Not everyone is inclined to look at a tax bill and think, “How can I maximize my credit card rewards on these expenses?” But if you’re one of those people, here are a few things to keep in mind:
There are inevitable costs associated with paying taxes with a credit card. Even though you can dodge credit card interest and other inconveniences – for example, by paying that credit card bill in full or taking advantage of a 0% APR introductory offer – you will still have to pay a processing fee of around 2% or more, which could wipe out any rewards .
It may take some effort, but it is possible to find credit card offers so rich that they justify the costs.
Just ask David Rae, who has paid taxes with credit cards multiple times, to take advantage of the lucrative credit card deals. For him, the value of the trips and the benefits he’s gained by paying taxes with credit cards more than justifies the cost of the processing fees, he says.
“I’m able to pay off my credit card so I don’t pay interest,” says Rae, certified financial planner at DRM Wealth Management in Los Angeles. “And I really like traveling for free.”
For maximizers like Rae who always pay their credit card bills in full, here’s three times paying taxes with a card to earn rewards can make sense.
1. Your current rewards are higher than the processing fees
About these unavoidable costs: Third-party vendors that accept credit card payments for the IRS charge a processing fee for these payments ranging from 1.87% to 1.99% of the amount billed with certain minimums. Some services with built-in electronic payment options, such as TurboTax, charge even more. Since most credit cards offer ongoing rewards that are lower than this processing fee, the costs of paying taxes this way often outweigh the benefits, notes Susan Allen, a chartered accountant and senior executive for the department. tax practice and ethics at the American Institute of CPAs.
But, of course, there are exceptions.
If your credit card rewards are higher than this processing fee, it may be a good idea to pay taxes with a credit card to earn rewards, Allen says. For example, you might be able to take advantage of:
First year bonus rewards. the Discover it® Miles offers an unlimited 1.5% cashback on all purchases and automatically matches any miles you’ve earned at the end of the first year, for example. This means that your effective earning rate is 3% in the first year.
Precious redemptions. If you can squeeze at least 5 cents worth of every air mile you earn on your credit card, even getting just 1 mile for every dollar spent in taxes might make sense.
Remember, you won’t get any value from credit card rewards until you actually redeem them. Before paying a processing fee up front, make sure you earn rewards that you will use.
2. You earn a big signup bonus
It’s hard to find a credit card with ongoing rewards high enough to wipe out high processing fees. But find a credit card with a big signup bonus? Much easier.
Paying taxes with a credit card for rewards “could potentially work if someone got a signup bonus that was greater than the fees associated with using credit cards to pay taxes,” says Allen.
Many rewards cards offer signup bonuses worth $ 500 or more, and some even waive the annual fee for the first year. Your tax bill could help you meet the high expenditure requirements on these cards – often spending a few thousand dollars in the first few months – all at once. This could potentially earn you hundreds of dollars in rewards after the processing fee.
3. You can reach spending thresholds for valuable benefits
For Rae, the CFP, paying taxes with a credit card hasn’t just helped him earn rewards; it also helped him achieve elite status on Delta Air Lines more quickly. This is because he was able to meet the required spending threshold on his Delta SkyMiles® Reserve American Express Card earlier, which earned him a hefty bonus that counted towards that status. The value of that status and the miles it earned far exceeded the processing fee, he says.
“I fly at least once a month for work and I like to travel a bit personally,” says Rae. “So having status with the airline means that I get upgrades. … Sometimes I can be upgraded for free to First Class or Business Class.
If you have a hotel card or co-branded airline card, you may also be eligible for Elite status or other important benefits, such as a companion ticket or a free night, by meeting certain spending conditions. . Assuming you can maximize such benefits, paying taxes with a card to hit those thresholds faster might be worth it.
This article was written by NerdWallet and was originally published by Forbes.