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Preparing taxes is no fun. No fun at all. But paying taxes doesn’t have to be painful. In fact, it can be quite rewarding to pay taxes via credit card. The key is to earn credit card rewards that more than offset tax payment fees. Here’s what you need to know…

Important due dates

  • January 15 2020: 4th quarter estimated taxes for 2019
  • July 15 2020:
    • Final 2019 taxes due (usually April 15)
    • 1st quarter 2020 estimated taxes (usually April 15)
    • 2nd quarter 2020 estimated taxes (usually June 15)
  • September 15: 3rd quarter 2020 estimated taxes
  • January 15 2021: 4th quarter 2020 estimated taxes

Pay taxes via credit card: Key Info

Here is some key information you’ll need to know about paying taxes with credit or debit cards:

Credit card fee 1.87% to 1.99% (or 2.85%): The IRS maintains a list of companies that accept credit and debit cards towards tax payments. You can find the current information by clicking here. Currently there are three separate payment processing companies on the list. At the time of this writing, debit card fees range from $2 to $3.95 per transaction and credit card fees range from 1.87% to 1.99%. Alternatively, you can pay taxes via the Plastiq Bill Pay service, but that will cost you more: 2.85% (as of July 1 2020). (Plastiq is great alternative for paying bills with your credit card!)

Two payment limit (per processor): The IRS maintains a table of frequency limits for paying taxes via credit or debit card (found here). In general, they say you can make up to two payments per tax period per type of tax payment. For example, you can make 2 payments every quarter to your quarterly estimated taxes, and you can make 2 payments every year to your annual taxes. Important: In my experience, these limits are enforced per payment processing company. That means that you can really make up to 6 payments per tax period per type of tax payment (or more if you make Plastiq bill payments as well). According to an IRS advisor several years ago,they did not think that there would be any problem with making more than 2 payments by using different processors, More than 2 payments per tax period where made and never had any issues. still the outcome cannot be guarantee to be the same.

No cash advance fees: It is frequently asked whether credit card companies charge cash advance fees when paying taxes by credit card. The answer is no. All three payment processors agree (via their FAQ pages) that the payment is treated as a purchase not a cash advance. You can find FAQ info herehere, and here.

Unlimited payments via Plastiq: If you’re willing to incur slightly higher fees, you can make an unlimited number of tax payments via the Plastiq bill pay service. Plastiq usually charges 2.85%* to pay bills (including taxes) via credit card, but they occasionally offer lower fees via short term promotions. For details and to sign up, use Travel Freely’s referral link to get $500 in “fee free payments” when you start.

To pay taxes via Plastiq, use Plastiq’s tax payment screenplastiq.com/us-taxes.

Fees no longer deductible: Tax preparation fees used to be deductible when itemizing deductions for personal tax returns, but that is no longer the case.

Card processing fees are tax-deductible for business taxes: This can substantially reduce your net cost of using payment services.

View tax payment history: Once you’ve made payments through online processors, you may want to see proof that the IRS received the amount you sent. You can view past payments by signing up here: irs.gov/payments/view-your-tax-account.

Reporting estimated payments: Estimated payments should be reported when filing your annual taxes. In my experience, if mistakes are made and you forget to report some of these payments, the IRS will catch the error and refund the difference.

Paying end of year taxes: Tell your tax preparer or tax software that you’ll pay via check. Then, browse to the appropriate tax payment site (e.g. Pay1040.com, OfficialPayments.com, or PayUSAtax.com) to pay your taxes. There is no need to mail in the 1040V payment voucher.

Overpayments will be refunded: The IRS will refund any overpayment unless you owe a debt on your account.

No payment voucher required: You don’t need to send in a voucher if you pay by card.

Samsung Pay & Google Pay

Some tax payment websites support mobile wallet payments such as Samsung Pay or Google Pay. The US Bank Altitude Reserve card earns 3X for mobile wallet payments, so it should be a great match. However, readers have reported that Samsung / Android Pay (Google Pay) are only supported through Visa Checkout and that this does not trigger the Altitude’s 3X rewards.

Amex Express Checkout

Since Amex is strict about not counting manufactured spending towards new credit card welcome bonuses, tax payments are a great alternative. The nice thing about Amex Express Checkout is that you can use it to make payments even if you don’t have your card. If you recently signed up for a new Amex card and added it to your online account but haven’t yet received the physical card, you should still be able to pay through Amex Express Checkout.

Top 5 reasons to pay federal taxes with a credit card or gift card

1. Profit

A number of credit cards earn cash rewards greater than 1.87%. The best of the best are two cards that earn 3% cashback in your first year of card membership:

  • 3% first year:
    CardBenefits
    Discover It Miles - Double Miles your first year$50 + First Year Double
    Get $50 after first purchase. All miles earned in first 12 months will be doubled. This makes this a 3% cash back card for the first year. 
    No Annual Fee
    Base: 1.5X
    Earning rate: 1.5 miles per dollar for all spend.

    Noteworthy perks: ⚬ No foreign transaction fees ⚬ Redeem miles for travel or for cash back (1 cent per mile either way)
    Alliant Cash Back Visa Signature CardThis card no longer features a first-year bonus.
    No Annual Fee First Year, Then $99
    Base: 2.5X
    Earning rate: 2.5% cash back everywhere up to $250 back per billing cycle (Note that some purchases, like those from GiftCards.com, are not eligible for cash back)

    Noteworthy perks: No foreign transaction fees
    Note: This is based on the first year estimate

Since you’ll earn 3% cash back on both the base tax payment and the processing fees with the above cards, your profit should be approximately 1.186% of your tax payment.

Example:

  • $10,000 tax payment + 1.87% fee = $10,187
  • Cash back earned at 3% = $305.61
  • Profit = $305.61 – $187 = $118.61 (1.186% of $10K)

2. Meet minimum spend requirements

If you recently signed up for new credit cards, chances are good that you have to spend thousands of dollars in order to earn the associated signup bonuses. Paying taxes is a cheap and easy way to accomplish that.

Go to our Best Monthly Offers page to view most valuable welcome bonuses.

3. Buy miles cheaply

Several credit cards offer up to 1.5 miles per dollar for spend. In these cases, a 1.87% tax payment fee means that you can essentially buy miles for 1.22 cents per dollar. Even better, some cards earn 2 miles per dollar.  The Amex Blue Business Plus credit card earns 2 Membership Rewards points per dollar on up to $50K spend per year. And the Citi Double Cash card earns 2 cents per dollar uncapped. Those cash rewards can be converted to Citi ThankYou points and then to airline miles. With these 2X everywhere cards you can essentially buy miles for 0.92 cents per dollar.

2X Example:

  • $10,000 tax payment + 1.87% fee = $10,187
  • Miles earned at 2X = 20,374
  • Cost per mile = $187 / 20,374 = 0.92 cents per mile

1.5X Example:

  • $10,000 tax payment + 1.87% fee = $10,187
  • Miles earned at 1.5X = 15,281
  • Cost per mile = $187 / 15,281 = 1.22 cents per mile

Cards that offer 2X airline miles per dollar:

  • Citi Double Cash: Earns 2 cents per dollar, uncapped. Cash rewards can be converted to ThankYou points and when paired with a Citi Premier or Prestige card those points can be transferred to a large selection of airline programs.
Excellent card for cash back. This card has risen to the top for great everyday spending cards because of it's 2% cash back. Instead of cash back, you can also choose to earn double ThankYou points instead.
  • Amex Blue Business Plus: Earns 2 Membership Rewards points per dollar on up to $50K spend per calendar year. Points can be transferred to a large selection of airline programs or to a few hotel programs.
10,000 Amex Membership Rewards Points after you spend $3,000 in the first 3 months. One of the best Amex business cards with no annual fee. It has transfer partners and offers 2x rewards for all of your spending up to a limit. Earn 2X Membership Rewards points on all eligible purchases, up to $50K spend.

Cards that offer 1.5X airline miles per dollar:

  • Chase Ultimate Rewards. Two no-fee cards in Chase’s lineup earn 1.5 Ultimate Rewards points per dollar for all spend. Pair either one with a premium card (e.g. Sapphire ReserveSapphire PreferredInk Business Preferred, etc.) to transfer points to several airline or hotel programs:
$200 after you spend $500 in the first 3 months. A great cash back or points card with no annual fee and 0% APR intro offer for purchases. Compliments other Chase cards with 1.5% cash back or 1.5x points on all purchases.
50,000 Chase Ultimate Rewards Points after you spend $3,000 in the first 3 months. A no-brainer, great business card with a great bonus, no annual fee, and 0% offer. Your choice to receive 1.5% cash back or 1.5x points.
  • Amex Membership Rewards. Amex offers two cards that are capable of earning up to 1.5X. In either case, points can be transferred to a large selection of airline programs or to a few hotel programs.
85,000 Amex Membership Rewards Points after you spend $20,000 in the first 3 months. A card loaded with benefits for frequent travelers.
15,000 Amex Membership Rewards Points after you spend $1,000 in the first 3 months.
  • Capital One Miles. Capital One offers two cards that earn 2X rewards miles everywhere. These “miles” can be transferred to real airline miles, usually at a rate of 2 to 1.5. This means that the following cards are capable of earning 1.5X airline miles everywhere:
50,000 Capital One Miles after you spend $3,000 in the first 3 months. Best "no-thinking" starter card (or compliment to Chase Sapphire Preferred) for those who don't want to think when earning and redeeming miles. Additional limited time offer to earn up to 100,000 miles total.
50,000 Capital One Miles after you spend $4,500 in the first 3 months.

4. Earn valuable big spend bonuses: elite status, free nights, companion pass, etc.

Many credit cards offer bonuses for meeting high spend thresholds. Here are a few examples:

  • Amex Delta Reserve or Delta Reserve BusinessSpend $30,000, get 15,000 Medallion Qualifying Miles (towards elite status). At $60,000, $90,000, and $120,000 you’ll get another 15,000 Medallion Qualifying Miles.
  • Amex Delta Platinum or Delta Platinum Business: Spend $25,000, get 10,000 Medallion Qualifying Miles (towards elite status). At $50,000 spend, get another 10,000 Medallion Qualifying Miles.
  • Southwest PlusSouthwest Premier, or Southwest Business: With Southwest, when you earn 125,000 points in a calendar year (including points earned from credit card spend) you get a companion pass good for an unlimited number of flights for the rest of that year and all of the next calendar year.
  • Barclaycard JetBlue Plus, or JetBlue Business: Spend $50,000 and get Mosaic status which offers free changes and cancellations; free checked bags; expedited security; early boarding; free drinks; enhanced point earnings; and 15,000 bonus points upon qualifying.

5. Liquidate Visa/MasterCard gift cards cheaply

Visa and MasterCard gift cards are debit cards. As such, they qualify for low flat fees for debit tax payments: $2.00, $2.55, or $2.58 (depending upon the tax processor you use). In other words, your cost to liquidate $500 gift cards will be approximately half a percent (0.5% to 0.54%). That’s pretty cheap.

If you use $500 Visa/MasterCard gift cards, then you can pay the following amounts:

  • PayUSAtax.com ($2.58 fee): Make a $497.42 payment.
  • Pay1040.com ($2.59 fee): Make a $497.41 payment.
  • OfficialPayments.com ($2 fee): Make a $498 payment.

The biggest problem with this is the IRS imposed 2 payments per processor limit. This means that you can liquidate no more than 6 gift cards per type of tax payment.  In the past, Official Payments allowed more payment via phone.  Recent reports, though, indicate that this is no longer the case.

(Note: Some of this content originally appeared on The Frequent Miler and has been posted with permission.)

 

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