Paying your taxes with a credit card might sound unorthodox.
However, when done right, you can benefit big with rewards. Imagine getting a free flight or a big cash back bonus just for doing something you would have had to do anyway?
It's possible, and we'll show you how.
In this article, we’ll outline when it makes sense to use your credit card to pay your taxes.
Paying Taxes with Your Credit Card
The IRS has offered the option to pay your taxes with a credit card for many years now. This adds a layer of convenience that you don’t have with other options, such as writing a check. With a credit card payment, your tax bill is settled immediately, whereas with a check it can get lost in the mail, creating all sorts of problems.
You must use one of three payment processors approved by the IRS when paying by credit card. Fees range from 1.87% to 1.99% with minimum amounts ranging from $2.50 to $2.69.
Remember, you can do this with estimated taxes too! Check out our ultimate guide on estimated taxes.
Earning Rewards by Paying Your Taxes
You may be wondering if the fees negate any reward you might earn. This will depend on the card you’re using. Some cash-back cards will pay more than the fees. But many cards will restrict cash-back rewards to certain purchases.
Also, rewards only make sense if you aren’t carrying a balance every month that accrues interest charges. If you pay off your balance every month, read on.
Also, trying to accumulate regular points usually isn’t going to be enough to overtake the processing fee. Paying by credit card works best when you can surpass a spending threshold to unlock big rewards that are far greater than what you would have earned through the credit card company’s regular points schedule.
As previously mentioned, you’ll earn big rewards by meeting the card’s spending threshold. Below are a few examples of paying a $4,000 tax bill and the rewards earned.
Capital One® Savor®: Earn a one-time $300 cash bonus once you spend $3,000 on purchases within 3 months from the account opening. This card generates a 16.6% return.
We already know the fee on $4,000 is $74.80. When you subtract the fee from the $500 bonus, you still have $425.20 left over from this transaction.
Blue Cash Preferred® Card: After you spend $1,000 in purchases on your new card in your first 3 months, you will receive the $250 back in the form of a statement credit. $250 back creates a 25% return.
For the Blue Cash Preferred® Card and the Wells Fargo Cash Wise Visa® Credit Card, we’ve already seen that a $250 bonus will easily cover the payment processor fee on a $4,000 tax bill.
Wells Fargo Cash Wise Visa® Credit Card: Get a $150 cash rewards bonus when you use your new card to make $1,000 in purchases in the first 3 months. This is another 15% return.
Other Reasons to Pay Your Taxes with a Credit Card
If you need a certain points level for a flight that you’d like to book now, paying your taxes can help you reach that goal. When compared to buying miles directly from the airline company, you may come out ahead.
If the tax payment deadline is only a few days away, paying with a credit card can ensure the payment reaches the IRS before the deadline.
You Can't Deduct The Processing Fees
Sadly, as of 2018, the new Trump Tax law eliminated the deduction for processing fees. So, you need to make sure that it's worth it.
Can You Pay Taxes with a Debit Card?
Yes, you can. The fees are flat and range from $2.00 to $3.95 for payments over $1,000. However, you won’t be able to earn rewards by using a debit card. You still need to use a credit card to earn any rewards.
Paying your taxes by credit card ensures your payment reaches the IRS in a timely manner. You’ll also have an immediate receipt that can be printed out as proof of payment. Additionally, you’ll earn big rewards if you reach your credit card’s spending threshold. Keep in mind that this method only works if you are paying off your credit card balance every month.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.