Every year, taxpayers who owe the IRS dread the arrival of the April tax deadline. And while some are able to write a check for their tax liability, others must turn to their credit cards to meet their obligations.
But unfortunately, paying taxes with a credit card incurs a processing fee of 1.88-2.35%. Nevertheless, there are some ways to pay taxes with a credit card in ways that nullify these fees.
Use an extremely valuable rewards card
Very few reward credit cards offer points, miles, or cash back worth more than 1.88% of the money spent, but there are some. For instance, it is possible to come out ahead using an airline miles or hotel rewards credit card, but only when the points or miles received are utilized for the highest value rewards. These rewards typically involve premium class international airline tickets or luxury hotel stays.
In another example, the Capital One Venture Rewards card earns double miles on all purchases, and their miles are worth one cent each as statement credits towards any travel related expense.
But always keep in mind, this strategy only works for cardholders who avoid interest charges by paying their entire balance in full each month.
Use a tax payment to meet a spending requirement for a sign up bonus
Even if the rewards earned from spending do not offset the credit card processing fee, it may still be worthwhile to charge taxes to a credit card in order to receive a sign up bonus. For example, the Chase Sapphire Preferred features a sign up bonus of 40,000 Ultimate Rewards points when new cardholders spend $3,000 within three months. If paying a tax bill is enough to reach that threshold, then it could be a good idea. Once again, taxpayers must pay their entire statement balance in full in order to avoid interest charges.
Utilize a 0% APR promotional financing offer
Although paying taxes with a credit card will incur a significant fee, that fee can be justified if the cardholder pays no further interest by utilizing a 0% APR promotional financing offer. For example, a cardholder with a Citi Simplicity would have 18 months of interest free financing on new purchases. A taxpayer would still incur the credit card processing fee, but this would be less than even the customary 3% balance transfer fee imposed by most credit cards. This strategy works so long as the credit card holder’s balance is paid in full before the promotional financing expires.
By understanding when it makes sense to pay taxes with a credit card, cardholders can come out ahead when they pay their taxes.