When it comes time to pay your tax bill, we’ve all been tempted with the idea of paying with a credit card.
With a large bill, there’s the potential to earn rewards, right?
This is the tradeoff:
- You can earn rewards paying with a credit card, but,
- You will pay a percentage fee when paying taxes with a credit.
Your decision is this – are the rewards greater than the fees?
Let’s dig in.
Table of Contents
How Much Does It Cost to Pay Taxes With A Credit Card?
To pay the least in fees, you need to make a direct payment using Pay1040 or ACI Payments. If you make a direct payment, you will pay:
| Processor | Consumer Debit Card |
Credit Card |
|---|---|---|
| PAY1040.com | $2.15 | 1.75% ($2.50 min) |
| ACI Payments | $2.10 | 1.85% ($2.50 min) |
This fee is far lower than if you pay your taxes through a tax preparation service or software, as you’ll next.
The IRS lists the convenience fees for each of the IRS e-file and e-pay service providers:
| Processor | Rate | Minimum Fee |
|---|---|---|
| PAY1040.com/SpecialOffers/TurboTax | 2.49% | $3.95 |
| TaxAct.com | 2.59% | $2.99 |
| Drakesoftware.com | 2.59% | $2.99 |
| Hrblock.com | 2.49% | $2.99 |
| Crosslinktax.com | 2.79% | $2.99 |
| Wolterskluwer.com | 2.59% | $2.99 |
| TaxBandits.com | 2.95% | $.00 |
| Taxhawk.com | 2.95% | $.00 |
| Turbotax.com | 2.95% | $.00 |
The minimum fee is 2.49% with PAY1040 and HRBlock and the highest fees are clocking in 2.95% with TaxBandits, Taxhawk, and TurboTax. The minimum fees are listed too but if you’re considering paying with a credit card for rewards, the minimum is unlikely to impact your decision.
As you can see, using an e-file or e-pay provider increases the cost.
Next, you have to identify a credit card that will give you more rewards than what you pay in fees.
If we assume you are paying the minimum, which is 1.75% when you use PAY1040 directly, there are only a handful of cards that work.
Fidelity Rewards Visa Signature Credit Card
The Fidelity Rewards Visa Signature Credit Card is an unlimited 2% cash back card when you get the cash back deposited into a Fidelity account. It has no annual fee or caps and limits on the cashback, so this is a card that could work.
The challenge here is that the fee is 1.75% and the cashback is 2.00% – that leaves you just 0.25% in rewards for your effort. That’s 25 cents for every $100 of taxes paid – is that worth your time?
U.S. Bank Smartly Visa Signature Card
The U.S. Bank Smartly Visa Signature Card is another option as it lets you earn up to 4% cash back on every purchase. The base earning is 2% but if you have a large qualifying balance, the cash back rewards increases up to 4%.
- With a $5,000 – $49,999 balance, the card earns 2.50% cashback.
- With a $50,000 – $99,999 balance, the card earns 3.00% cashback.
- With a $100,000+, the card earns 4.00% cashback.
A good way to achieve this, assuming you have $100,000 to move around, is to open an investment account and put it into a low cost index fund. This gets you 4% cash back on the card without a significant change to your situation.
This could be significant enough to be worth your time setting up, especially since you could use the card for other purchases and get 4% cashback – which is significantly higher than many other cards.
High Welcome Reward Credit Cards
If you had your eyes on a credit card with a significant welcome bonus and high initial spend requirement, paying your taxes (even with the fee) could put you over the top. With many of these cards offering at least 1% cash back, it helps soften the fees.
Here are a few cards worth considering:
- Chase Sapphire Preferred Card
- Capital One Venture X Rewards Credit Card
- American Express Gold Card
- Blue Cash Preferred® Card from American Express
Reality: It’s Rarely Worth It
It’s rarely worth it to pay your taxes with a credit card.
First, it depends on how much you expect your bill to be. If it’s a few hundred dollars, the return is not going to be worth your time. Even at $1,000 – 1% is only ten dollars.
Next, even if it’s sizable, there are very few cards that exceed the near-2% fee hurdle. And the ones that do, barely clear it. The U.S. Bank Smartly card is the rare exception but you have to move $100,000 to U.S. Bank – only you know if it’s worth your time.
Finally, you could use it to get the welcome bonus on a new credit card. Getting a new card can be fairly quick so if that’s the route you wish to pursue, I’d get it now so you have it ready for when you pay your taxes in April.
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About Jim Wang
Jim Wang is a forty-something father of four who is a frequent contributor to Forbes and Vanguard’s Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.
Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology – Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.
One of his favorite tools (here’s my treasure chest of tools, everything I use) is Empower Personal Dashboard, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you’re on track to retire when you want. It’s free.
Opinions expressed here are the author’s alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.
