Paying Taxes By Credit Card: How To Come Out Ahead

Filed Under: Advice, Credit Cards
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Ah, tax season.

As many Americans are starting to procrastinate finalize their tax returns, 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. I’ve updated this with new examples since last time we published it, but if you’re already familiar with how to pay taxes with your credit card without paying more in fees than you save, feel free to skip it.

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.

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 2018 balance due this April, and then another six payments for your Q1 2019 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. The IRS helpfully(?) tracks everything by the primary taxpayer’s social security number, so regardless of which method or service you use, you can easily verify that all payments were received.

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 (click card name for more details)Return on everyday spendValue of rewardsNet cost of $5k payment
Chase Freedom Unlimited® with new 3% offer3% or 3x points (on up to $20,000 spent in your first year)1.7¢ / $255($161.50)
The Blue Business® Plus Credit Card from American Express2x points (up to the first $50,000 spent per calendar year)1.70¢ / $170.00($76.50)
The Bank of America® Premium Rewards® Credit Card + Preferred Rewards Program2.625% with the Preferred Rewards Platinum Honors program,1.00¢ / $131.25 with Preferred Rewards Platinum($37.75) with Preferred Rewards Platinum
The Business Platinum® Card from American Express1.5x points (on purchases of $5,000 or more)1.70¢ / $127.50($34.00)
Chase Freedom Unlimited®1.5x points1.70¢ / $127.50($34.00)
Capital One® Venture® Rewards Credit Card2x miles1.10¢ / $110($16.50)
Capital One® Spark® Miles for Business2x miles1.10¢ / $110($16.50)
Citi® Double Cash Card1% cash back when you buy, plus an additional 1% as you pay1.00¢ / $100.00($6.50)
The Bank of America® Premium Rewards® Credit Card 1.5% (without any Preferred Rewards Program bonus)1.00¢ / $75 $18.50
Barclaycard AAdvantage Aviator Silver Card1x miles1.30¢ / $65.00$28.50
Hilton Honors American Express Surpass® Card3x points0.40¢ / $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

In most cases, even if you apply for a card today and are approved promptly, you unfortunately might not receive it in time to make a payment by April 15th. If you will need to pay estimated quarterly taxes in June, and are planning ahead, you obviously have plenty of time.

Otherwise, 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.

For example, the Hilton Honors American Express Surpass® Card 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.

Promotional or low-interest opportunities

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 promotional 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 an extremely low or even 0% card (that also earns points) could be a good option.

Promotional interest cards

Bottom line

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?

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Comments
  1. There is one additional gotacha: If you come from a tax preparer’s site, the payment sites can quote wildly different prices – and the different prices will stick, as they set a cookie. For instance, if you follow hrblock’s link, 1040.com will charge %2.49 instead.

  2. I’d like an opinion on something that I never see mentioned by the numerous articles that suggest this technique.

    What happens if I withhold enough from a regular salary where I simply don’t have any estimated tax to pay? Or, what happens if I don’t owe any tax, but am instead owed a refund from the government?

    Is there any risk to making an arbitrarily excessive tax payment if I don’t owe anything? I assume I’d simply be entitled to an even larger refund, having effectively given the government an interest-free loan in the interim.

    I acknowledge that your opinions are not that of a professional tax preparer, accountant or tax attorney.

  3. The 35% AMEX Platinum rebate (or 50% AMEX Centurion rebate) for paying by some airfare with points is worth more than the 1.35 cents this article says. Your example 7500 points would cover $75 of airfare and then you get a 2625 point rebate. Your net points spend was 4875 for the $75, you got over 1.5 cents per point.

  4. @Asarious – Not an expert here but I’m pretty sure that would be treated as a pre-payment and you would be entitled to a larger refund (or smaller tax liability) on your 2019 taxes in ~10-12 months.

  5. But Tiffany, what card do you use? Or does it vary? I am planning to put estimated tax payments on the Hyatt card in order to reach Globalist. At Lucky’s current valuation that is a cost of 0.37 cents per dollar (0.37%), but it seems to me the threshold bonuses (free night certificates, suite upgrades, waived resort fees and parking, late checkout) will make it worth while, assuming one would stay at Hyatt several times a year but not otherwise reach Globalist.

  6. @ Asarious — Your assumptions are correct, and you’d just get a larger refund. That happened to us last year, because we paid estimated taxes, but ended up not owing as much as planned due to our house purchase.

    That being said, I wouldn’t recommend the IRS as the best merchant for increasing your everyday credit card spend just because.

  7. @ Hepworth — It varies, depending on what I have going on, or what miles I feel like I need. It’s an especially great way for me to meet minimum spend, so that’s usually the focus. The Hyatt card is a good pick if you’ll stay enough to get the benefits of Globalist!

  8. Kind of a silly point here, but in the valuation, you are also earning points points on the fee that is paid, so the benefits of paying taxes are actually slightly greater ($1.75/$5k in tax payments). Not a whole lot but definitely moves the needle.

    Did want to see your opinion on using a card like the Discover IT Miles with the 1st year double your miles bonus (1.5 points/dollar, doubles after first year so a total of 3% after a year). Could almost leverage that card for a whole year of tax payments (2018 tax payment, 2019 estimates x4 and then if filing early enough 2019 payment if needed).

  9. I agree with Tiffany I overpaid this year not really a great feeling but if taxes are owed the payment price makes sense. nothing like giving the government a 0% loan and then paying an almost 2% fee for it. the other thing I think that was missed here is the 1.5x on chase unlimited is worth 2.25 when you combine it with the reserve. Surprised that was not included as well as the Amex every day for 1.5x but I get you were just providing examples.

  10. Also, if you are paying as a business, the fees can be deducted as business expense on next year’s taxes. That boosts your return.

  11. I have a significant capital gains tax bill from a house sale. I am trying to use cash back cards but the limit of two payments per month plus my credit lines are creating havoc. Is there a workaround for the two payments/company? Another point is allowing enough time for the credit card company to process the charge and the bank to clear the payment. Assume a week is needed for each charge.

  12. @Asarious I have never seen that there is a problem overpaying taxes and getting a refund. Just think about people who do an extension and thus don’t know what they will owe. When I’ve been in this boat I have opted to overestimate way high on my 4/15 payment just in case, so I don’t end up with a penalty. They just refund it back, or you can apply it to the next calendar year.

  13. Tiffany, your above example is unnecessary complicated.

    Deciding on whether or not to go for it is independent of how much you pay in tax.

    (Card Multiplier on spend) x (point valuation per OMAAT as %) should be greater than payment commission %. That’s it.

    Very simple assuming you agree with OMAAT values and the commission % does not rise with higher amounts.

    Unless you value your points much greater than 1.99 c/mile, then you have no business doing this on a 1point/$ card.

  14. I’ve been using my Amex business blue. It nets out MR points for just under 1 cent apiece. I’ll take all I can buy for that price.

  15. I just got a 60 day extension on back taxes for about 6K. Just paid off all my credit cards hoping for a credit score jump next month. That would be huge to help me get the minimum spend for a sign on bonus.

  16. This article forgets that it depends on what other cards you use. For example, if you hold the Chase Reserve card, you are entitled to a 50% bonus if you redeem the points for travel through their travel service and unlike Amex Platinum there is no service fee. Therefore, if you use the Unlimited Freedom which earns 1.5 points per dollar, the relative value is 2.24 per dollar.

  17. Timely article. Last year I sold a rental real estate property for a substantial amount of money (and no, I didn’t want to do a 1031). I saw this option of paying by credit card and thought about this option.
    Right now I’m weighing the option of getting the miles for charging the card, paying the 1.9+ fee for the privilege to pay by card and finally the possible hit to my credit score for paying a little less than 200K (quarterly) for just 2019.
    It is the possible hit to my credit score where I hesitate to take this option. Appreciate the article and the comments following.

  18. ^correction-the 200K is divided on a quarterly basis. I am not paying 800K for this year.

  19. @travelingw/oaclue,

    First of all congrats on your success! I have made a lot of big purchases on cards and there is a hit to the credit score if you leave it there for the month and pay it off just before the due date. However after it is paid off and reported again the the score goes right back up. It is simply a matter of your credit usage percentage that is creating that change. If you have the money anyway, then pay it off right away and unless it happens to be the time of the week or month that the credit companies report it will most likely have no time to show up on the credit report and lower your score. After I started tracking my scores I found that when I did pay off right away there was no effect. Basically I would make the big purchase, watch it to see when it posts and then pay right away and my scores were not affected at all. Hope this helps and have fun with all of those points!

  20. As someone else noted, the Chase Unlimited has 1.5% return which translates to 2.25% when couples with Sapphire rewards.

    Also, I believe that CC fees may be deductible, which is relevant if you already itemize deductions rather than using the standard deduction. If so, effective cost of fee is much lower.

  21. Looks like all of these payments are for federal taxes only. Any recommendations for paying state income taxes?

  22. @ Gail — It’s actually a really good question, but as it sounds like you’ve already discovered, the specifics vary by state. California makes it easy, but they use a payment processor that charges a higher fee than the Federal programs, so it really just depends.

  23. One of the posters above seems to be thinking of doing an overpayment on their taxes on purpose in order to MS points with a float period for the incoming refund. If there is a large overpayment made when in fact the account already had a refund coming, wouldnt the refund be at least reviewed by an IRS agent before being approved? Im all for MSing credit cards with the banks but here this looks like it increases the risk of an audit. Id be interested to know if any tax professionals have an opinion on this?

  24. @Tiffany,

    You left off the best option, paying with a debit card. Usually you are charged about $2.56/transaction with a debit card. If one takes advantage of the current Staples deal with a Chase Ink Cash/Plus, you can purchase a $200 gift card for $201.95. You’d pay an extra $2.56 1040 fee, for $4.51 for (201.95*5 = 1010 points). $4.51/1010 = 0.446c/UR point. Similar deals using freedom at Grocery. If you want simpler, use a 1% back debit card.

  25. @ Jeremy — Sure, that’s a good option for someone who has a relatively small amount to pay, but I don’t believe it scales?

  26. I have (what I think is) a very high federal tax bill this year and would need to either pay on 2 cards (except for Amex mentioned below) or 1 card and a check due to my CC limits. I have Chase Sapphire Reserve, Chase Freedom Unlimited and Amex Platinum. I usually travel a couple times a year for pleasure but try to use points as much as I can when I do for at least the larger charges (business class air, nice hotels, etc). I can pay all by check and have been going back and forth as to the best option. Any suggestions? I’ve been driving myself crazy trying to decide.

  27. If I apply for the chase Freedom Unlimited today, I’d be able to use it before the physical card arrives? Thinking about the 4/15 deadline…..

  28. It was well worth it to me, for about a $25 fee, to pay $1,300 in federal taxes with my Hilton Aspire. I’m trying to meet the minimum spend bonus (I’m not a big spender), and this frees me to put my grocery purchases on my Freedom for the 5x quarterly bonus.

  29. @David – tax preparer here. I assuming you’re referring to @Asarious’ comment. Deliberately overpaying taxes isn’t going to raise red flags by itself. The threshold at which a refund requires a manual review is many times higher than even a generous credit limit. Something else in the return might flag a return for audit, but the refund itself won’t. If you don’t mind paying the fee and floating an interest-free loan to the IRS for a few weeks, knock yourself out.

  30. @Martine, I sold my home in 2017, and for that year, I had a huge capital gains tax hit on both my federal and state taxes. I had just received my Platinum Delta SkyMiles card and wanted to meet my minimum spend using that card, but my line of credit was nowhere near my tax bill. I called AMEX, explained the situation, and they advise me to “prepay” my AMEX account with enough extra money to cover my tax bill (with service charge). I did this, waited until I could see the credit on my card, and then paid the taxes. Not only did this meet my minimum spend, but with the points I accumulated plus my current status on Delta, I became a Diamond Member.

  31. Word of caution: paid a very high tax bill last year using my Amex SPG since the points I would earn were worth more than the fees I paid based on the redemption I had in mind. Once I made the payment I got a call from Amex confirming that I was the one making that big expense on my card. They were nice and accepted the charge. Couple days later I saw my credit score had tanked. By a lot!!!!! I immediately paid my balance with Amex but it took over 3 months for my credit score to get back to normal. Not sure if I used a lot of my credit limit for the first time or what else happened but I have decided not to pay taxes with credit card again.

  32. Tiffany, First, thank you for great blog posts.

    I do not get your logic on the Ascend card. Those points are less valuable than Amex points. The points I would get on the Ascend card are just a fraction of the points needed at the Conrad Maldives. 3x $5000 gets you 15K points at Hilton which is hardly a drop in the bucket for the points needed at any great hotel they have.

    I must be missing something here.

  33. @david: Your refund would have to be $2 million to make Its way to the Joint Committee on Taxation.

  34. Property taxes are due this month too, at least here in Washington. King County charges 2.35% to put them on a CC. Is there any way to do better?

  35. I had a small quarterly bill of $1,500. I used my Chase Ink Unlimited. The fee was $28.05.

    Total Points = (1500 + 28.05) * 1.5 = 2,292.075 points
    CSR bonus of .5 = 2,292.075 * 1.5 = 3438.11 (Travel Value Points)
    Travel Value Dollars = 3438.11 / 100 = $34.38

  36. At the top of the list, co-equal with the Chase Freedom Unlimited special first year offer, is the Discover IT Miles card (first year bonus double this card’s normal 1.5% return = 3%).

    Additionally, the Bank of America Business Travel Rewards Mastercard (with Platinum Honors status) also returns (like it’s sister Premium Awards card) 2.625%. The BIG advantage this card has over the Premium Awards card is, since it’s a mastercard, it also can be used with plastiq for any purchase (including mortgages) and provide a small overall return after the plastiq 2.5% fee.

  37. What is missed here, is when pushing through a “big” payment, just notify the bank prior that such payment is going to occur. Problems happen when the charge is outside normal spending patterns.

  38. What about two BOA Cash Rewards with online shopping selected as 3% category and Platinum honors on both cards (two cards because your examples are for a $5k payment and BOA Cash Rewards has a $2.5K quarterly cap for earning on 3% categories)? Does any of the online tax payment processors post as online shopping to BOA Cash Rewards? (I know theoretically tax payment is excluded from online shopping category, but it may be different in practice).

  39. I followed all the comments, but I don’t understand why the net cost on the new 3% Chase Freedom Unlimited is so much hire than the 1.5% Unlimited.

  40. What about using them to earn elite qualifying nights? I have estimated taxes to pay several times a year and I could earn Hyatt elite qualifying nights towards maintaining my Globalist status. I love using my status but I usually have to do a couple annoying stays to keep it. If I put my taxes on it I would earn several nights a year that way and use the points to stay pay for other nights.

  41. I had a fairly large tax due this year, approximately $60,000. I ended up calling Chase and having them raise the credit limit on my Freedom Unlimited and lowering the limit on my Reserve and airline and hotel branded cards. They raised the limit to $37,000 so I simply made one charge, paid it off immediately and then a few days later charged the rest. My Freedom card is interest free until June of this year so it also a slight bonus. I just discovered that Alliant Credit Union now has a card that offers 2.5% back on all purchases and currently is offering 3% back for the first year – I plan on using that card next year since so many of the airline and hotel programs are being seriously devalued (United being the worst offender).

  42. My husband and I are starting a business. I didn’t know you could make two payments via credit card on your IRA forms. I’ll have to keep that in mind and find a service that can help me prep for tax season.

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