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Our “must read” on credit cards: The Pros and Cons of Credit Cards
Why Americans Should Love Paying Taxes
Please note: I am not a tax advisor. I have never been a tax advisor and will likely never be a tax advisor. Nothing in this post should be taken as tax advice and you should consult a professional with tax questions, not some guy on the internet.
In a few months, spring will begin, at least according to the calendar if not Mother Nature. And, as Lord Tennyson wrote, in the spring, a young man’s fancy lightly turns to thoughts of that special moment: paying taxes.
Okay, I’m not sure that His Lordship had an April 15 deadline but, if he did, he would have been well-advised to pay his taxes with a credit card.
Making Money By Paying The IRS
Nobody likes doing their taxes and, certainly, nobody likes paying taxes. But if you have to pay, you might as well make a bit of money while doing so.
You may not know this, but you can actually pay your federal taxes, including estimates, with a credit card.* The catch is that credit card processors charge a fee, which they pass along to you. But if you have a credit card whose rewards are greater than the fee (See below for two options.), you’ll come out ahead.
There are three major companies that the IRS partners with to process secure payments:
I’ve used all three and they are virtually the same, so you might as well go with the cheapest one. The sites are simple to use and self-guided. You’ll input your personal information, choose what kind of taxes you are paying and they’ll charge you instantly
You’re not going to make a lot of money paying taxes. It’s kind of a good-news-bad-news situation: The more you owe, the more you can take advantage of credit card rewards when paying. It’s about the psychic joy of getting a little something back when you get to April 15.
Two Credit Cards To Use To Pay Your Taxes
If you have a credit card that pays you 1-1.5% back, you need to get rid of it, or at least stick it in a block of ice. It’s not the best card to use for everyday purchases, never mind taxes. Here are two options for you. The first is more straightforward, but the second has a much better profitability profile.
Citi Double Cash Card
This is the perfect card for people who want one card that pays a decent rebate on all purchases. Double Cash pays, as you might have guessed, 2% cash back on every purchase you make, regardless of size, category or any other limiting criteria that you can think of. It’s a “no-muss-no-fuss” solution. The card comes with no annual fee, has no added benefits and no sign-up bonus.
Your profit: You’ll make 0.13% back on (2% reward minus the 1.87% fee) on the transaction. It’s not great, but that and your tax bill will get you a cup of coffee. Seriously. A $3,000 bill is worth almost a $4 profit, more than enough to pick up a coffee at Starbucks. But not the good stuff.
Capital One Venture Card
The Capital One Venture Card is the first one that I got when I began looking for a 2% card. It’s got a few more bells and whistles and, with a $500 sign-up bonus, is one of the most profitable cards out there.* (Also, please be sure to check out our Credit Card with a Travel Bonus page!)
The advertisements say that you’ll get double “miles” on each purchase (two miles per dollar spent), but those miles can also be used to pay for a wide range of travel expenses (Points never expire.), making it a 2% card (Keep reading for a potentially more lucrative use.). This card’s strengths, though, are in the benefits that come with it. They include:
- A 50,000 point ($500) sign-up bonus when you spend $3,000 in the first three months.
- A $100 credit toward TSA Pre-check or Global Entry
- The ability to transfer points to one of 15 airline partners, including Air France KLM, Cathay Pacific, Qantas and JetBlue. Note: Most transfers at at the ratio of 2:1.5 (two Cap One miles equals 1.5 airline miles).
The annual fee is $95, which is waived for the first year. After that, the $500 sign-up bonus should have you covered.
Here’s where the real opportunity is: Consensus values miles as worth about two cents each. If two “Capital One miles” translate to 1.5 airline miles, than each dollar spent is actually worth three cents. A $10,000 tax bill is worth $113 in rewards!
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Oh, One More Thing…
Paying Taxes With A Credit Card
You don’t need a tax bill to evaluate the card that you are using. If you’re getting anything less than 2% back from your current option, you should take a look at one of the ones above.
*Capital One refers to its rewards as “miles,” but that’s just a marketing term. They’re more like points worth a penny each.
