March 22, 2015

Paying Federal Taxes With a Credit Card

Earlier in the year, I posted about paying local property taxes (here in Denver) with a credit card.  But what about federal taxes where most of us owe the bulk of our tax bill?  While most people likely shy away from paying their taxes with a credit  card, it can make sense in a bunch of situations.  I've been paying my estimated taxes with a credit card for the past few years and after doing the math, I feel like I've come out ahead each year.

There are several options to pay your taxes (personal or business, estimated, etc...) with a credit card.  The cheapest "convenience fee" you'll find on any of the federal tax sites is 1.87% at payUSAtax.  There are really three situations where paying this fee makes sense.  Keep in mind in both situations that having the cash to pay off the credit card bill is paramount - if you're paying interest and fees on top of the 1.87%, you are not going to come out ahead.

Pay federal taxes at payUSAtax for 1.87%

First, if you need to hit a sign-up bonus threshold and wouldn't ordinarily hit the bonus without "extra spend."  Say you picked up the Amex Starwood Preferred Guest Card and you need $2,000 in spend to earn the additional 15,000 SPG points after spending $5,000 in totally.  And you so happen to owe $2,000 on your taxes.  You'd be paying $37.40 in fees to aid you in picking up 15,000 SPG points worth (easily) $400.  Definitely worth it.

Second, you are working towards a threshold bonus.  For example, the United MileagePlus Explorer Card doles out a 15,000 mile bonus after $25,000 in annual spend.  Say you owe $5,000 on your taxes due this April and you've spent $20,000 on the card already.  Putting the $5,000 on your Explorer card will cost you $93.50 in fees but you'll be earning 20,000 United Miles for hitting the spend threshold.  I value United miles at $.02 so you'd be well ahead in this example as well.

Third (keep in mind this is an extreme example) let's say want to fly Cathay Pacific First Class to Asia.  That will cost you 135,000 miles roundtrip.  And let's say that you owe $110,000 on your federal taxes.  If that's you, congratulations - you are killing it!!  The Amex Starwood Preferred Guest Card enables you to earn 1.25 airline miles per dollar spent on non-bonused spend like tax payments.  The card actually earns 1 SPG per dollar spent but points can be transferred in lots of 20,000 with a 5,000 point bonus - thus the 1.25 miles/dollar.

You could be sitting here

So, you put the $110,000 on your SPG card, pay the 1.87% fee and earn 140,071 SPG points for a fee of about $2,057.  That's enough for the roundtrip first class ticket to Asia using AA miles.  Considering coach tickets to Hong Kong go for roughly that amount, I'd say that's a pretty good deal. Obviously extreme but you get the point.  In this example, you're buying AA miles at a bit under 1.5 cents a piece - a cost at which most people would speculatively buy them.

Taxes are due in just a few short weeks - good luck!

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