Paying Taxes with Credit Cards: A Rewards Strategy or Costly Mistake?
Points and miles enthusiasts are perpetually on the lookout for innovative methods to accumulate rewards, and tax season presents a tempting opportunity. The central question arises: Is it financially prudent to settle a substantial tax bill using a credit card? According to financial experts, the answer hinges critically on the specific credit card in question.
Understanding the Costs and Fees
The Internal Revenue Service (IRS) permits credit card payments through third-party payment processors, which impose fees typically ranging from 1.75 percent to 1.85 percent of each transaction. For instance, using a service like e-file.com simplifies online filing without paperwork, and promotional codes such as SAVE28 can offer discounts on federal tax software, though these are subject to terms and conditions.
At first glance, a rewards credit card earning at least 2 percent cash back or equivalent points might seem advantageous. However, the reality is more nuanced. After accounting for the processing fee, net rewards often dwindle to a mere 0.15 to 0.25 percent of the tax payment. On a $10,000 tax bill, this translates to a modest $15 to $25 in rewards—hardly a windfall.
When Credit Card Tax Payments Make Sense
Despite the fees, certain scenarios can yield significant benefits. Many credit cards feature lucrative welcome bonuses, requiring new cardholders to spend a specified amount within a short timeframe to earn perks like thousands of points or miles. For example, the Chase Sapphire Preferred card currently offers 75,000 bonus points after spending $5,000 in the first three months. Using this card to pay a tax bill could help meet that threshold, with the points potentially valued at up to $750 for travel through Chase Travel. After a $87.50 processing fee and a $95 annual fee, the net gain might still be substantial, making the rewards worthwhile for some.
Similarly, hotel-focused cards like the Marriott Bonvoy Boundless credit card provide new cardholders with three free nights after spending $3,000 in three months, plus an additional night after another $1,000 spend, all for a $95 annual fee. As Robin Saks Frankel, an associate producer at CardCon, notes, "This is the kind of outstanding welcome bonus you can knock out by settling a big tax bill with the IRS and still justify the processing fee." The value of multiple free hotel nights could far exceed the combined costs of fees and the annual card fee.
Potential Pitfalls and Expert Warnings
However, experts caution against viewing this strategy as a universal solution. Frankel warns that while earning welcome bonuses with a tax payment can provide a strong first-year benefit, cardholders must carefully assess whether ongoing spending justifies the annual fee in subsequent years. For instance, the Marriott Bonvoy Boundless card may not be cost-effective for those who do not travel frequently.
Moreover, some financial advisors strongly discourage this approach. Ted Jenkins, managing partner at Exit Wealth, advises, "Only look at this as an absolute last resort even if you can pay it off next month," highlighting risks such as accruing interest if balances are not paid in full. Ultimately, the decision depends on individual financial circumstances, card terms, and long-term spending habits.
