March 23, 2014

Paying Taxes With a Credit Card to Earn Points & Miles

I'm in the unfortunate (or fortunate since I did not give a "free" loan to Uncle Sam) position of owning money on both my state and federal income taxes.  Several people have asked me if there is value in paying taxes with a credit card.  The good news is that the short answer is yes.  But the answer can be a bit more complicated depending on your particular situation.

All of the Federal IRS tax payment vendors charge a "convenience fee" of between 1.88% and 2.35%.  The convenience fee is a payment card industry term and an easy way of passing the actual cost of processing the card on to the customer (in this

So let's say you owe the IRS on your taxes this year.  You have a few options.  You can pay the IRS via direct debit from your checking account, write a paper check, or pay with a credit card.  If you pay with a credit card, you will incur the ~2% fee but you will gain extra time to pay because your credit card statement won't due on 4/15.  And you will earn points if you put the charge on a points earning credit card.

In this situation, I like to think that you are "buying" points at around 2 cents (2% of the total) each.  This is actually cheaper than the rate that most airlines will sell you points.  But the biggest benefit is that the spend will go towards (as The Points Guy points out in the link below) category and annual spend bonuses.

The United MileagePlus Explorer Card has a great annual spend bonus

For example, the United MileagePlus Explorer (which I know many of you have) offers 10,000 additional United miles after spending $25,000 in a calendar year.  So if paying your taxes with this card would help you to achieve this bonus, it would definitely be worth it.  You can also pay your quarterly estimated federal taxes (and in Colorado estimated state taxes) with a credit card.  This strategy really only works if you have the cash to pay off your card immediately.  If you would otherwise accrue a balance, this strategy probably isn't for you.

Let's say you had already spent $20,000 this year on the card and you needed $5,000 incremental spend to achieve the bonus...and you happened to owe $5,000 on your taxes federal taxes.  If you put your taxes on this card you would earn a total of 15,000 miles for a convenience fee of around $100.  That is .66 cents/mile which is about the best you are ever going to do acquiring valuable airline miles.

I'm not going to reinvent the wheel since The Points Guy already has a great post on all of the approved IRS (for Federal Tax Payments) tax payment vendors.  I wouldn't advise this strategy for everyone but as I noted above, it can make sense in a variety of situations.

Good luck filing and perhaps getting one step further to a great award redemptions by paying your taxes with a credit card!

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