Most people probably don’t look forward to paying their taxes. For those of us in the miles & points world, though, one silver lining is the potential to generate credit card spending at an attractive rate.
Personally I pay all of my estimated quarterly and annual taxes by credit card, so in this post I’d like to take a closer look at why. Long story short, the credit card rewards that you can generate by using a credit card can more than offset the fee of doing so. Given that several cards earn 2x transferable points per dollar spent, this is often an opportunity to generate transferable points for under one cent each, well below what I value them at.
How much does it cost to pay taxes by credit card?
You can’t pay your federal taxes directly with the IRS by credit card, but rather there are two services that facilitate this. For the record, this is officially approved by the IRS, so this isn’t some shady operation. Here are the two options, along with their fees for credit card payments:
- Pay1040.com, with a 1.75% credit card fee (the fee is 2.89% for Amex personal cards and all business cards)
- ACI Payments, Inc., with a 1.85% credit card fee (the fee is 2.95% for business cards)
|
Fee structure |
Pay1040 |
ACI Payments |
|---|---|---|
|
Visa & Mastercard personal |
1.75% |
1.85% |
|
American Express personal |
2.89% |
1.85% |
|
Business credit cards |
2.89% |
2.95% |
|
Best tax payment use |
Personal Visa/MC cards |
Personal Amex cards |
While the exact types of cards accepted differ somewhat between the services, all of them accept American Express, Mastercard, and Visa payments.
Also note that the above fees are for paying federal income taxes, whether year-end or quarterly. If you’re paying state or local taxes (including property taxes), there may be opportunities to pay by credit card directly online. However, the fees will differ, and the above services can’t be used for that.
For what it’s worth, there used to be a third processor as well, which was PayUSAtax, but that company is no longer processing tax payments.
What are the logistics of paying taxes by credit card?
Of course everyone is in a different situation when it comes to how much they owe in taxes, and what their credit limits are on cards. Some people with big tax bills might be in a position where what they owe is significantly more than the credit limit on their card. So how does that work?
The IRS officially claims that you’re allowed to make two credit card payments per payment period. However, anecdotally speaking, the limit seems to be two credit card payments per payment processor per tax period. Since there are two services, you can potentially make four payments per payment period by credit card. If you pay quarterly taxes, this means you could potentially make well over a dozen payments per year by credit card.
|
Period |
Estimated tax payment |
Individual annual return |
|---|---|---|
|
Q1 |
April 15 |
— |
|
Q2 |
June 15 |
— |
|
Q3 |
September 15 |
— |
|
Q4 |
January 15 (following year) |
— |
|
Annual |
— |
April 15 |
At least that’s how I (and many others) have been doing it for years without issue. You always provide your social security number when making a payment, and the IRS lets you track payments received based on that. I’ve never had an issue with them not showing up correctly.
There could be a benefit to using a card with no preset spending limit, since these cards will often let you spend more than a traditional card. If your tax bill is more than the credit limit on one card, you can of course split the payment across multiple cards.
For that matter, if you pay long enough before the deadline, you could always max out your credit limit, pay off the balance, and then make another payment with the same card (though just be aware of the risks of credit card cycling).
It could also pay to be strategic about the timing of when your credit card statement closes. If you put a tax payment on a card right at the beginning of your billing cycle, you could easily have a whole month (or even more) to then pay that off, without paying any interest.
If you choose not to pay your taxes by credit card, you can make a direct payment from your bank account, or mail a check or money order, and the IRS won’t charge any extra fees for this. You can also pay by wire, but that often does incur a fee.
When is paying taxes by credit card worth it?
If you’re a savvy credit card user who pays taxes directly to the IRS, then paying your taxes by credit card should be a no-brainer. This is a great opportunity to generate credit card spending at the reasonable cost of just a 1.75% convenience fee.
Before I talk about the exact situations under which this makes sense, let me emphasize a couple of points:
- You shouldn’t pay taxes by credit card if you’re not actually good at maximizing credit card rewards, and if you’re not earning rewards that exceed the cost of the fees; you’ll want at least a calculated return of 2%, and ideally more
- You shouldn’t pay taxes by credit card if you can’t use credit cards responsibly, and are going to end up financing your tax payments using high credit card interest rates
With that in mind, under what circumstances does it make sense to pay your taxes by credit card, while paying a fee of 1.75-1.85%? In no particular order…
Credit cards with a great return on spending
The credit card landscape is incredibly competitive nowadays, and credit card rewards structures have improved considerably. If you’re using one of the best cards for everyday spending, you should easily be able to get value that exceeds the 1.75-1.85% fee.
For example, there are several cards that potentially earn up to 2x transferable points per dollar spent, including the following:
I value all these points currencies at 1.7 cents each, meaning that to me that’s the equivalent of a 3.4% return on spending. This is essentially a way to acquire transferable points for under a cent each, which I think most would agree represents a good value. I’d buy transferable points all day long at under one cent each if I could.
Let me also emphasize that above I’m including both personal and business cards that earn 2x transferable points. However, keep in mind that you should typically not use business cards for personal spending. However, I’m trying to be thorough in terms of the return on spending offered by various cards.
As you can see above, you can even come out marginally ahead by using a good cash back card, which earns a 2%+ return on spending. A 2% return on spending probably isn’t worth the hassle factor, but in some cases you can do even better than that.
In the interest of being thorough, let me also mention that while the Bilt Palladium Card (learn more) is incredibly lucrative and my go-to card for everyday spending (as it earns 2x points plus 4% back in the form of Bilt Cash), tax payments are explicitly listed as not being eligible for earning rewards. So don’t use this card for tax payments, and that applies to all three Bilt credit cards, so also the Bilt Blue Card (learn more) and Bilt Obsidian Card (learn more).
Meet credit card minimum spending requirements
There are some amazing credit card welcome bonuses out there, which generally require you to spend a certain amount within a defined period. Sometimes the spending requirements might be more than you’d otherwise ordinarily spend, especially if there’s a huge bonus with a significant spending requirement.
Paying taxes at a reasonable fee of 1.75-1.85% is a great way to generate credit card spending for these purposes.
Credit cards with spending or threshold bonuses
In addition to the cards with a generally lucrative return on everyday spending, there are also cards with specific threshold spending bonuses, which are particularly lucrative.
For example, the World of Hyatt Credit Card (learn more) has a $15,000 annual spending sweet spot, if you ask me. If you put a $15,000 payment on the card for a 1.75% fee (~$263), you’d earn 15,000 World of Hyatt points, a Category 1-4 free night award, and an incremental six World of Hyatt elite nights. That’s a pretty great value.
Similarly, the Hilton Honors American Express Surpass® Card (learn more) offers a free night award when you spend at least $15,000 on the card in a calendar year. So not only would you earn 45,000 Hilton Honors points for spending $15,000, but you’d also earn a free night award valid at a property costing up to 250,000 Hilton Honors points. That’s incredible.
Credit cards with airline & hotel elite status opportunities
There are more opportunities than ever before to earn airline and hotel loyalty program elite status through credit card spending.
For example, American AAdvantage status is based on earning Loyalty Points, so you can qualify for elite status through credit card spending. Spending $170,000 on the Citi® / AAdvantage® Executive World Legend Mastercard® (learn more) would earn you American’s top tier Executive Platinum status (you need 200,000 Loyalty Points, and the card offers an annual Loyalty Points bonus of up to 40,000 points — spending $165,000 would earn you 30,000 bonus Loyalty Points).
Now, is this worth earning exclusively through credit card spending? No, probably not. But at the margins it can be worth it, and at the rate of 1.75-1.85%, that’s pretty attractive pricing.
Perhaps the even more compelling opportunity involves Alaska Atmos Rewards elite status, given that credit cards can earn status points. In particular, the Atmos™ Rewards Summit Visa Infinite® Credit Card (learn more) earns one status point for every $2 spent. The thing is, your spending doesn’t just count toward status, but also toward other rewards, like earning Global Companion Awards. I think the math very much checks out here.
To give a hotel example, the IHG One Rewards Premier Credit Card (learn more) offers IHG One Rewards Diamond status if you spend $40,000 on the card in a calendar year. If you spent $40,000 on taxes with a 1.75% fee, you’d be paying an extra $700. For that you’d receive the following:
- 120,000 IHG One Rewards points (the card earns 3x points)
- A $100 statement credit and an additional 10,000 points (the card offers this when spending $20,000 per calendar year, plus making one additional purchase)
- IHG One Rewards Diamond status
I’d say that very much has the potential to be worthwhile as well.
Credit cards with low-interest opportunities
In general I advise against financing charges on your credit card, given how high interest rates can be. However, we do sometimes see promotional low or no interest rate opportunities on a credit card. If you’re in a cash crunch and being able to finance these charges for some amount of time would be helpful, this could give you some extra time.
Again, I’d avoid this if at all possible, but I do think it’s worth acknowledging. Just make sure you are able to make the full payment before the higher interest rates kick in, because that could quickly get very expensive.
Paying taxes with credit cards FAQs
Yes, you can pay federal taxes with a credit card, although you generally don’t pay the IRS directly with the card. Instead, the IRS authorizes third-party payment processors to handle credit card tax payments. For someone who is strategic about credit card rewards, paying taxes by card can be an interesting way to generate a large amount of spending while earning points, miles, or cash back.
The cost depends on the payment processor and the type of credit card you’re using. Federal tax payments generally involve a processing fee, so you need to factor that expense into your calculations. Current fees range from 1.75% to 2.95%, depending on the processor and the card type. Obviously the math works much better if you’re paying a fee of 1.75% rather than 2.95%.
It can be, but it depends on the rewards you’re earning and the fee you’re paying. The key is to compare the value of the points, miles, or other benefits you’ll receive against the processing fee. If your card earns rewards worth more than the fee, paying taxes by credit card can potentially make sense. Personally, I think this is particularly compelling when the spending helps you unlock a valuable welcome bonus, spending threshold bonus, or elite status benefit.
The major payment processors accept cards from networks including Visa, Mastercard, and American Express, although the exact cards and fees can vary by processor. Generally business cards come with higher fees than personal cards.
Yes. This can be one of the most valuable reasons to use a credit card for a tax payment. If you have a new card with a large minimum spending requirement, a tax bill can provide a convenient way to reach that threshold without manufacturing spending or buying things you don’t need. Of course, you should only do this if you’re able to pay the credit card balance in full.
Yes. Quarterly estimated federal tax payments can be made by credit card through an IRS-authorized payment processor. This can actually be particularly useful for people who have significant quarterly tax obligations because it creates multiple opportunities throughout the year to generate credit card spending.
Potentially, yes. Payment limits apply, so you can’t necessarily put an unlimited number of separate transactions through the system. The IRS and payment processors have rules governing how many credit card payments can be made for a particular tax period. If you have a very large tax bill, it’s important to verify the current limits before trying to split the payment across multiple cards.
Bottom line
I’ve been paying my taxes by credit card for many years, and find it to be an excellent value. Being able to generate credit card spending for a fee of under 2% is a no-brainer, in my opinion. It’s an easy opportunity to reach minimum spending, it’s a great way to acquire transferable points for under one cent each, and it’s also the easiest way to meet spending threshold bonuses or earn elite status.
Personally my default is using a card earning 2x transferable points, though I’ll also often use this opportunity to reach minimum spending requirements on cards.
Do you pay taxes by credit card, and if so, what’s your strategy for deciding which card to use?
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