Paying Taxes With a Credit Card

If you know me, you know that any opportunity for financial arbitrage is one I will take. (Okay, this technically isn’t arbitrage, but I can’t think of a better descriptor).

Yet paying taxes with a credit card seems a bit counterintuitive.

Credit card points are hard to come by, so any purchase you’re already planning to make that yields more cash back or points than the fee being charged ($0 fee for day-to-day domestic transactions) is worth putting on a credit card, if you ask me.

You receive some points and your hard-earned cash can sit in a high-yield savings account for an extra 30 or so days.

My Mom and Dad scoff if I buy something for $2 on a credit card… but I don’t carry cash and debit cards can be a bit riskier to use anywhere except at a well-established bank ATM.

It’s worth mentioning: earning 2% back or a few points is “pointless” (ha!) if you are paying exorbitant interest by carrying a balance on that card. But let’s assume you are paying off your statement balance every month in full and not paying interest.

In that case… there’s a small (read: very small) opportunity to win out here.

The Math

Paying your federal taxes on a credit card is no different than paying via bank account in the eyes of the IRS - they just want your money. They’ve partnered with a few providers to facilitate this payment avenue - Pay1040 is the one I use. Unlike most “day-to-day domestic transactions”, this payment does incur a fee: 1.75% for consumer credit cards.

Pay1040 Fee Rates

I’m willing to cough up that 1.75% of my tax bill, however, because I use a credit card that earns 2% in the form of points - it’s my Venture X card. (If you follow this blog you’ll be able to name all the credit cards I have eventually).

By using a credit card with this reward rate, you are earning 0.25% in cash or points. For the math-savvy, you’ll know that equates to about $12.50 (!!!) on a hypothetical $10,000 tax bill.

My idle cash also lives in a High Yield Savings Account, and I pay my credit card bills directly from that account. That account is currently earning about 9.65% APY. (How to get that high of an APY on a no-risk savings account is another post entirely).

When you crunch the numbers… that’s another $40 in interest that you could earn on your hypothetical $10,000 tax bill while waiting to pay your credit card bill. In total, that’s about 0.5% of your tax bill back in your pocket.

So is it worth it?

The effort involved here is pretty low, but so is the payoff.

But earning a few bucks for “free” is the name of the game.

That being said, there are at least two other reasons this could be worth the effort of filling out one extra form.

First, if you are like me and earn most of your credit card points from signup bonuses with minimum spend requirements, your tax payment can count toward those requirements. (You bet I’ve put my referral link and the signup bonus information for the Venture X card below the fold. Spoiler: you can earn $750 in points by paying a $4,000 tax bill with it, and this is where the method really shines).

Second, if you value having credit card points and putting in the time and effort into maximizing their value for trips, they can be worth more than the 1 cent per point metric I’ve used as a valuation above. A high tax bill offers a way to convert your cash to points for your next trip.

Happy (almost) tax day to those who celebrate.

- Chris