April 15th is only a month a way and many people are wondering how to soften the blow. If you have to pay the IRS a lump sum of money, the big question is: “is there a way to at least earn points and miles?” For the most part, paying taxes with a points and miles credit card does not make sense. The fees that you have to pay are typically more than the points are worth.
But… there is one card that will actually be worth it! I wrote about the Discover it Miles credit last week and the untraditional sign up bonus (application link). Instead of a lump sum of points/miles after meeting the minimum spend, you’ll get double miles earned for the first 12 months. Typically you earn 1.5x miles per dollar spent, so during the first year that will give you a fixed 3x miles per dollar spent. This is for all purchases with no cap! The 3x miles per dollar spent can really be thought of as 3% cash back based on how you redeem the miles earned. Keep in mind that the double miles are not credited to your account until you’ve had the card for 12 months.
Now, before I go through all the information, I just want to point out that I have not personally paid my taxes through the Discover it Miles credit card. This is a new card so there is little information available on whether or not you get points for it. Historically, those paying their taxes with a credit card have received the points (paying taxes with a debit card, however, have not always paid out). So while I hope the Discover it Miles credit card works with paying taxes I cannot speak from personal experience. Just wanted to get that disclaimer out there!
There are a few different ways to pay your Federal taxes online via credit card:
- PayUSAtax.com – charges 1.87% credit card fee (if a Visa credit card, then the fee is 2.29%)
- ValueTaxPayment.com – charges 1.87% credit card fee (if a Visa credit card, then the fee is 2.29%)
- Pay1040.com – charges 1.87% credit card fee
- Businesstaxpayment.com – charges 1.87% credit card fee
While there are a few more options than the four sites I have listed above, these ones have the least expensive fees. I am going to pick an arbitrary number here, but let’s say your Federal taxes are $5,000. That means the fee you are charged is $93.50. You will also earn 15,000 miles with the Discover it Miles credit card which is equal to a fixed $150.000 (remember though, this is only for the first year you have the card). So you are ultimately making $56.50 by paying your taxes with this card.
There is also a limit of the number of times you can pay via credit card, and while this schedule includes all the information if I am reading it correctly you can do it twice per tax year. Estimated taxes can be done twice per quarter, so if you pay quarterlies, you can pay via credit card as well.
State taxes are not as cut and dry with the fee. Every state seems to have a different fee. I found this article that links you to the various payment sites for each state. If you cannot find information for your particular state through that article, then you can pay your State taxes through the Official Payments site as well. This site allows you to pay your State taxes and will also give you the fee for your particular state. New York, for example, charges a 2.25% fee by going through one site and a 2.49% fee when going through the Official Payments site.
While you will not come out as ahead when paying State taxes, it is still something. Again, let’s say you owe your State $5,000 in taxes. Assuming a 2.49% fee, you will pay $124.50. However, you’ll earn another 15,00 miles with the Discover it Miles credit card which is equal to $150.00. This is only putting you ahead by $25.50. Still better than nothing!
Now, some things to keep in mind. You only have a certain credit limit with your credit card. So you might not be able to put your entire tax bill on your credit card at one time. While you can pay twice at the end of the year, doing quarterlies might help if you have a large tax bill.
Here are some other things that are good to know when paying via credit card. I copied and pasted this directly from the IRS site:
- Fees differ from those in the table above when you choose the integrated IRS e-file and e-pay option. View your options.
- There are limits on how often you can make individual and business payments. Visit thefrequency limit table by type of tax payment for details.
- High balance payments of $100,000+ may require coordination with your provider.
- You usually can’t cancel payments.
- You can’t make Federal Tax Deposits.
- You can’t get an immediate release of a Federal Tax Lien. Refer to Publication 1468 for payment options.
- This form of payment eliminates your need for a voucher.
- Your card statement will list this payment as “United States Treasury Tax Payment.” The convenience fee paid to your provider will be listed as “Tax Payment Convenience Fee” or something similar.
- The fee is deductible for personal tax types as a miscellaneous itemized deduction. However, only those miscellaneous expenses that exceed 2 percent of the adjusted gross income can be deducted. For more information, refer to Publication 529, Miscellaneous Deductions.
- For business tax types, the fee is a deductible business expense.
- If you overpaid, IRS will refund it after the return is processed, excepting offsets or debt on your account.
While this post primarily focuses on the Discover it Miles credit card, there are some other credit cards that work as well, just not as good. For example, the Capital One Venture card and Barclaycard gives 2% cash back. While this works for the Federal tax payment, it will cost you more money for the State tax payment. Also, paying with a debit card is MUCH cheaper as it is a fixed fee with the lowest fee being only $2.89. There are a few points and miles earning debit cards although most are no longer available to new applicants and do not always give the miles for paying taxes. You also might find that paying with another points and miles credit card is worthwhile if you need to meet a certain minimum spend or if you redeem your miles for way more than the 1.87% fee you are charged.
Keep in mind, I am not an accountant or financial advisor. If you are not 100% sure with any tax decision, I suggest speaking to your own personal accountant! I am purely here to advise that there are certain credit cards that allow you to earn points and miles when paying your taxes!
Key Links:
- Discover It Miles: Earn double the number of miles for the first year you have the card. This means you will earn 3x miles on all purchases for the first year with no cap. No annual fee.
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Anyone knows if you can deduct the fee in schedule C for self-employed?
Apparently it is deductible. Read near the bottom.
http://www.irs.gov/uac/Pay-Taxes-by-Credit-or-Debit-Card
@Judy – I read it the same way!
Check below in FAQ section of PayUSATax payment service. This sound like an opportunity for MS.
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34.What if I accidentally paid more than I owe?
In most instances, the IRS will refund an overpayment once the return is received and processed. An overpayment may be used to settle or offset an existing debt on the taxpayer’s account.
how is it MS if the amount is refunded back to the same card?
@Nick – This is just making money by paying with a credit card that gives you a higher percentage than the fee paid.