your due date (depending on your card’s grace period). But if you pay your taxes just after your statement cycle closed, you will have an additional 30 days until your due date, for a total of 51 to 55 days. Furthermore, some credit cards offer interest-free financing on new purchases. For example, the Amex Everyday Preferred Card offers new cardmembers 12 months of interest-free financing on both new purchases and balance transfers (though there is a 3% fee on balance transfers).
- Gain a little bit of extra leverage — Let’s face it: Credit card issuers profit from merchant fees (which are passed on to you in this case as convenience fees). If you have a card that you use very infrequently, then you aren’t a very valuable customer. But if you’re able to make occasional large charges like tax payments, your card issuer may be more likely to waive your annual fee, offer you a retention bonus or grant you other considerations. There are no guarantees, but it certainly won’t hurt.
Drawbacks of Using a Credit Card to Pay Your Taxes
It’s rarely a good idea to finance your tax liability with your credit card. If you’re unable to pay your statement balance in full, consult your accountant or tax advisor about creating a payment plan with the IRS, which will offer lower interest rates than the standard rate of nearly any credit card.
The Best Credit Cards to Use for Tax Payments
Here are seven top cards to pay your taxes with this year. I’ve included the net gain in rewards you can earn from each based on paying through the processor that charges the lowest fee (Pay1040.com, with a 1.87% charge). If you’re able to claim your convenience fees as a tax deduction, your gains can be even greater.
The Blue for Business Credit Card from American Express — Through February 22, this card is offering 2x points on all purchases for the first $50,000 spent in your first cardmember year. You also receive a 30% bonus on your regular spending (but not the 2x bonus), for a total of 2.3x on your first $50,000 spent in your first cardmember year. Since Membership Rewards points are valued at 1.9 cents each, this works out to a whopping 4.37 cents in value per dollar. The net gain is a remarkable 2.5 cents per dollar. Just note that this card is not eligible for point transfers by itself, however you can redeem these with transfer partners if you have another Membership Rewards-earning card.
Chase Freedom Unlimited — This card offers 1.5% cash back all purchases, but you could also transfer the cash-back rewards to your (or your spouse or domestic partner’s) Chase card accounts like the Chase Sapphire Preferred Card, Chase Sapphire Reserve or the Ink Business Preferred Credit Card to redeem them as Ultimate Rewards points. You can then transfer points from these accounts to 11 different travel partners. Points redeemed from the Sapphire Preferred or the Ink Business Preferred are worth 1.25 cents each for travel reservations made through the Chase travel portal, while points from the Sapphire Reserve are worth 1.5 cents apiece toward travel reservations. According to TPG’s most recent valuations, Ultimate Rewards points are worth 2.1 cents each, so you end up with 3.15 cents in value. This is a net gain of 1.28 cents per dollar.
Discover it Miles — This card offers 1.5 miles per dollar spent, and miles are worth one 1 cent each toward travel statement credits or as a direct deposit in your bank account. After the first year of your account, you’ll receive a bonus equal to your first year’s rewards. This equates to a total of 3% in value, although you will have to wait a year for the second half. Therefore, this card offers a net 1.13-cent gain per dollar spent, after the 1.87% fee.
Amex EveryDay Preferred Credit Card from American Express — This card offers just 1 Membership Rewards point per dollar spent, but it also features a 50% points bonus when you use it more than 30 times during a statement cycle. TPG currently values these points at 1.9 cents each, so the rewards you earn are worth 2.85 cents per dollar when you earn the 50% bonus. This equates to a net return of 0.98 cents per dollar after the 1.87% fee.
The Business Platinum Card from American Express — As of October 2016, this card offers 1.5x Membership Rewards points on purchases that exceed $5,000. Based on TPG’s valuations, this equals 2.85 cents in value per dollar spent, for a net gain of 0.98 cents after the 1.87% convenience fee.
Starwood Preferred Guest Credit Card from American Express — At 2.7 cents each, Starpoints are easily the most valuable currency included in TPG’s monthly valuations. After the 1.87% convenience fee, using this card will still result in a 0.83-cent gain per dollar spent.
Barclaycard Arrival Plus World Elite Mastercard — This card offers double miles on all purchases, and each mile is worth 1 cent toward travel purchases. It also offers 5% of your redeemed miles back, for a gross return of 2.1%. This equates to a 0.23-cent gain per dollar spent.
Do you plan on paying your taxes with a credit card this year? Which card will you use?
Featured image courtesy of Pascal Broze via Getty Images.
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- Earn 50,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $625 toward travel when you redeem through Chase Ultimate Rewards®
- 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
- Earn 5,000 bonus points after you add the first authorized user and make a purchase in the first 3 months from account opening
- No foreign transaction fees
- 1:1 point transfer to leading airline and hotel loyalty programs
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