Tax time is here. If you owe Uncle Sam some money, you can earn reward points by paying the amount you owe with your credit card. This is NOT something for everyone. There is a fee associated with paying taxes by credit card. But in some cases, it can make sense.
Basics: How to Pay Tax by Credit Card
Yes, the IRS has a way for you to pay your taxes by credit card. Just click on the link to see how: Pay IRS Taxes by Credit Card
If you pay estimated taxes on a quarterly basis, or if you owe taxes at the end of the year, just click on one of the links to the tax paying services. The service will ask for your name as it appears on IRS forms, and for your social security number. You. can then designate any amount to be paid to the IRS. The amount is sent, and you will immediately receive an e-mail confirming the payment.
How Much Does it Cost? 1.87% or more
The least expensive option at this time is to use Pay1040.com
It charges a fee of 1.87%, with a minimum fee of $2.89. So if you are paying $1000 in taxes, you will pay a fee of $18.70. Your credit card will be charged a total of $1018.70, and you will earn 1018 reward points if you are using a card that “pays” 1 point/mile per dollar.
When Does This Makes Sense?
First, in most cases, it does NOT make sense to pay taxes by credit card. I prefer to get my reward points at no extra cost to me. But, there are times when it can make sense. You need to run the numbers to see if it is a good investment in your case.
To Meet Minimum Spend:
If you have a new credit card, and you are trying to meet your minimum spend requirement, paying a fee of 1.87% can make sense. For example, consider a typical airline card that will award you 50,000 miles after spending $3000. If your normal spending habits will only net you $2000 in spend in the required period, you could easily justify spending $18.70 in fees to be sure that you get the 50,000 miles.
Make a Profit with an Alaska Air Credit Card:
You could pay your taxes and still make a “profit” after fees if you get a new Alaska Airlines card from Bank of America. The current offer on that card gives you 30,000 Alaska Air miles, and a $100 credit after you spend $1000 on the card. There is an annual fee of $75, which is not waived. You could get this card, and use it to pay $1000 in taxes. You would pay fees of $93.70 ($75 annual fee and $18.70 for the cost of using credit to pay taxes). After you get your $100 statement credit, you have a “profit” of $6.30.
Use with a Credit Card that Rewards at 2% Rate
Some credit cards have a higher reward rate than 1 point per dollar. For example, if you have a Barclay Arrival card, you earn 2 Arrival points per dollar spent. So if you pay a fee of 1.87%, you still come out ahead.
Topping Off Reward Balances
Sometimes we are close, but not quite at the level needed to get a reward. If you can justify pay 1.87 cents per point to top off an account – then paying your tax bill is one way to do that. But keep in mind that airline or hotel points are sometimes available to buy directly for less than that amount.
Benjamin Franklin told us that the only things that are certain are death and taxes. Since the taxes are certain, you might as well think about whether it makes some sense to earn travel rewards when you pay them. We’ll save the death issue for another day.