Ah, tax season.
As many Americans are finalizing their 2017 tax returns this week, questions about earning points for making those payments always come up.
I pay all my estimated quarterly and annual taxes by credit card, so figured it would be helpful to go through the details of that for people who haven’t done it before or might need a refresher.
How much does it cost?
If you need to pay State or Local taxes, those rules (and fees) vary tremendously, so you’ll want to check with your local tax authority. For Federal taxes, however, there are three services that can accept credit cards for tax payments, with the following fee structure:
Obviously the best play here is to utilize the service with the lowest fees, but in certain circumstances using one of the others can make sense as well.
Splitting your payments
If you have a very large payment to make that exceeds your limits on your credit card (and if so, congrats on your success last year / I’m sorry), or if you want to spread your spending across multiple cards for other reasons, you can do that.
For example, the Chase Freedom® Card is offering 5x points for up to $1500 in purchases made through PayPal for Q1 of 2018. Some of these services accept PayPal at the same rate as other credit card purchases, so if you have a small tax payment, or if you’re able to split your payment, it’s certainly worth putting ~$1500 on the Chase Freedom (well, or $1473 if using Pay1040.com, which should be $1500.55 when the fees are added in). Other cards are more lucrative after that first $1500, so being able to split payments is nice.
The IRS page notes that most forms allow you to make two payments via credit card. What isn’t clearly stated, however, is that in practice you can make two payments via credit card with each service, for each period or form.
So theoretically you could make six payments for your 2017 balance due this week, and then another six payments for your Q1 2018 estimated tax payment.
Hopefully you don’t need to do that, and keep in mind that the fees for some of the services are higher, but it is an option.
Calculate the return
Just because you can put taxes on a credit card doesn’t mean that you should. With fees fluttering around 2%, you shouldn’t pay your taxes this way without calculating your net cost/gain.
These numbers will vary based on how you value miles, but let’s look at a few examples. If you’re using Pay1040.com, for example, which levies a 1.87% fee, here’s what a $5,000 payment (with $93.50 in fees) would look like using Ben’s values on a few different cards:
|Card||Return on everyday spend||Value of rewards||Net cost of $5k payment|
|2x points (up to the first $50,000 spent per calendar year)||1.70¢ / $170.00||($76.50)|
|1.5x points (on purchases of $5,000 or more)||1.70¢ / $127.50||($34.00)|
|Chase Freedom Unlimited®||1.5x points||1.70¢ / $127.50||($34.00)|
|Citi® Double Cash Card||1% cash back when you buy, plus an additional 1% as you pay||1.00¢ / $100.00||($6.50)|
|Barclaycard AAdvantage Aviator Silver Card||1x miles||1.30¢ / $65.00||$28.50|
|Hilton Honors Ascend Card from American Express||3x points||0.40¢ / $60||$33.50|
Obviously there are many other cards you could consider using here, but hopefully that helps you get the idea.
Keep in mind that how you are going to use the points matters as well. With The Business Platinum® Card from American Express, you’d not only be getting 1.5 points/$1 for a purchase over $5k, the card also gives you a 35% refund when you redeem points through the “Pay with Points” option. This is essentially an opportunity to redeem Membership Rewards points for 1.35 cents of airfare each (either on your designated airline in economy, or on any available airline in business or first class).
So that $5,000 tax payment earns 7,500 Membership Rewards points, which can be used for $115.38 towards airfare through the Pay With Points option. Subtract out the $93.50 in fees, and you’re still coming out ahead even if you don’t accumulate additional points to transfer for a big award (provided you were going to spend money on airfare this year, but I assume that’s why you’re all here).
As you can see, using the right card is critical in order for this to be worthwhile. Though there are a few exceptions where you might accept a lesser return in exchange for another benefit.
Meeting minimum spend
Ideally you would have planned this out a few weeks ago so as to have your new cards in-hand, but if you missed that boat there are still options.
American Express often issues temporary cards that can be used for online purchases until your physical card arrives, provided you sign up online and are instantly approved. If you’ve been considering an Amex card, it may make sense to apply for one of those, get the temporary card, and knock out the minimum spend quickly.
And of course, if you’re working towards a large welcome bonus, the return for each $ spent towards the minimum spend is significantly higher, which helps the math as well.
Achieving threshold bonuses
Sometimes it’s not the points themselves that are most valuable, but the extra perks you get for spending a certain amount on a credit card.
American fliers, for example, may find value in charging large amounts to Barclay’s AAdvantage Aviator Silver Card early in the year. This card gets you:
- Up to 6,000 worth of elite qualifying dollars (3,000 when spending $25,000, and another 3,000 when spending another $25,000)
- Up to 10,000 elite qualifying miles (5,000 when spending $20,000, and another 5,000 when spending another $20,000)
That extra elite qualifying spending may put you higher on the upgrade list, which depending on your travel patterns could be a worthwhile benefit even if it’s costing you a bit for that spend.
Similarly, the Hilton Honors Ascend Card from American Express and The Hilton Honors American Express Business Card offer a Weekend Night Reward from Hilton Honors after you spend $15,000 in purchases on your card in a calendar year. A $15,000 tax payment would have a net cost of ~$100.50 once you subtract out the value of the Hilton points earned. If you have a particular trip in mind, that could still be an excellent value.
In general, if meeting those spending thresholds wouldn’t otherwise be possible, it’s worth considering if the 1.87-1.99% fee for paying taxes via a card could still be a good value.
In general, I wouldn’t recommend putting any large purchase on a credit card unless you also have the cash to pay it off. An unexpectedly large and unaffordable tax bill, for example, is likely best resolved by setting up a payment plan with the IRS.
If you just need a bit of wiggle room, however, it could be worth examining the many cards offering a 0% interest rate on purchases as part of the welcome bonus. The number of months at the promotional rate vary by card, so check the terms, but if you can plan and budget such that the full balance could then be paid in a few months, putting your taxes on a 0% card (that also earns points) could be a good option.
Earning a chunk of points can take some of the sting out of making tax payments, but be sure the return or benefits make sense for your situation before paying that extra fee.
Who else pays taxes with a credit card? Which card are you using this time around?